MegaWest Provides Corporate Update and Files Second Quarter Report

Related Quotes

Symbol	Price	Change
MGWSF.OB	0.22	-0.01

{"s" : "mgwsf.ob","k" : "c10,l10,p20,t10","o" : "","j" : ""}

CALGARY, ALBERTA--(MARKET WIRE)--Dec 31, 2008 -- MegaWest Energy Corp., (the "Company" or "MegaWest") (OTC BB:MGWSF.OB - News), an independent oil and gas company, specializing in non-conventional oil and gas projects with a focus on North American heavy oil, announced today that it has provided a corporate update to shareholders along with filing its second quarter interim financial statements and management's discussion and analysis on SEDAR's website at www.sedar.com.

LETTER TO SHAREHOLDERS

We are pleased to report that MegaWest Energy has achieved a number of significant milestones in the quarter ended October 31, 2008. It has increased its leased acreage in Missouri/Kansas, Kentucky and Montana to over 110,000 net acres. More specific project milestones are as described below:

MISSOURI

Oil sales from the Marmaton River Project (Phase I) commenced in August 2008. The construction and commissioning of the Grassy Creek Project was completed on schedule and within budget in October 2008. As the Marmaton River Project reservoir began to respond to steam injection, production ramped up to average over 100 barrels per day in November. This was at the upper end of reservoir simulation predicted performance for that point in time. The reservoir simulation predicts that these wells would reach 300-500 barrels a day of production with continued operations. Initial indications of reservoir performance at Grassy Creek were better than those achieved at Marmaton, consistent with the better reservoir quality and thicker oil pay zone.

KENTUCKY

Design of the Green River Demonstration Project was completed, with all regulatory applications submitted and major equipment purchased for a planned construction start in early 2009. The Company farmed out 4,300 acres on the western flank of its acreage for New Albany Shale gas testing, retaining a 34.75% working interest. Two wells have been drilled and logged and are awaiting fracturing and flowrate testing.

MONTANA

2-D seismic over the Teton and Loma prospects was acquired and processed. The Company committed to the Devils Basin prospect and purchased trade seismic for reprocessing and interpretation.

OUTLOOK

The current weakness in global oil prices and the world-wide collapse of both the capital and credit markets over the past few months has, however, necessitated that the Company undertake an in-depth technical and economic review of all of its projects. As a result, the Company has recently taken the difficult decision to suspend steaming operations in Missouri pending a recovery in oil prices. The Company has also suspended all capital projects and put a hold on all discretionary spending.

The Company-wide review is ongoing with staff Teams concentrating on the following:

1. A Technical Team is evaluating and documenting all project opportunities and upsides and putting together data room type documentation to support possible asset sales, farm-outs, or industry joint venture opportunities;

2. An Operations Team is evaluating restart options for Marmaton River and Grassy Creek including gas price contract, oil pricing, alternative fuels, alternative technologies, and operating cost reductions; and,

3. A Strategic Team is evaluating corporate strategic alternatives including new funding alternatives, property sales or farm-outs, corporate transactions, and overhead cost reductions.

The overall goal of these actions is to maintain a positive cash balance through 2009 and to be in a position to aggressively restart operations once world markets stabilize and oil prices improve.

Another result of the current state of the oil markets is that the Company has recognized a substantial impairment in its carrying value for some of its oil and gas assets.

Despite the current, temporary weakness in the oil market, MegaWest continues to believe that heavy oil will inevitably become an even greater component of total oil production as supplies of light oil become harder to find and more costly to produce. Proposed royalty increases by the Alberta government and high construction costs will negatively impact future production growth from the Canadian oilsands.

More specifically, we believe that the Company's focus on the acquisition and development of known significant heavy oil resources within the United States is a viable longer term strategy for the Company. Relative to the oilsands, MegaWest's projects should benefit from higher field-gate pricing, closer proximity to markets, lower construction costs, shorter permitting turnarounds and lead time to production, and the ability to manage capital exposure through a staged, modular development approach.

The dedication and commitment of MegaWest's staff during these difficult times has been admirable and is greatly appreciated.

We expect that 2009 will bring a return to more predictable financial markets and a strengthening oil price such that the real value in MegaWest's projects can begin to be realized. MegaWest is taking and will take every opportunity to ensure that the Company emerges from these trying times in a position to capitalize on the capability of its personnel and the quality of its heavy oil properties.

On Behalf of the Board,

George T. Stapleton, II, Chairman of the Board and Chief Executive Officer

About MegaWest

MegaWest is continuing to execute its business plan to create shareholder value. MegaWest owns or has the right to earn an interest in over 146,000 acres in Missouri, Kansas, Kentucky, Montana and Texas. MegaWest seeks to prove up significant resources and achieve production from its heavy oil properties through the application of new technical developments in the commercial thermal recovery of heavy oil.

Forward-Looking Statements

This press release contains forward-looking information and statements including opinions, assumptions, estimates and expectations of future employee retention. Forward-looking statements include information that does not relate strictly to historical or current facts. When used in this document, the words "anticipate", "believe", estimate", "expect", "forecast", "intent", "may", "project", "plan", "potential", "should" and similar expressions are intended to be among the statements that identify forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to a wide range of known and unknown risks and uncertainties, and although the Company believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will be realized. We have attempted to identify important factors that could cause actual results, performance or achievements to vary from those current expectations or estimates expressed or implied by the forward-looking information. The risks and uncertainties that could affect future events or the Company's future financial performance are more fully described in the Company's quarterly reports (on Form 6-K filed in the US and the financial statements and Form 51-102F1 filed in Canada), the Company's annual reports (on Form 20-F filed in the US and the financial statements and Form 51-102F1 filed in Canada) and the other recent filings in the US and Canada. These filings are available at www.sec.gov in the US and www.sedar.com in Canada. For all such forward-looking statements, we claim the safe harbour for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

MegaWest Energy Corp.

Management Discussion and Analysis as of December 29, 2008

(in Canadian dollars unless otherwise indicated)

MANAGEMENT DISCUSSION AND ANALYSIS as of December 29, 2008

Management's discussion and analysis ("MD&A") is a review of operations, current financial position and outlook for MegaWest Energy Corp ("MegaWest" or the "Company"). It should be read in conjunction with the interim consolidated financial statements and the notes thereto for the three and six months ended October 31, 2008 and 2007, the annual consolidated financial statements for the year ended April 30, 2008 and 2007 and the related notes thereto, prepared in accordance with Canadian generally accepted accounting principles.

NATURE OF BUSINESS

MegaWest is a non-conventional oil company with emphasis on North American heavy oil projects. MegaWest has operatorship of, and owns or has the right to earn a majority interest in, over 146,000 gross acres of prospective oil and gas leases in Missouri, Kansas, Kentucky, Montana, and Texas. MegaWest is incorporated in Alberta and its shares trade in the United States on the Over-the-Counter Bulletin Board exchange ("OTC") under the symbol "MGWSF".

MegaWest had working capital of $4,758,898 at October 31, 2008. Due to low oil prices, the Company suspended operations at its two Missouri heavy oil projects subsequent to October 31, 2008. The Company is negotiating to reduce the gas supply cost for the projects and, depending on oil prices, is planning to re-start one of the Missouri projects in the first quarter of calendar 2009. In addition, the Company is evaluating alternatives related to the Kentucky project which include attracting a joint venture partner and re-negotiating its work commitment. The Company is currently implementing reductions to its administrative and operating costs. Additional capital may be required in the future to fund its capital and administrative costs. Additional capital may be in the form of equity, debt, sale of property, joint venture farmouts or any combination thereof.

RESULTS OF OPERATIONS

Operational and Project Review

Missouri

The Missouri lease holdings now include a 100 percent interest in 33,467 gross unproved acres of land, an increase of over 20,000 acres in the quarter. MegaWest has, to date, built two 500 barrel of oil per day steam drive production facilities (Marmaton River and Grassy Creek), drilled 51 exploration/delineation wells with an 86% success rate and completed 120 development wells with a 100% success rate.

Phase I of the Marmaton River steam drive project includes a steam generation and oil treating plant with a throughput capacity of 500 barrels of oil per day, 13 steam injection wells, 40 producing wells, one water source well and one water disposal well on approximately 10 acres. First oil sales from the project occurred in August 2008 and 2,961 barrels of oil were sold in the quarter, resulting in oil sales, net of royalties, of $197,457 in the quarter.

Due to current economic conditions, specifically low oil prices and significantly reduced equity and capital markets, the Company has suspended steaming operations at both the Marmaton River and Grassy Creek projects in December. MegaWest is in the process of seeking an alternate natural gas supply to reduce field operating costs. Depending on oil prices, MegaWest expects to re-commence operations at one of the Missouri projects in the first quarter of calendar 2009.

Prior to operations being suspended, the Marmaton River project was producing approximately 100 barrels of oil per day. During the quarter the wells for the second production phase, consisting of 10 injection wells and 24 production wells on approximately 10 additional adjacent acres, were drilled and awaiting tie-in. The Marmaton Phase II wells will be tied-in and put into production once there is more clarity on the direction and stability of oil prices.

The Grassy Creek steam drive project was completed on budget and on schedule in the quarter. This project has a steam injection and production treating plant similar to Marmaton River with a design capacity of 500 barrels of oil per day. Phase I of the project consists of 46 production wells, 15 injection wells, 2 observation wells and 2 service wells on approximately 19 acres. Since Grassy Creek commenced steam injection in late October, it was not yet producing significant quantities of oil when steaming operations were suspended.

It is anticipated that each of these projects could develop 250 to 300 acres of leases over their 25 to 30 year project life. Additional drilling phases on each of these projects will be necessary to maintain target production rates. It is further anticipated that a number of additional projects of similar design and size may be drilled and constructed across MegaWest's Missouri lease holdings.

The Company has not recorded an impairment charge on its Missouri costs at October 31, 2008 since these projects are the Company's near term primary focus and management believes these projects are commercial at expected future oil prices.

Kansas

The Chetopa project is a pre-commercial heavy oil demonstration project located two miles south of Chetopa, Kansas. The project is currently suspended, and includes certain oil and gas equipment and a 100 percent interest in two oil and gas leases covering 392 gross unproved acres. On 15 of these acres are 20 steam injector wells, 33 producer wells and a water well which had been previously drilled, completed, equipped and tied in for production. A tank battery, steam generator and two transfer stations are also in place on the property. While the Chetopa project was in operation, 11,500 barrels of oil were sold that resulted in $803,195 of oil sales, net of royalties, included in the Kansas cost pool. The Company has drilled five wells to evaluate the prospectivity of the remaining acreage.

At October 31, 2008 the Company recorded an impairment charge against its costs on the Kansas unproven property of $3,069,858. The remaining costs represent the estimated salvage value of the equipment. The impairment was recorded as the Company has no plans in the near term to invest funds in the Kansas project because of the current low oil price, the expected lack of capital available for the project and the cost of retrofitting the existing plant and converting to a natural gas fuel source. The Company is obligated to pay a net revenue interest up to a maximum of US$750,000 on net revenues generated from the Chetopa project. The net revenue interest becomes payable after MegaWest recovers 100 percent of its capital and operating costs, and will be paid quarterly from 25 percent of the project's net revenues. As at October 31, 2008, no net revenue interest has been earned.

Kentucky

The Kentucky lease holdings include a 62.5 percent working interest in the shallow rights (above the base of the Beech Creek limestone formation) and an additional 37.5 percent working interest in the deep rights on 34,000 gross unproved acres in Kentucky. The Company holds a 34.75 percent working interest in all rights under an additional 4,300 gross unproved acres in Kentucky.

The Company is committed to fund a work program covering the first US$15,000,000 of exploration, testing and development expenditures on the leases aimed at proving the commercial recovery of the potential oil contained in the leases. MegaWest drilled eight exploration wells at various strategic locations on the Kentucky land in fiscal 2008. The result of this drilling program was confirmation of the commercial prospectivity of three Mississippian heavy oil pay zones found at depths of 200-600 feet from surface. A number of potential project locations have been indentified, and the first location has been appraised with four delineation wells. A steam drive enhanced recovery project has been designed and permit applications have been submitted for this location. Certain equipment and long lead items have been purchased; however, the start-up of this project will be delayed until there is more certainty regarding oil prices and the availability of project funding.

The New Albany Shale underlies a large portion of the Company's acreage position in Kentucky. 4,300 acres of the Company's leases have been farmed out for drilling and testing of New Albany Shale gas potential with the Company retaining a 34.75% working interest. In September, two wells were drilled and logged it is expected that the operator will proceed with plans to fracture and rate test these wells in 2009.

At October 31, 2008 the Company recorded an impairment charge against its costs on the Kentucky unproven property of $18,053,054. The remaining costs represent the Company's estimate of the fair market value of the leases and amounts invested to date on the demonstration project. The impairment was recorded because of the current low oil price and the expected lack of capital available for such a project in the near term. The Company is currently evaluating its alternatives related to the Kentucky project which include, but are not limited to, attracting a joint venture partner and re-negotiating its agreement. There can be no assurance that the Company will be successful in its attempts to find an economic alternative and further impairment charges may be recorded in the future.

As part of the acquisition of the Kentucky area, MegaWest is obligated to spend U.S. $15,000,000 by October 2009. In the event MegaWest does not complete this work program or re-negotiate the obligation, the Company is obligated to pay 37.5 percent of the unspent balance to its joint venture partner. To October 31, 2008, MegaWest had spent $4.7 million towards this commitment.

Montana

The Montana lease holdings include 43,700 gross unproved acres in Montana covering three prospects, Teton, Loma and Devils Basin. At Teton and Loma, the Company has a 40 percent working interest and can earn an additional 20 percent working interest on certain leases (60 percent overall) by carrying its working interest partner through the first U.S.$2.5 million of work. The Devils Basin prospect was acquired on July 31, 2008 for $105,000 cash, 100,000 shares of MegaWest and a carry of its partners 25 percent working interest cost on the first well. Upon completion of drilling the first well, MegaWest will own a 75 percent working interest in the 4,933 acre prospect. MegaWest currently owns 100 percent interest in 800 gross unproved acres at Devils Basin, subject to certain provisions of its area of mutual interest agreement with its working interest partners.

Acquisition of new 2D seismic over the existing Teton and Loma prospects has been completed and processed during the quarter. Interpretation of this seismic is ongoing, however the results to date did not validate the Company's geological model. As a result, additional geological work will be required before future drilling locations can be determined. At Teton, MegaWest is targeting a heavy oil reservoir, which if successful, may ultimately be developed through the application of SAGD, steam drive or cyclic steam stimulation. At Loma, MegaWest is targeting a light oil reservoir.

Trade seismic has been purchased on the Devils Basin prospect, which will be used to identify one or more prospective drill locations that MegaWest plans to test with a vertical well. At Devils Basin, MegaWest is targeting light oil production from the Heath Shale from horizontal wells.

At October 31, 2008, the Company recorded an impairment charge to the Montana land costs by $9,928,428. The remaining costs represent the Company's estimate of the fair market value of the oil and gas leases held plus amounts for the recently acquired 2D trade seismic on the Devils Basin leases. The impairment was recorded as the Company has no plans in the near term to continue exploration on the Montana lands given the current low oil price and the expected lack of capital available for such a project. The Company is now developing strategic alternatives related to these prospects.

Texas

As of October 31, 2008, the Company's interest in the project consists of approximately 34,000 gross unproved acres in Edwards County, Texas. Pursuant to earn-in agreements the Company may earn up to a 66.67 percent working interest in all leased acreage. Included in the total are 20,600 acres in which the Company has already earned a 50 percent working interest and 13,363 acres in which the Company has already earned a 25 percent working interest.

During the year ended April 30, 2008 the Company wrote-off $5,891,223 of the Texas cost pool. During the first two quarters of fiscal 2009, the Company has continued to write-off any additional costs incurred on the Texas project. As a result, the Company recorded $128,972 and $326,271 of impairment on the Texas costs during the three and six month periods ended October 31, 2008. The remaining costs represent the Company's estimate of the fair market value of the oil and gas leases. The Company is continuing to undertake a review of strategic alternatives related to this project.

Other

During the quarter the Company acquired an additional four used steam generators. At October 31, 2008 the Company has seven steam generators to be used at future project locations.

Outlook

The current financial markets, coupled with low oil prices, have required the Company to re-evaluate spending in all areas. As a result, the Company is taking steps to significantly reduce its general and administrative expenses, steaming operations at both the Marmaton River and Grassy Creek projects have been suspended pending higher oil prices and capital spending for 2009 has been significantly reduced.

MegaWest's near-term focus is to demonstrate commercial heavy oil production in Missouri.

Financial Review

Three months Ended October 31, 2008

MegaWest reported a net loss of $31,324,221, ($0.24) per share basic and diluted, for the three months ended October 31, 2008, compared with a net loss of $2,230,876, ($0.03) per share, for the comparable 2007 period. The loss for the 2008 period was mainly attributable to additional write-down of oil and gas assets of $31,248,639 (2007 - $nil) as discussed above in the operational review, administrative expenses of $1,581,710 (2007 - $1,176,105), offset by a foreign exchange gain of $1,483,636 (2007 - loss of $1,223,238).

The Company had interest income of $58,870 for the three months ended October 31, 2008 compared with $239,691 for the comparable period. The decrease in interest income for the 2008 period is the result of a lower average cash balance and lower interest rates.

General and administrative expenses for the three months ended October 31, 2008, totaled $1,581,710 net of $328,769 capitalized to oil and gas assets. During the three months ended October 31, 2007, the Company incurred general and administrative expenses of $1,176,105, net of $303,721 capitalized to oil and gas assets. General and administrative expenses are detailed in the table below.

 

                                  Three months                  Six months
                              ended October 31            ended October 31
--------------------------------------------------------------------------
                           2008           2007         2008           2007
--------------------------------------------------------------------------
Stock-based
 compensation:
Stock options       $   307,800  $     268,720  $   510,930  $     719,280
Shares issued for
 services                     -        132,300      238,525        271,000
Less: capitalized
 portion                (94,844)       (99,007)    (187,526)      (182,907)
                  ----------------------------  --------------------------
                        212,956        302,013      561,929        807,373
Salaries and
 benefits               967,894        595,614    1,798,682      1,246,103
Professional fees       274,247        210,722      453,870        418,410
Investor
 relations               24,168        203,944      115,163        301,451
Office and
 operations             365,891        131,470      654,067        341,740
Information
 technology              65,323         36,063      112,568         72,521
Less: capitalized
 portion               (328,769)      (303,721)    (748,250)      (540,421)
                  ----------------------------  --------------------------
                      1,368,754        874,092    2,386,100      1,839,804
--------------------------------------------------------------------------
                  $   1,581,710  $   1,176,105  $ 2,948,029  $   2,647,177
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Stock-based compensation expense of $212,956 (2007 - $302,013), net of the capitalized portion, was recorded for the three months ended October 31, 2008. Stock-based compensation expense was attributable to the cost associated with granting stock options to new employees and consultants. The overall decrease in stock-based compensation from 2007 to 2008 is primarily due to fewer stock option grants and a lower fair value per share assigned to each option.

Salary and benefit costs of $967,894 (2007 - $595,614) was recorded during the three months ended October 31, 2008. The increase in salary and benefit costs in 2008 is due to an increase in staff levels from 2007 to 2008, new hire signing bonus and consulting fees.

Professional fees totaled $274,247 (2007 - $210,722) and consist of legal, audit, accounting and tax advisory fees. The costs in the quarter include to ongoing legal fees and one-time costs associated with preparing for, and completing the internal control over financial reporting attestation requirements of the U.S. Securities and Exchange Commission.

Investor relation expenses of $24,168 (2007 - $203,944) for the three months ended October 31, 2008 and were incurred in an effort to raise investor awareness of the Company. The decrease in investor relations costs is due to fewer IR consultants engaged in the quarter.

Office and operations costs during the three months ended October 31, 2008 totaled $365,891 (2007 - $131,470) and are primarily made up of office rent and supplies, license and maintenance costs, insurance, telephone and internet, travel and miscellaneous costs. The increase in cost over 2007 is primarily due to larger office space in Calgary and the opening of a field office in Missouri.

Information technology costs during the three months ended October 31, 2008 totaled $65,323 (2007 - $36,063) and mainly consists of part-time IT consulting, software license and maintenance fees.

The foreign exchange gain for the three months ended October 31, 2008 resulted from the Company holding substantially all of its cash in U.S. dollars while the U.S. dollar strengthened against the Canadian dollar during the quarter. The Company has not entered into any hedging agreements, however the Company holds U.S. dollars to pay its U.S. denominated project costs.

Six Months Ended October 31, 2008

MegaWest reported a net loss of $32,437,997, ($0.25) per share basic and diluted, for the six months ended October 31, 2008, compared with a net loss of $4,608,647, ($0.06) per share, for the comparable 2007 period. The loss for the 2008 period was mainly attributable to the additional impairment on oil and gas assets of $31,377,611 (2007 - $nil) as discussed above in the operational review, administrative expenses of $2,948,029 (2007 - $2,647,177), offset by a foreign exchange gain of $1,855,776 (2007 - loss of $2,352,669).

The Company had interest income of $122,183 for the six months ended October 31, 2008 compared with $530,567 for the comparable period. The decrease in interest income for the 2008 period is the result of a lower average cash balance and lower interest rates.

General and administrative expenses for the six months ended October 31, 2008, totaled $2,948,029 net of $748,250 capitalized to oil and gas assets. During the six months ended October 31, 2007, the Company incurred general and administrative expenses of $2,647,177, net of $540,421 capitalized to oil and gas assets.

Stock-based compensation expense of $561,929 (2007 - $807,373) was recorded for the six months ended October 31, 2008. Stock-based compensation expense is comprised of $510,930 (2007 - $719,280) attributable to the cost associated with granting stock options to new employees and consultants and $238,525 (2007 - $271,000) attributable to the cost associated with issuing shares for consulting services. The overall decrease in stock-based compensation from 2007 to 2008 is primarily due to fewer stock option grants and a lower fair value per share assigned to each option.

Salary and benefit costs of $1,798,682 (2007 - $1,246,103) was recorded during the six months ended October 31, 2008. The increase in salary and benefit costs in 2008 is due to an increase in staff and consulting levels from 2007 to 2008.

Professional fees totaled $453,870 (2007 - $418,410) and consist of legal, audit, accounting and tax advisory fees. The costs to date relate to the fiscal 2008 year end filings including one-time costs associated with preparing for, and completing the internal control over financial reporting attestation requirements of the U.S. Securities and Exchange Commission.

Investor relation expenses of $115,163 (2007 - $301,451) for the six months ended October 31, 2008 and were incurred in an effort to raise investor awareness of the Company. The decrease in investor relations costs is due to fewer IR consultants engaged in the quarter.

Office and operations costs during the six months ended October 31, 2008 totaled $654,067 (2007 - $341,740) and are primarily made up of office rent and supplies, license and maintenance costs, insurance, telephone and internet, travel and miscellaneous costs. The increase in cost over 2007 is primarily due to larger office space in Calgary and the opening of a field office in Missouri.

Information technology costs during the six months ended October 31, 2008 totaled $112,568 (2007 - $72,521) and mainly consists of costs incurred during the first quarter on the implementation of a new accounting system as well as license and maintenance fees.

The foreign exchange gain for the six months ended October 31, 2008 resulted primarily from the translation of our U.S. dollar denominated cash balances into our Canadian dollar functional currency, while the U.S. dollar strengthened against the Canadian dollar during the second fiscal quarter. The Company has not entered into any hedging agreements, however the Company holds U.S. dollars to pay its U.S. denominated project costs.

 

SUMMARY OF QUARTERLY RESULTS

                                                                 2009
--------------------------------------------------------------------------
(000's except per share amounts)                              Q2        Q1
--------------------------------------------------------------------------
Interest income                                       $      59   $     63
Loss                                                    (31,324)    (1,114)
Loss per share                                            (0.24)     (0.01)
Total assets                                          $  33,851   $ 63,015

                                                     2008
--------------------------------------------------------------------------
(000's except per share amounts)       Q4         Q3         Q2         Q1
--------------------------------------------------------------------------
Interest income                  $     42   $    140   $    240   $    291
Loss                               (8,813)    (4,481)    (2,231)    (2,378)
Loss per share                      (0.11)     (0.06)     (0.03)     (0.03)
Total assets                     $ 48,555   $ 55,674   $ 57,167   $ 49,584

                                                                 2007
--------------------------------------------------------------------------
(000's except per share amounts)                             Q4         Q3
--------------------------------------------------------------------------
Interest income                                        $    263   $      -
Loss                                                     (3,560)    (3,276)
Loss per share                                            (0.08)     (0.21)
Total assets                                           $ 52,533   $ 11,013

In Q2 of 2009, the Company recorded an impairment charge to the Kansas, Kentucky and Montana oil and gas cost pool aggregating $31,051,340.

In Q4 of calendar 2008, the Company recorded an impairment charge on the Texas oil and gas asset cost pool of $5,891,223 and wrote off its equity investment in its Texas joint venture project.

The increased net loss in Q3 of 2008 is mainly attributable to financing cost due to the extension of the term of the private placement warrants and recognition of loss on marketable securities.

Starting in Q3 of 2007, the Company changed focus to an oil and gas company from a technology company. As a result, the increases in total assets relate to the cash proceeds from private placements and capital assets from acquisition of oil and gas assets.

LIQUIDTY AND CAPITAL RESOURCES

MegaWest's projects are either exploration in nature or in early stages of development, and profitable oil and gas operations have not yet been attained.

MegaWest had working capital of $4,758,898 at October 31, 2008. Due to low oil prices, the Company suspended operations at its two Missouri heavy oil projects subsequent to October 31, 2008. The Company is negotiating to reduce the gas supply cost for the projects and, depending on oil prices, is planning to re-start one of the Missouri projects in the first quarter of calendar 2009. In addition, the Company is evaluating alternatives related to the Kentucky project which include attracting a joint venture partner and re-negotiating its work commitment. The Company is currently implementing reductions to its administrative and operating costs. Additional capital may be required in the future to fund its capital and administrative costs. Additional capital may be in the form of equity, debt, sale of property, joint venture farmouts or any combination thereof.

Cash and Financial Conditions

MegaWest had working capital of $4,758,898 as at October 31, 2008, compared to working capital of $4,328,075 as at April 30, 2008. As at October 31, 2008, MegaWest had cash available of $7,087,639, of which $1,193,126 was restricted. Restricted cash consists of deposits made to secure two letters of credit and certain state well bonds for oil and gas wells.

Cash used in operating activities for the three months ended October 31, 2008, totaled $1,027,852 on a $31,324,221 net loss for the period.

Investing Activities

Cash used in investing activities was $8,736,996 for the three months ended October 31, 2008 (2007 - $5,657,405) and included cash capital expenditures of $9,680,182 incurred on the Company's oil and gas assets as follows:

- $125,897 on the Chetopa project for operations;

- $5,981,955 in the Missouri area for lease acquisition, geological and geophysical activities, operating costs at the Marmaton River project and construction costs at the Grassy Creek project;

- $1,326,450 in the Kentucky area for lease rentals, geological and geophysical activities and costs associated with the design, and procurement of long lead items for the first thermal oil project;

- $194,636 for completing analysis of Texas drilling and testing results;

- $1,088,883 for lease acquisitions and geological and geophysical activities in the Montana area; and

- $962,361 for other expenditures on oil and gas and office equipment, including costs for the acquisition of four used steam generators.

Cash used in investing activities was $13,705,838 for the six months ended October 31, 2008 (2007 - $7,786,272) and included cash capital expenditures of $14,736,643 incurred on the Company's oil and gas assets as follows:

- $153,547 on the Chetopa project for operations;

- $9,698,965 in the Missouri area for lease acquisition, geological and geophysical activities, operating costs at the Marmaton River project and construction costs at the Grassy Creek project;

- $2,296,359 in the Kentucky area for lease rentals, geological and geophysical activities and costs associated with the design, and procurement of long lead items for the first thermal oil project;

- $323,608 for completing analysis of Texas drilling and testing results;

- $1,274,842 for lease acquisitions and geological and geophysical activities in the Montana area; and

- $989,322 for other expenditures on oil and gas and office equipment, including costs for the acquisition of used steam generators.

Financing Activities

Cash received from financing activities was $127,485 for the three months ended October 31, 2008, and relates to the cash proceeds from warrants exercises. Cash received from financing activities during the three months ended October 31, 2007 was $nil.

Cash received from financing activities was $14,967,372 for the six months ended October 31, 2008, and relates to the cash proceeds of $14,839,887 from 26,750,000 common share private placement and the cash proceeds from warrants exercises. Cash received from financing activities during the six months ended October 31, 2007 was $nil.

The Company did not have any debt obligations at October 31, 2008.

The Company's shares trade in the United States on the Over-the-Counter Bulletin Board exchange ("OTC"). The number of outstanding shares and the number of shares that could be issued if all dilutive instruments are converted to shares at the following dates were:

 

                                   December 22,   October 31,     April 30,
                                          2008          2008          2008
--------------------------------------------------------------------------
Common shares outstanding          133,244,472   132,919,472    95,131,666

Stock options (1)                   10,072,000    11,164,500     9,650,000
Warrants
  Private placement (2)                      -             -    18,682,623
  Incentive (3)                     10,675,000    10,675,000    12,575,000
  Consulting (4)                     6,000,000     6,000,000     6,000,000
  Acquisition (5)                      250,000       250,000       250,000
Unit rights (6)                              -             -       562,500
Convertible promissory notes (7)             -             -     7,356,000
--------------------------------------------------------------------------
Total potential shares             160,241,472   161,008,972   150,207,789
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Notes:

(1) Represents stock options to purchase common shares at prices from U.S.$0.10 to U.S.$1.00 per share, with expiry dates through to August, 2012 and with various vesting terms.

(2) Represented share purchase warrants issued in connection with our private placement offerings. These warrants expired unexercised on July 5 and August 28, 2008, respectively. Each whole share purchase warrant was exercisable into one common share at U.S.$1.00 and U.S.$1.30, respectively.

(3) Represents warrants that entitle the holder to purchase common shares of the Company at a price of U.S.$0.10 per share until January 15, 2009.

(4) Represents warrants granted to various investor relations and other contractors. The consulting warrants are exercisable into one common share at an exercise price of U.S. $0.50 and expire on January 5, 2009.

(5) Represent warrants granted as partial consideration for the acquisition of the Teton and Loma prospects in Montana. Each warrant is exercisable into one common share at a price of U.S.$2.50 until April 24, 2009.

(6) Represented rights to buy an additional 375,000 units under the same terms as the March 2007 private placement. These rights expired on August 28, 2008.

(7) Represents common shares that could have been issued from the conversion of the principal and accrued interest of the convertible promissory notes at US$0.25 per share. On June 20, 2008 the convertible promissory notes matured and were converted into 7,412,559 common shares of the Company.

Contractual Obligations

The Company's commitments and contractual obligations at October 31, 2008 consist of the following:

(a) Contractual Obligations:

In Kentucky, the Company is obligated to spend U.S. $15,000,000 on the project by October 2009. In the event the Company does not complete this work program, the Company is obligated to pay 37.5 percent of the unspent balance to its joint venture partner. As at October 31, 2008, the Company incurred $4.7 million towards this obligation. The Company is evaluating its alternatives related to the Kentucky project which include attracting a joint venture partner and re-negotiating its work commitment.

In Kansas, MegaWest is obligated to pay a net revenue interest up to a maximum of U.S. $750,000 on net revenues generated from the Chetopa project. The net revenue interest becomes payable after the Company recovers 100 percent of its capital and operating costs, and will be paid quarterly from 25 percent of the project's net revenues. As at October 31, 2008, no amount of net revenue interest has been earned.

(b) Office and Equipment Leases:

The Company is committed to office rent, office operating costs and equipment leases over the upcoming fiscal years as follows:

 

2009                                                           $   290,116
2010                                                               565,132
2011                                                               545,132
2012                                                               568,279
2013                                                               578,450
Thereafter                                                         197,615
--------------------------------------------------------------------------
Total                                                          $ 2,744,724
--------------------------------------------------------------------------

(c) Severance Obligations:

Pursuant to employment agreements with three senior officers, the Company is obligated to pay up to $700,000 under certain events around employment termination.

TRANSACTIONS WITH RELATED PARTIES

The Company incurred the following related party transactions in the three and six month periods ended October 31. These transactions were measured by the exchange amount, which is the amount agreed upon by the transacting parties. A director and the former Chief Financial Officer ("CFO") was affiliated with a company that provided MegaWest with administrative services. For the three and six month periods ended October 31, 2008, the Company paid $6,530 and $51,530 respectively, for these services (three months ended October 31, 2007 - $45,000, six months ended October 31, 2007 - $99,600).

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our accounting principles are described in Note 1 to the annual consolidated financial statements for the year ended April 30, 2008 and 2007. We prepare our annual consolidated financial statements in conformity with Canadian GAAP.

The preparation of our financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue and expenses. On an ongoing basis we evaluate our estimates, including those related to acquisitions, status of oil and gas projects (proved or unproved), asset impairment, tax valuation allowances, volatility and market value of our share price and contingencies. These estimates are based on information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions and conditions.

The critical accounting policies that affect the more significant judgments and estimates used in preparation of our financial statements are described our annual MD&A for the year ended April 30, 2008 and have not changed to date.

CHANGE IN ACCOUNTING POLICIES

On May 1, 2008, the Company adopted new Canadian accounting standards regarding financial instruments and capital disclosures.

(1) Financial instruments

On May 1, 2008, the Company adopted new accounting standards for Financial Instruments - Disclosures, and Financial Instruments - Presentation. The new disclosure standards increase the Company's disclosures regarding the risks associated with financial instruments and how those risks are managed. The implementation of these standards did result in additional disclosures presented in note 14 to the interim financial statements.

(2) Capital Disclosures

On May 1, 2008, the Company adopted a new accounting standard for Capital Disclosures. This standard specifies disclosures about objectives, policies and processes for managing capital, quantitative data about what an entity regards as capital, whether an entity has complied with all capital requirements and, if it has not complied, the consequences of such non-compliance. The implementation of this standard did result in additional disclosures presented in note 15 to the interim financial statements.

(3) New accounting pronouncements

On May 1, 2009, the Company will be required to adopt a new accounting standard for Goodwill and Intangible Assets, which defines the criteria for the recognition of intangible assets.

On May 1, 2011, the Company will be required to adopt International Financial Reporting Standards ("IFRS"). MegaWest continues to monitor and evaluate the impact of convergence efforts to IFRS and the new policies on the Company's financial results.

OFF BALANCE SHEET ARRANGEMENTS

The Company does not have any off balance sheet arrangements other than the items noted above in contractual obligations.

FINANCIAL INSTRUMENTS

The Company is exposed to exchange rate fluctuations between the U.S. and Canadian dollars. The Company does not engage in the use of derivative financial instruments.

DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company's management, as appropriate, to allow timely decisions regarding required disclosures. Because of its inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent all errors or fraud. A system of internal controls can provide only reasonable, not absolute, assurance that the objectives of the control system are met, no matter how well conceived or operated.

For the year ended April 30, 2008, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), of the effectiveness of the design and the operation of the Company's disclosure controls and procedures, as defined in Multilateral Instrument 52-109. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were not effective as of April 30, 2008, due to the material weaknesses identified in the Company's internal controls over financial reporting. Refer to the annual MD&A for the year ended April 30, 2008 for a further discussion of internal controls over financial reporting. There have been no changes to the disclosure controls and procedures for period ended October 31, 2008.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

The Company maintains a set of internal controls and disclosure controls over financial reporting which have been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Canadian GAAP.

During the first quarter the Company implemented a new accounting system. The new system supports multi-currency transactions and is comprised of multiple ledgers designed for ledger accounting, budgeting and forecasting. The system's security feature provides better control over segregation of duties by limiting access to the system features and applications by individual users or user groups. Also in August the Company hired a controller to the finance team.

For the three month period ended October 31, 2008, there have been no other changes in the design of internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. Refer to the annual MD&A for the year ended April 30, 2008 for a further discussion of internal controls over financial reporting.

RISKS AND UNCERTAINTIES

The annual MD&A for the year ended April 30, 2008 includes an overview of certain business risks and uncertainties facing the Company. Those risks remain in effect on October 31, 2008. In addition, the following risks became prevalent during the quarter:

Oil Prices

The recent volatility and downward trending oil prices have required the Company to suspend steaming operations at its Missouri projects. The Company requires improved oil prices in order for its Missouri projects to generate positive cash flows and economic returns.

ADVISORY REGARDING FORWARD-LOOKING STATEMENTS

This MD&A contains forward-looking information and statements including opinions, assumptions, estimates and expectations of future production, cash flows and exploration results. Forward-looking statements include information that does not relate strictly to historical or current facts. When used in this document, the words "anticipate", "believe", estimate", "expect", "forecast", "intent", "may", "project", "plan", "potential", "should" and similar expressions are intended to be among the statements that indentify forward-looking statements.

Forward-looking statements are not guarantees of future performance and are subject to a wide range of known and unknown risks and uncertainties, and although the Company believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will be realized. Any number of important factors could cause actual results, future actions, conditions or events to differ materially from those in the forward-looking statements, including, but not limited to, the volatility of oil and gas prices, the ability to implement corporate strategies, the state of domestic capital markets, the ability to obtain financing, changes in oil and gas acquisition and drilling programs, operating risks, production rates, reserve estimates, changes in general economic conditions, and other factors. Undue reliance should not be placed on forward-looking statements as the Company can give no assurance that they will prove to be correct.

The forward-looking statements contained in this MD&A are made as of the date hereof. While the Company acknowledges that subsequent events and developments may cause the views expressed herein to change, the Company has no intention and undertakes no obligation to update, revise or correct such forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable securities law.

The Company believes that the expectations reflected in the forward-looking statements and information contained herein are reasonable, but no assurance can be given that these expectations, or the assumptions underlying these expectations, will prove to be correct and such forward-looking statements and information included in this document should not be unduly relied upon. The forward-looking information included herein represents the Company's views as of the date of this document and such information should not be relied upon as representing the Company's views as of any date subsequent to the date of this document. We have attempted to identify important factors that could cause actual results, performance or achievements to vary from those current expectations or estimates expressed or implied by the forward-looking information. However, these factors are not intended to represent a complete list of the factors that could affect us and there may be other factors that cause results, performance or achievements not to be as expected or estimated and that could cause actual results, performance or achievements to differ materially from current expectations. There can be no assurance that forward-looking information will prove to be accurate, as actual results and future events could differ materially from those expected or estimated in such statements. Accordingly, readers should not place undue reliance on forward-looking information.

The risks and uncertainties that could affect future events or the Company's future financial performance are more fully described in the Company's annual reports (on Form 20-F filed in the U.S. and Canada) and the other recent filings in the U.S. and Canada. These filings are available at www.sec.gov in the U.S. and www.sedar.com in Canada.

COMPANY INFORMATION

Additional information related to MegaWest is available on the Company's website at www.megawestenergy.com, SEDAR's website at www.sedar.com and EDGAR's website at www.sec.gov.

     Contacts:
     MegaWest Energy Corp.
     George T. Stapleton, II
     CEO
     (403) 984-6342
      
     MegaWest Energy Corp.
     R. William (Bill) Thornton
     President and COO
     (403) 984-6342
     Email: investor.relations@megawestenergy.com
     Website: http://www.megawestenergy.com
      
     Vorticom Inc.
     Nancy Tamosaitis
     Public Relations
     (212) 532-2208
     Email: nancyt@vorticom.com