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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

Or

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission File Number 1-35191

LONE PINE RESOURCES INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (403) 292-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. o Yes  x No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  x No

As of August 2, 2011 there were 85,019,232 shares of the registrant’s common stock, par value $.01 per share, outstanding.

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LONE PINE RESOURCES INC.

INDEX TO FORM 10-Q

June 30, 2011

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PART I—FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

LONE PINE RESOURCES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In Thousands, Except Share Amounts)

See accompanying Notes to Condensed Consolidated Financial Statements.

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LONE PINE RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In Thousands, Except Per Share Amounts)

See accompanying Notes to Condensed Consolidated Financial Statements.

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LONE PINE RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In Thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

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LONE PINE RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

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LONE PINE RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) ORGANIZATION AND BASIS OF PRESENTATION

Organization

Lone Pine Resources Inc. (“Lone Pine” or the “Company”) is an independent oil and gas exploration, development, and production company with operations in Canada within the provinces of Alberta, British Columbia, and Quebec, and in the Northwest Territories. Lone Pine was incorporated on September 30, 2010 by Forest Oil Corporation (“Forest”) in contemplation of an initial public offering by Lone Pine (the “Offering”) of Lone Pine’s common stock.  The Offering was completed on June 1, 2011, with Forest retaining a controlling interest in Lone Pine, owning 82% of the outstanding shares of Lone Pine common stock.  See Note 12 for more information on the Offering.

Lone Pine’s predecessor, Lone Pine Resources Canada Ltd. (“LPR Canada”), formerly known as Canadian Forest Oil Ltd., was a wholly-owned subsidiary of Forest and certain of Forest’s other wholly-owned subsidiaries, and was originally acquired by Forest in 1996. Forest contributed its direct and indirect ownership interests in LPR Canada to Lone Pine in conjunction with the Offering in exchange for 70 million shares of common stock of Lone Pine and $29 million in cash. Forest is an independent oil and gas company engaged in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids primarily in North America. Forest was incorporated in New York in 1924, as the successor to a company formed in 1916, and has been a publicly held company since 1969.

Forest has advised Lone Pine that it intends to distribute, or spin-off, to Forest’s shareholders, all of its remaining shares of Lone Pine common stock that Forest owns.  Forest also has advised Lone Pine that it intends to consummate the spin-off on or about September 30, 2011; however, Forest retains the right to decide whether to consummate the spin-off at its sole discretion. Immediately prior to the completion of the Offering, Lone Pine entered into agreements with Forest related to the separation of its business operations from Forest. These agreements govern various interim and ongoing relationships between Forest and Lone Pine, including the extent and manner of Lone Pine’s dependence on Forest for administrative support for a period following the Offering.

Basis of Presentation

The Condensed Consolidated Financial Statements included herein include the following:

·                  the June 30, 2011 balance sheet of Lone Pine and its wholly-owned consolidated subsidiaries, including LPR Canada;

·                  the December 31, 2010 balance sheets of LPR Canada, as Lone Pine’s predecessor, and Lone Pine, which were combined to form the restated December 31, 2010 Lone Pine balance sheet;

·                  Statements of operations for the three and six months ended June 30, 2011 for Lone Pine and its wholly-owned consolidated subsidiaries, including the results of operations of LPR Canada for the period prior to Forest’s contribution of LPR Canada to Lone Pine immediately prior to the Offering;

·                  Statements of operations for the three and six months ended June 30, 2010 for LPR Canada, as Lone Pine’s predecessor;

·                  Statement of cash flows for the six months ended June 30, 2011 for Lone Pine and its wholly-owned consolidated subsidiaries, including the cash flows of LPR Canada for the period prior to Forest’s contribution of LPR Canada to Lone Pine immediately prior to the completion of the Offering;

·                  Statement of cash flows for the six months ended June 30, 2010 for LPR Canada, as Lone Pine’s predecessor;

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·                  Statement of stockholders’ equity for the six months ended June 30, 2011 for Lone Pine and its wholly-owned consolidated subsidiaries, including the equity transactions of LPR Canada for the period prior to the completion of the Offering.

The functional currency of LPR Canada, Lone Pine’s operating subsidiary, is the Canadian dollar, and Lone Pine’s functional and reporting currency is the U.S. dollar. These financial statements are presented in conformity with U.S. generally accepted accounting principles (“GAAP”). Lone Pine conducts operations in one industry segment, natural gas and liquids exploration, development, and production, and in one country, Canada.

In the opinion of management, all adjustments, consisting of normal recurring accruals, have been made that are necessary for a fair presentation of the financial position of Lone Pine at June 30, 2011, and the results of its operations, its cash flows, and changes in its stockholders’ equity for the periods presented. Interim results are not necessarily indicative of expected annual results because of the impact of fluctuations in the price of oil, natural gas, and natural gas liquids and the impact the prices have on Lone Pine’s revenues and derivative instrument fair values.

In the course of preparing the Condensed Consolidated Financial Statements, management makes various assumptions, judgments, and estimates to determine the reported amounts of assets, liabilities, revenues, and expenses, and in the disclosures of commitments and contingencies. Changes in these assumptions, judgments, and estimates will occur as a result of the passage of time, and the occurrence of future events and, accordingly, actual results could differ from amounts previously established.

The more significant areas requiring the use of assumptions, judgments, and estimates relate to volumes of proved oil and gas reserves used in calculating depletion, the amount of future net revenues used in computing the ceiling test limitation, and the amount of future capital costs and abandonment obligations used in such calculations, determining impairments of investments in unproved properties, valuing deferred tax assets and goodwill, and estimating fair values of financial instruments, including derivative instruments.

For a more complete understanding of Lone Pine’s operations, financial position, and accounting policies, reference is made to the consolidated financial statements of Lone Pine and LPR Canada for the year ended December 31, 2010, and related notes thereto, included in Lone Pine’s final prospectus dated May 25, 2011 and filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) under the Securities Act of 1933 as amended (File Number 333-171123) on May 26, 2011 (the “Prospectus”).

(2) EARNINGS (LOSS) PER SHARE AND COMPREHENSIVE EARNINGS

Earnings (Loss) per Share

Basic earnings (loss) per share is computed using the two-class method by dividing net earnings (loss) attributable to common stock by the weighted average number of common shares outstanding during each period. The two-class method of computing earnings per share is required for those entities that have participating securities or multiple classes of common stock. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Holders of restricted stock issued under Lone Pine’s stock incentive plan have the right to receive non-forfeitable cash dividends, participating on an equal basis with common stock. Holders of phantom stock units issued to directors under Lone Pine’s stock incentive plan also have the right to receive non-forfeitable cash dividends, participating on an equal basis with common stock, while phantom stock units issued to employees do not participate in dividends. In summary, Lone Pine restricted stock awards and director phantom stock units are participating securities, and earnings are allocated to both common stock and these participating securities under the two-class method. However, these participating securities do not have a contractual obligation to share in Lone Pine’s losses. Therefore, in periods of net loss, none of the loss is allocated to these participating securities.

Under the treasury stock method, diluted earnings (loss) per share is computed by dividing (a) net earnings (loss), adjusted for the effects of certain contracts, if any, that provide the issuer or holder with a choice between settlement methods, by (b) the weighted average number of common shares outstanding, adjusted for the dilutive effect, if any, of potential common shares (e.g. stock options, unvested restricted stock grants, and unvested phantom stock units that may be settled in shares). No potential common shares shall be included in the computation of any diluted per share amount when a net loss exists. Unvested restricted stock grants and participating phantom stock units were not included in the calculation of diluted loss per share for the three and six months ended June 30, 2011, as their inclusion would have an antidilutive effect. There were no potential common shares outstanding for the three and six months ended June 30, 2010.

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Lone Pine issued 70 million shares of common stock to Forest as partial consideration for Forest’s contribution of its direct and indirect ownership interests in LPR Canada in connection with the Offering.  This recapitalization, effected immediately prior to the Offering, is treated similar to a stock dividend in that the computations of basic and diluted earnings per share have been adjusted retroactively for all periods presented to reflect this change in capital structure.

The following sets forth the calculation of basic and diluted earnings (loss) per share for the periods presented.

Comprehensive Earnings (Loss)

Comprehensive earnings (loss) is a term used to refer to net earnings (loss) plus other comprehensive income. Other comprehensive income is comprised of revenues, expenses, gains, and losses that under GAAP are reported as separate components of stockholders’ equity instead of net earnings (loss). Lone Pine’s other comprehensive income for the three and six months ended June 30, 2011 and 2010 includes net foreign currency gains and losses related to the translation of the assets and liabilities of its Canadian operations to U.S. dollars.

The components of comprehensive earnings (loss) are as follows:

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(3) STOCK-BASED COMPENSATION

The table below sets forth total stock-based compensation recorded during the three and six months ended June 30, 2011 and 2010, and the remaining unamortized amounts and weighted average amortization period as of June 30, 2011.  Stock-based compensation costs in 2010 and 2011 include costs recorded for Lone Pine employees participating in Forest’s stock incentive plans.  In addition, the three months ended June 30, 2011 include costs associated with Lone Pine employees and directors participating in Lone Pine’s own stock incentive plan.

(1)                                  $4.3 million of the unamortized stock-based compensation cost is based on the closing price of Lone Pine’s common stock on June 30, 2011, and $2.9 million of the unamortized stock-based compensation cost is based on the closing price of Forest’s common stock on June 30, 2011.

If Forest proceeds with the spin-off of its remaining shares of Lone Pine common stock to its shareholders, Lone Pine’s employees will be deemed to have been involuntarily terminated under the terms of their phantom stock unit and performance unit agreements awarded under Forest’s stock incentive plans, and their awards under those agreements will vest in full and be paid, subject to adjustment to account for the distribution, in accordance with those terms.

Stock Options

The following table summarizes stock option activity for Lone Pine employees in Forest’s stock incentive plans for the six months ended June 30, 2011.  There have been no options granted under Lone Pine’s stock incentive plan as of June 30, 2011.

(1)                                  The intrinsic value of a stock option is the amount by which the market value of the underlying stock, as of the date outstanding or exercised, exceeds the exercise price of the option.

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Restricted Stock, Performance Stock Units, and Phantom Stock Units

The following table summarizes the restricted stock and phantom stock unit activity in Lone Pine’s stock incentive plan for the six months ended June 30, 2011.  There have been no performance stock units granted under Lone Pine’s stock incentive plan as of June 30, 2011.

(1)                                  All of the unvested units of phantom stock at June 30, 2011 must be settled in cash. The phantom stock units have been accounted for as a liability within the Condensed Consolidated Financial Statements.

The following table summarizes the performance stock unit and phantom stock unit activity for Lone Pine employees in Forest’s stock incentive plans for the six months ended June 30, 2011.  There have been no restricted stock grants to Lone Pine employees under Forest’s stock incentive plans for the six months ended June 30, 2011.

(1)                                  Of the unvested phantom stock units at June 30, 2011, 228,935 units can be settled in cash, shares of common stock, or a combination of both, while the remaining 20,645 units can only be settled in cash. Of the 33,750 phantom stock units that vested during the six months ended June 30, 2011, 300 units were settled in shares of common stock and 33,450 units were settled in cash.  The phantom stock units have been accounted for as a liability within the Condensed Consolidated Financial Statements.

(4) DEBT

The components of debt are as follows:

(1)                                  In June 2011, the Company repaid all amounts outstanding on the note payable to Forest using proceeds from the completion of the Offering and borrowings under the credit facility.

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Bank Credit Facility

On March 18, 2011, Lone Pine entered into a stand-alone, CDN$500 million credit facility among Lone Pine, as parent, LPR Canada, as borrower, and a syndicate of banks led by JPMorgan Chase Bank, N.A., Toronto Branch (the “Lone Pine Credit Facility”). The Lone Pine Credit Facility became effective upon the closing of the Offering, and replaced the existing LPR Canada bank credit facility at such time. The Lone Pine Credit Facility will mature on March 18, 2016. Availability under the Lone Pine Credit Facility is governed by a borrowing base, which is currently CDN$350 million. The determination of the borrowing base is made by the lenders, in their sole discretion, taking into consideration the estimated value of LPR Canada’s oil and gas properties in accordance with the lenders’ customary practices for oil and gas loans. The borrowing base will be redetermined semi-annually, and the available borrowing amount under the Lone Pine Credit Facility could increase or decrease based on such redetermination. In April 2011, the lenders set the borrowing base at CDN$350 million, and the first redetermination of the borrowing base is expected to occur on or about October 1, 2011.  In addition to the scheduled semi-annual redeterminations, LPR Canada and the lenders each have discretion at any time, but not more often than once during any calendar year, to have the borrowing base redetermined.

The borrowing base is also subject to change in the event (1) Lone Pine or any of its subsidiaries issue senior unsecured notes, in which case the borrowing base will immediately be reduced by an amount equal to 25% of the stated principal amount of such issued senior unsecured notes, excluding any senior unsecured notes that Lone Pine or any of its subsidiaries may issue to refinance then-existing senior notes, or (2) LPR Canada sells oil and gas properties included in the borrowing base having a fair market value in excess of 10% of the borrowing base then in effect. The borrowing base is subject to other automatic adjustments under the Lone Pine Credit Facility. A lowering of the borrowing base could require LPR Canada and Lone Pine to repay indebtedness in excess of the borrowing base in order to cover a deficiency.

Borrowings under the Lone Pine Credit Facility bear interest at one of two rates that may be elected by LPR Canada. Borrowings bear interest at a rate that may be based on:

(1) the sum of the applicable bankers’ acceptance rate (as determined in accordance with the terms of the credit facility), and a stamping fee of between 175 to 275 basis points, depending on borrowing base utilization; or

(2) the Canadian Prime Rate (as determined in accordance with the terms of the credit facility) plus 75 to 175 basis points, depending on borrowing base utilization.

The Lone Pine Credit Facility includes terms and covenants that place limitations on certain types of activities, including restrictions or requirements with respect to additional debt, liens, asset sales, hedging activities, investments, dividends, mergers, and acquisitions, and also includes a financial covenant. The Lone Pine Credit Facility provides that LPR Canada will not permit its ratio of total debt outstanding to consolidated EBITDA (as adjusted for non-cash charges) for a trailing twelve-month period to be greater than 4.00 to 1.00.

Under certain conditions, amounts outstanding under the Lone Pine Credit Facility may be accelerated. Bankruptcy and insolvency events with respect to Lone Pine, LPR Canada, or certain of Lone Pine’s or LPR Canada’s subsidiaries will result in an automatic acceleration of the indebtedness under the Lone Pine Credit Facility. Subject to notice and cure periods, certain events of default under the Lone Pine Credit Facility will result in acceleration of the indebtedness under the facility at the option of the lenders. Such other events of default include non-payment, breach of warranty, non-performance of obligations under the Lone Pine Credit Facility (including the financial covenant), default on other indebtedness, certain pension plan events, certain adverse judgments, change of control, a failure of the liens securing the Lone Pine Credit Facility, and, until completion of the spin-off, an event of default under Forest’s credit facility.

The Lone Pine Credit Facility is collateralized by Lone Pine’s assets. Under the Lone Pine Credit Facility, LPR Canada is required to mortgage and grant a security interest in 75% of the present value of the proved oil and gas properties and related assets of LPR Canada and its subsidiaries. LPR Canada is required to pledge, and has pledged, the stock of its subsidiary to the lenders to secure the Lone Pine Credit Facility. Under certain circumstances, LPR Canada could be obligated to pledge additional assets as collateral. Upon completion of the spin-off, the stock of all of Lone Pine’s subsidiaries will be pledged to the lenders to secure the Lone Pine Credit Facility. Until the spin-off is completed, Forest will guarantee the obligations of LPR Canada under the Lone Pine Credit Facility. Following the spin-off, Lone Pine and certain of its other subsidiaries will guarantee the obligations of LPR Canada under the Lone Pine Credit Facility.

Of the CDN$500 million total nominal amount under the Lone Pine Credit Facility, JPMorgan Chase Bank and 10 other banks hold 100% of the total commitments, with JPMorgan Chase holding 13.3% of the total commitments, two

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lenders holding 11.7% each of the total commitments, three lenders holding 10% each of the total commitments, and the other lenders holding 6.7% each of the total commitments.

From time to time, Lone Pine and its affiliates have engaged or may engage in other transactions with a number of the lenders under the Lone Pine Credit Facility. Such lenders or their affiliates have served as underwriters or initial purchasers of Lone Pine’s equity securities, serve as counterparties to LPR Canada’s commodity derivative agreements, and may, in the future, act as agent or directly purchase LPR Canada’s production.

Prior to the effectiveness of the Lone Pine Credit Facility, LPR Canada’s bank credit facility was part of Forest’s combined bank credit facilities (the “Combined Facility”), which consisted of (1) a $1.65 billion U.S. credit facility (the “U.S. Facility”), among Forest and a syndicate of banks led by JPMorgan Chase Bank, N.A., and (2) a $150 million Canadian credit facility (the “Canadian Facility”), among LPR Canada and a syndicate of banks led by JPMorgan Chase Bank, N.A., Toronto Branch. On May 25, 2011, Forest and LPR Canada entered into the Third Amendment to Second Amended and Restated U.S. Credit Agreement and Termination of Second Amended and Restated Canadian Credit Agreement (the “Amendment”) some of the operative provisions of which became effective on May 25, 2011 and some of the operative provisions of which became effective on June 1, 2011. Pursuant to the Amendment and in connection with the Offering and the effectiveness of the operative provisions of the Lone Pine Credit Facility, the Combined Facility was amended to, among other things, remove any collateral owned by Lone Pine or any of its subsidiaries from the collateral securing the U.S. Facility, terminate the Canadian Facility, terminate various guaranties securing the Canadian Facility, release collateral securing the Canadian Facility, terminate certain liens and mortgages securing the Canadian Facility, and terminate the Second Amended and Restated Intercreditor Agreement, dated as of June 6, 2007, among the lenders specified therein.

As of June 30, 2011, there were outstanding borrowings of $281 million (CDN$271 million) under the Lone Pine Credit Facility.

Note Payable to Forest

In 2004, LPR Canada entered into a promissory note with Forest. The note, as amended, limited the principal amount outstanding at one time to $500 million and called for principal amounts to be repaid upon Forest’s demand or, failing such demand, on November 11, 2014. Proceeds from Lone Pine’s Offering and borrowings under the Lone Pine Credit Facility were used to repay the note in June 2011, and the note was cancelled. The interest rate charged on borrowings under the note during the periods presented was set at three-month LIBOR plus two times Forest’s credit default swap rate, with such interest rate being reset on the first day of each quarter.

(5) PROPERTY AND EQUIPMENT

Acquisition

On April 29, 2011, the Company completed the acquisition of certain natural gas properties located in the Narraway field in Alberta for $79 million using funds advanced by Forest under LPR Canada’s promissory note payable to Forest.  The acquisition increased the Company’s working interests in certain properties already owned and operated by the Company in the Narraway field and provided additional capacity in gathering systems and a gas plant in the Narraway field. The acquisition was accounted for using the acquisition method of accounting, which requires the assets and liabilities acquired to be recorded at their fair values at the date of acquisition. The provisional estimate of fair values is as follows (in thousands):

Full Cost Method of Accounting

The Company uses the full cost method of accounting for oil and gas properties. All of the Company’s oil and gas operations are conducted in Canada. All costs incurred in the acquisition, exploration, and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes, and overhead related to exploration and development activities) and the fair value of estimated future costs of site restoration, dismantlement, and abandonment

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activities are capitalized. During the three months ended June 30, 2011 and 2010, Lone Pine capitalized $.2 million and $.6 million of general and administrative costs (including stock-based compensation), respectively. During the six months ended June 30, 2011 and 2010, Lone Pine capitalized $1.5 million and $1.9 million of general and administrative costs (including stock-based compensation), respectively. Interest costs related to significant unproved properties that are under development are also capitalized to oil and gas properties. During each of the three months ended June 30, 2011 and 2010, Lone Pine capitalized $.3 million of interest costs attributed to unproved properties. During the six months ended June 30, 2011 and 2010, Lone Pine capitalized $.5 million and $.3 million, respectively, of interest costs attributed to unproved properties.

Investments in unproved properties, including capitalized interest costs, are not depleted pending determination of the existence of proved reserves. Unproved properties are assessed periodically to ascertain whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding period of the properties, geographic and geologic data obtained relating to the properties, and estimated discounted future net cash flows from the properties. Estimated discounted future net cash flows are based on discounted future net revenues associated with probable and possible reserves, risk adjusted as appropriate. Where it is not practicable to assess individually the amount of impairment of properties for which costs are not individually significant, such properties are grouped for purposes of assessing impairment. The amount of impairment assessed is added to the costs to be amortized, or is reported as a period expense, as appropriate.

The Company performs a ceiling test each quarter under the full cost method of accounting. The ceiling test is a limitation on capitalized costs prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is not a fair value based measurement. Rather, it is a standardized mathematical calculation. The ceiling test provides that capitalized costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves using current prices, excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, at a discount factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. Should the net capitalized costs for a cost center exceed the sum of the components noted above, a ceiling test write-down would be recognized to the extent of the excess capitalized costs.

Gain or loss is not recognized on the sale of oil and gas properties unless the sale significantly alters the relationship between capitalized costs and estimated proved oil and gas reserves attributable to a cost center.

Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, as adjusted for future development costs and asset retirement obligations, are amortized over the total estimated proved reserves. The Company uses its quarter-end reserves estimates to calculate depletion for the current quarter.

Capital Leases

In April 2011, Lone Pine entered into a sale-leaseback transaction where Lone Pine sold compressors for CDN$7.7 million and simultaneously entered into a lease that provides for annual lease payments of approximately CDN$1.5 million for five years.  This lease is classified as a capital lease.  Lone Pine did not have any capital lease agreements as of December 31, 2010.

The Company’s assets recorded under capital leases are set forth in the table below.

(1)        Amortization of assets recorded under capital leases is included in the Condensed Consolidated Statement of Operations as “Depreciation, depletion, and amortization.”

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The Company’s future minimum lease payments under capital leases, together with the present value of the net minimum lease payments, is set forth in the table below.

(1)                Amount necessary to reduce net minimum lease payments to present value.

(2)                Reflected in the Condensed Consolidated Balance Sheet as current and noncurrent “Capital lease obligations” of $1.2 million and $6.6 million, respectively.

(6) ASSET RETIREMENT OBLIGATIONS

Lone Pine records the fair value of a liability for an asset retirement obligation in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset. Subsequent to initial measurement, the asset retirement obligation is required to be accreted each period to its present value. Capitalized costs are depleted as a component of the full cost pool using the units-of-production method. Lone Pine’s asset retirement obligations consist of costs related to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties.

The following table summarizes the activity for Lone Pine’s asset retirement obligations for the six months ended June 30, 2011 and 2010.

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(7) FAIR VALUE MEASUREMENTS

The Company’s assets measured at fair value on a recurring basis at June 30, 2011 are set forth in the table below.  The Company has no liabilities measured at fair value on a recurring basis at June 30, 2011.

(1)                                The authoritative accounting guidance regarding fair value measurements for assets and liabilities measured at fair value establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These tiers consist of: Level 1, defined as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

(2)                                The Company’s derivative assets include commodity derivatives (see Note 8 for more information on these instruments). The Company utilizes present value techniques to value its derivatives. Inputs to the valuations include published forward prices and credit risk considerations, including the incorporation of published interest rates and credit spreads. All of the significant inputs are observable; therefore, the Company’s derivative instruments are included within the Level 2 fair value hierarchy.

The fair values and carrying amounts of the Company’s financial instruments are summarized below as of the dates indicated.

(1)                                  The Company used various assumptions and methods in estimating the fair values of its financial instruments. The carrying amount of the credit facility approximates fair value since borrowings under the credit facility bear interest at variable market rates.  The carrying amounts of advances and note payable to Forest approximated fair value due to their short-term nature. The carrying amount of the capital lease obligation approximates fair value, as 5-year interest rates have not materially changed since the lease was executed in the second quarter of 2011.  The methods used to determine the fair values of the derivative instruments are discussed above. See also Note 8 to the Condensed Consolidated Financial Statements for more information on the derivative instruments.

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(8) DERIVATIVE INSTRUMENTS

Commodity Derivatives

During the quarter ended June 30, 2011, Lone Pine entered into commodity swap derivative instruments as an attempt to moderate the effects of wide fluctuations in commodity prices on Lone Pine’s cash flow and to manage the exposure to commodity price risk. Lone Pine’s commodity derivative instruments generally serve as effective economic hedges of commodity price exposure; however, Lone Pine has elected not to designate its derivatives as hedging instruments for accounting purposes. As such, Lone Pine recognizes all changes in fair value of its derivative instruments as unrealized gains or losses on derivative instruments in the Condensed Consolidated Statement of Operations.

The table below sets forth Lone Pine’s outstanding commodity swaps as of June 30, 2011.