Zenith Announces 3rd Quarter Results

RNS Number : 1424Y

Zenith Energy Ltd

01 March 2017

ZENITH ANNOUNCES 3rd QUARTER RESULTS

Calgary, Alberta, March 1, 2017, Zenith Energy Ltd. ("Zenith" or the "Company") (LSE: ZEN; TSX.V: ZEE) the dual listed international oil & gas production company is pleased to announce its quarterly financial results from the three months ended December 31, 2016 ("Q3-2016" or the "Quarter") and the nine months ended December 31, 2016 ("YTD-2016").

These results were posted on SEDAR on February 28, 2017 in accordance with TSX rules. This is the first quarterly report to be published since the Company was admitted to trading on the London Stock Exchange on January 11 2017 and is therefore the first set of financials announced by the Company via the Regulatory News Service (RNS).

Highlights

· First full quarter of production from our asset in Azerbaijan

· Q3 profit of $341,000 generated in Azerbaijan

· Average production of 322 boepd across the group

· Net loss of $1,555,692 for the three months ending December 31, 2016 which includes non-recurring costs of approx. $890,000 in relation to London listing and options award

· Net profit of $614,713,380 for the nine months ending December 31, 2016

Corporate Activities

· Significant progress achieved towards LSE Main Market listing (Completed post quarter end)

· $593,000 raised from existing investors to help fund corporate activities towards London listing

· Senior management team strengthened by appointment of CFO

Exciting Outlook / Subsequent Events

· London listing achieved on January 11, 2017

· Gross fundraising of £3,187,000 completed in January 2017.

· Comprehensive Azerbaijan workover programme started in February 2017.

· Argentine assets sold in February 2017 to strengthen balance sheet allowing management to focus on improving profitability at other assets

· Re-assignment of costs of approx. $1,600,000 in Q4 post successful fundraise and completion of the business combination of the Azeri assets

· Loan payment of USD$700,000 made on January 20, 2017 to significantly reduce corporate debt

· $407,000 of convertible loan debt was converted on January 30, 2017 resulting in the issuance of 3,700,000 new shares

Andrea Cattaneo, Zenith CEO, commented:

"I am pleased to present our first set of quarterly results since listing on the London Stock Exchange. The quarter ending December 31, 2016 clearly evidences how Zenith is now gradually and increasingly reaping the rewards of its oil production revenues. The Company's primary objective emphatically remains to achieve incremental oil production increases through a systematic field rehabilitation programme in Azerbaijan. It should be underlined that these financial statements also reflect one-time costs related to the Company's recent listing on the London Stock Exchange which will not be incurred in the future. I look forward to presenting the next quarterly results which will further reflect the Company's positive direction, and to updating the Market with news in relation to the workover of well M-195 in Azerbaijan."

For further information, please contact:

José Ramón López-Portillo Chairman

Andrea Cattaneo CEO & President

Email: info@zenithenergy.ca

Telephone: +1 (587) 315-9031

Telefax: +1 (403) 775-4474

Zenith Energy Ltd.

Condensed Interim Consolidated Financial Statements

As at and for the three and nine months ended December 31, 2016 (Unaudited)

Managements' Responsibility

To the Shareholders of Zenith Energy Ltd.:

The accompanying unaudited condensed interim consolidated financial statements of Zenith Energy Ltd. (the "Company") as at and for the three and nine months ended December 31, 2016 have been prepared by and are the responsibility of the management of the Company and are approved by the board of directors of the Company. The unaudited condensed interim consolidated financial statements are prepared in accordance with International Financial Reporting Standards and reflect management's best estimates and judgments based on currently available information.

Notice of No Auditor Review of Interim Consolidated Financial Statements

In accordance with National Instrument 51-102 released by the Canadian Securities Administrators, the Company discloses that its auditors have not reviewed these unaudited condensed interim consolidated financial statements as at and for the nine months ended December 31, 2016.

(signed) "Andrea Cattaneo" (signed) "Alan Hume"

President and Chief Executive Officer Chief Financial Officer

February 28, 2017

Calgary, Alberta

Zenith Energy Ltd.

Condensed Interim Consolidated Statements of Changes in Equity
(Unaudited) (Expressed in Canadian dollars)

As at	Note	December 31, 2016 $	March 31, 2016 $
ASSETS
Current assets
Cash		18,476		137,982
Marketable securities	3	-		7,632
Trade and other receivables	18	1,956,334		787,477
Inventory	20	321,678		173,457
Prepaid expenses		296,177		385,504
		2,592,665		1,492,052
Non-current assets
Property and equipment	4	1,066,398,243		14,598,089
Prepaid property and equipment insurance		160,761		207,000
Total assets		1,069,151,669		16,297,141
LIABILITIES
Current liabilities
Trade and other payables	18	4,892,846		3,266,503
Oil share agreement		1,063,629		1,027,504
Deferred consideration payable	4	501,836		-
Loans payable	6	1,946,338		3,210,114
Convertible notes	7	-		697,046
Notes payable	8	213,608		-
		8,618,257		8,201,167
Non-current liabilities
Loans payable	6	2,376,388		673,647
Convertible notes	7	525,992		-
Derivative liability	7	398,892		357,936
Deferred consideration payable	4	287,044,416		-
Bonds	8	383,090		563,103
Decommissioning obligation	9	9,703,775		7,896,671
Deferred taxes	18	153,927,334		883,567
		454,359,887		10,374,924
Total liabilities		462,978,144		18,576,091
SHAREHOLDERS' EQUITY
Share capital	10	11,455,930		9,578,270
Warrants	11	1,509,537		1,509,537
Options		290,200		-
Contributed surplus		2,231,583		2,231,583
Accumulated other comprehensive loss		(10,381,178)		(1,952,414)
Surplus / (Deficit)		601,067,453		(13,645,926)
Total shareholders' equity		606,173,525		(2,278,950)
Total liabilities and shareholders' equity		1,069,151,669		16,297,141
Going concern (Note 1) Subsequent events (Note 19) Segmented information (Note 20)

Three months ended Nine months ended

December 31 December 31

	Note	2016 $	2015 $	2016 $	2015 $
Revenue
Oil and gas revenue		1,676,663	271,262	2,503,961	1,803,172
Electricity revenue		240,582	-	479,995	-
Royalties		-	(7,521)	(7,211)	(115,408)
		1,917,245	263,741	2,976,745	1,687,764
Expenses
Operating		1,017,487	459,763	1,802,019	1,272,597
Transportation		-	2,890	1,725	56,875
General and administrative (1)		1,901,148	641,112	3,696,671	1,981,875
Transaction costs		-	35,536	-	35,536
(Gain) on sale of marketable securities		-	-	(3,720)	-
Foreign exchange		(129,957)	(292,365)	(220,697)	(389,463)
Fair value adjustment on marketable securities	3	-	5,058	-	21,552
Fair value adjustment on derivative liability	7	39,531	(26,686)	39,531	(209,652)
Depletion and depreciation		319,197	55,598	523,012	249,202
		3,147,406	880,906	5,838,541	3,018,522
Loss from operations		(1,230,161)	(617,165)	(2,861,796)	(1,330,758)
Gain on business combination	4	-	-	771,189,297	-
Finance expense	14	(325,531)	(272,305)	(570,354)	(775,424)
Net income (loss) before tax		(1,555,692)	(889,470)	767,757,147	(2,106,182)
Income tax (provision) reduction 18		-	-	(153,043,767)
Net (loss)/profit		(1,555,692)	(889,470)	614,713,380	(2,106,182)
Exchange differences on translation on foreign operations		(233,589)	721,337	(8,428,763)	(88,046)
Comprehensive (loss)/profit		(1,789,281)	(1,761,125)	606,284,617	(2,194,228)
Net Profit (loss) per share
Basic	13	(0.03)	(0.03)	10.59	(0.07)
Diluted		(0.02)	(0.03)	5.90	(0.07)
Weighted average shares outstanding Basic	13	63,284,344	33,623,814	58,619,309	30,859,060
Diluted	13	108,912,461	57,774,291	104.247,426	55,009,357

(1) Included in the General and Administrative expenses for three and nine months ended December 31, 2016 are approximately CAD$600,000 and CAD$1,600,000 non-recurrent expenses related to the January 11th 2017 admission to the London Stock Exchange as well as a non-cash charge of C$290,000 in relation to the award of the 6,000,000 options.

For the nine months ended December 31	Note	2016 $	2015 $
Operating activities
Net profit/(loss)		614,713,380	(2,106,182)
Items not involving cash:
Shares issued for services		130,810	-
Gain on sale of marketable securities		(3,720)	-
Fair value adjustment on marketable securities		-	21.552
Fair value adjustment on derivative liability		39,531	(209.652)
Gain on business combination	4	(771,189,297)	-
Deferred taxation	18	-	-
Depletion and depreciation		523,012	249.202
Impairment of property and equipment		2,142	-
Options issued		290,200	-
Finance expense		194,016	383.514
Income tax expense		153,043,767	-
		(2,256,160)	(1.661.566)
Foreign exchange on translation		62,053	(398,404)
Change in non-cash working capital	16	285,031	89,666
		(1,909,076)	(1,970.304)
Financing activities
Proceeds from issuance of bonds		191,183	517,731
Net proceeds from loans		359,894	594,554
Repayment of notes payable		-	(204,315)
Proceeds from issue of share capital, net of share issue costs		1,325,139	637,130
Change in non-cash working capital	16	-	(30,660)
		1,876,216	1,514,440
Investing activities
Proceeds on sale of marketable securities		10,818	361,926
Purchase of marketable securities		-	(136,568)
Expenditures on property and equipment		(103,850)	(517,993)
Change in non-cash working capital	16	11,388	71,772
		(81,644)	(220,863)
Change in cash		(114,504)	(676,727)
Foreign exchange effect on cash held in foreign currencies		(5,002)	(90,711)
Cash, beginning of period		137,982	936,499
Cash, end of period		18,476	169,061

For the nine months ended December 31	Note	2016 $	2015 $
Share capital Balance - beginning of period		9,578,270	8,686,556
Unit private placement	10	1,577,360	637,130
Fair value of warrants		-	(87,200)
Conversion of convertible notes	10	300,300	-
Balance - end of period		11,455,930	9,236,486
Warrants Balance - beginning of period	11	1,509,537	1,245,708
Fair value of warrants		-	138,100
Expiry of warrants		-	(93,000)
Balance - end of period		1,509,537	1,290,808
Options Balance - beginning of period	12	-	-
Fair value of options issued		290,200	-
Balance - end of period		290,200	-
Contributed surplus Balance - beginning of period		2,231,583	2,138,583
Expiry of warrants		-	93,000
Balance - end of period		2,231,583	2,231,583
Accumulated other comprehensive loss Balance - beginning of period		(1,952,414)	(1,810,281)
Exchange differences on translation of foreign operations		(8,428,764)	(88,046)
Balance - end of period		(10,381,178)	(1,898,327)
Surplus / (Deficit) Balance - beginning of period		(13,645,926)	(5,971,478)
Net profit /(loss)		614,713,380	(2,106,182)
Balance - end of period		601,067,453	(8,077,660)
Total equity		606,173,525	2,782,890

1. Nature of operations and going concern

Zenith Energy Ltd. ("Zenith" or the "Company") was incorporated pursuant to the provisions of the British Columbia Business Corporations Act on September 20, 2007. The address of the Company's registered office is 15th Floor, 850 - 2nd Street S.W., Calgary, Alberta T2P 0R8, Canada. The Company is primarily involved in the exploration for, development of and production of oil and natural gas properties primarily in Argentina (until February 19, 2017), Azerbaijan and Italy.

As at December 31, 2016, the Company has a working capital deficit of $5,782,125 (March 31, 2016 - $6,709,115), negative cash flows from operating activities of $1,909,076 (March 31, 2016 - $2,473,767) and an accumulated surplus of $601,067,453 (March 31, 2016 deficit - $13,645,926) since its inception, and may incur future losses in the development of its business. Current cash resources will not be sufficient to continue the exploration and development activities. These conditions indicate the existence of material uncertainties that may cast doubt on the Company's ability to continue as a going concern. Continuing operations are dependent on the ability to obtain adequate funding to finance existing operations, and attain future profitable operations in Azerbaijan and Italy. Additional financing is subject to the global financial markets and economic conditions, and volatility in the debt and equity markets. These factors have made, and will likely continue to make it challenging to obtain cost effective funding. There is no assurance this capital will be available and if it is not, the Company may be forced to curtail or suspend planned activity.

These condensed interim consolidated financial statements have been prepared on the basis of the going concern assumption that the Company will be able to discharge its obligations and realize its assets in the normal course of business at the values at which they are carried in these consolidated financial statements, and that the Company will be able to continue its business activities. Realization values may be substantially different from carrying values as shown and these consolidated financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the going concern basis were not appropriate for these consolidated financial statements, then the adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the classifications used in the consolidated statements of financial position. These adjustments could be material.

Critical Accounting Estimates and Judgements

The Group makes estimates and assumptions concerning the future. The resulting estimates will, by definition, seldom equal the related achieved amounts. The estimates and assumptions that have significant risk of causing material adjustments and assumptions to the carrying amounts of assets and liabilities are disclosed below.

Valuation of the assets and liabilities associated with the Azerbaijan acquisition this assessment involves:

· Future revenues and estimated development and exploration costs;

· The discount rate to be applied for the purposes of deriving a recoverable value;

· The expected tax rate; and

· The expected oil price.

During the nine months ended December 31, 2016 the Company recognised a value of assets and associated liabilities for its Azerbaijan Assets acquired after the combination of the business, including the payments due in respect of the acquisition relating to royalties, work and exploration programmes and taxation. The valuations of the assets and of the liabilities have been based on the Net Present Value ("NPV") of future cash flows included in the Competent Persons Report prepared on behalf of the Company by Champan Petroleum Engineering Ltd. ("Chapman") and published on 15 June 2016 ("Original CPR"). The NPV of future cashflows was discounted at a rate of 10%. The Board considers 10% an appropriate rate of discount for the following reasons:

· The Asset has a verified producing history as well as current production;

· The asset is production & development with 2P reserves (made by way of a National Instrument 51-101) based over an acreage of 642 square kilometres comprised of different structures;

· The Asset is low cost and onshore, presenting a low operational risk;

· Azerbaijan has one of the world's oldest established Oil & Gas industries;

· Azerbaijan has a stable political environment with a government that has guaranteed and supported the licence rights of companies operating in the Oil & Gas industry since its independence in 1992

· Crude oil is exported via two different pipelines, one delivering oil to the Mediterranean Sea and the other in the Black Sea, thereby derisking routes to market from both a political and logistical perspective.

Any changes to the estimates may result in a material impact to the carrying value of both the assets and liabilities, arising in respect of the acquisition.

2. Basis of presentation

These condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, including International Accounting Standard 34 - Interim Financial Reporting. The Company has consistently applied the same accounting policies throughout all periods presented. These condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company's annual filings for the year ended March 31, 2016.

The following entities have been consolidated within the Company's financial statements:

Entity

Registered

Holding

Zenith Energy Ltd.	Canada	Parent
Ingenieria Petrolera del Rio de la Plata SRL	Argentina	100%
Ingenieria Petrolera Patagonia Ltd ("IPP")	US	100%
Canoel Italia SRL	Italy	100%
Zenith Aran Oil Company Limited	BVI	100%
Aran Oil Operating Company Ltd.	BVI	80%
Petrolera Patagonia Corporation ("PPC")	US	100% owned subsidiary of IPP
PP Holding Inc. ("PPH")	US	100% owned subsidiary of IPP
Petrolera Patagonia SRL	Argentina	95% owned subsidiary of PPC and 5% held by PPH

The functional currency of the Company is the Canadian dollar ("CAD"); the functional currency Company's Argentine subsidiaries is the Argentine Peso; the functional currency of the Company's Italian subsidiary is the Euro; the functional currency of the Company's Azerbaijan subsidiary and of the Company's United States subsidiaries is the United States dollar. The Company's presentation currency is the CAD. In Financial Statements, unless otherwise noted, all dollar amounts are expressed in CAD. References to "US$" are to United States dollars, references to "GBP" are to Great Britain Pounds, references to "AZN" are to Azerbaijan Manat.

b) Basis of measurement

The preparation of financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgment in applying the Company's accounting policies.

The Company makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and assumptions are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The significant judgements made by management in applying the Company's accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at and for the year ended March 31, 2016 and the following additional critical judgements:

Determination that the acquisition of the Azerbaijan oil assets is a business combination rather than an asset acquisition and the functional currency of the acquired business is New Manat.

The effect of a change in an accounting estimate is recognized prospectively by including it in comprehensive income in the year of the change, if the change affects that year only, or in the year of the change and future years, if the change affects both. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are discussed in Note 5 of the Company's audited consolidated financial statements for the year ended March 31, 2016. These unaudited condensed consolidated interim financial statements have been prepared on a historical cost basis, and are presented in Canadian dollars, unless otherwise indicated.

These condensed interim consolidated financial statements were authorized for issue by the Board of Directors on February 28, 2017.

3. Marketable securities

December 31

2016

March 31

2016

GRIT shares (a)

7,632

(a) GRIT shares

As at December 31, 2016, the Company held no GRIT shares (2015 - 116,913 GRIT shares with a fair value of GBP 18,122 ($34,130)).

The Company sold all of the GRIT shares for gross cash proceeds of $10,840 in July 2016 recognized a $3,720 gain on the sale of marketable securities and a $745 loss on foreign exchange in the Q2-2017 consolidated statements of loss and comprehensive loss.

4. Business combination

Azerbaijan

On January 26, 2016 the Company registered a branch of Zenith Aran Oil Company Ltd. ("Zenith Aran"), a wholly owned subsidiary of the Company, in Baku, Azerbaijan, to have an operating entity in Azerbaijan for the ownership and management of the Azerbaijan oil properties.

Zenith Aran was incorporated in the British Virgin Islands under the BVI Business Companies Act, 2004, on November 27, 2015.

On March 16, 2016, the Company's wholly-owned subsidiary, Zenith Aran, entered into a Rehabilitation, Exploration, Development and Production Sharing Agreement ("REDPSA") with SOCAR (State Oil Company of Azerbaijan Republic) and SOA (Socar Oil Affiliate) . The REDPSA covers 642 square kilometres which include the active Muradkhanli, Jafarli and Zardab oil fields located in the Lower Kura Region, about 240 kilometres inland from the capital city of Azerbaijan, Baku (the "Azerbaijani Operations"). Pursuant to the terms of the REDPSA, the Company and SOA have the exclusive right to conduct petroleum operations from the Azerbaijani Operations, through a newly incorporated operating company, Aran Oil Operating Company Limited (the "Aran Oil"). Aran Oil, in which Zenith has an 80% interest, is the operator of the concession, with the remaining 20% interest being held by SOA.

On June 24, 2016, the President of the Republic of Azerbaijan signed the REDPSA into law, following approval by Parliament on June 14, 2016. The delivery of the capital assets previously used in respect of the petroleum operations at the Azerbaijani Operations, from the previous operating company to Aran Oil, physically completed in June 2016, was formally completed on August 11, 2016 with the necessary signatures on related documents

Aran Oil now has operational control of the Azerbaijani Operations. The transfer of operational control did not involve any interruption of petroleum production operations at the Azerbaijani Operations.

As a part of the Handover, an inventory of equipment and material was prepared and the volumes of oil in the pipelines and tanks were recorded. Any revenues related to the existing oil as at the date of Handover were allocated to SOCAR. At the time of the formal finalitazion of the transaction the production in Azerbaijan was about 275 barrels per day of oil, they have generated revenues for the Company since the completion of the transfer to Aran Oil.

The Handover involved the transfer of certain individuals employed by the current operator of the Azerbaijani Operations to Aran Oil. In accordance with the laws of Azerbaijan, the transfer process involved the relevant employees being dismissed by their previous employer (the outgoing operator of the Azerbaijani Operations) and entering into new employment contracts with Aran Oil. Any payments to the relevant employees arising as a result of their dismissal by the previous operating company were for the account of the previous operating company. In accordance with the laws of Azerbaijan, the relevant employees have been employed by Aran Oil with effect from the Effective Date. The form of employment agreement follows the template prescribed by the Azerbaijani labour code.

The capital assets which transferred to Aran Oil as part of the Handover include production equipment, vehicles, wells, pumps, storage facilities, tools, generators, compressors, pipelines, offices, warehouses, buildings, rigs, yards, roads, infrastructure, radios, tubular goods, supplies, materials and facilities. The Company appointed a consultant in Azerbaijan to review and report on the availability and the state of the assets prior to Handover.

The term of the Contract Exploration Area portion of the REDPSA is 25 years from the date of SOCAR's approval of the contractor's development program. The term of each Area may be extended by an additional five years at SOCAR's discretion.

The valuations of the Asset and of the liabilities have been based on the Net Present Value ("NPV") of future cash flows included in the Competent Persons Report prepared on behalf of the Company by Chapman Petroleum Engineering Ltd. ("Chapman") and published on June 15, 2016 ("Original CPR"), and in particular the financial and economic data from page 93 to page 128.

The acquisition of Assets has been brought to account as a business combination using the acquisition method of accounting and resulted in a bargain purchase arising as follows:

Fair value of net assets acquired CAD$

D&P assets	1,052,765,084
Compensatory Oil*	(1,997,357)
Capital Costs*	(285,548,895)
Foreign Currency Translation	7,913,703
Decommissioning Obligations*	(1,943,339)
Gain on business combination	771,189,197
Taxation	(153,043,767)
Net NPV of the assets	618,145,430

* Amounts required to be paid under the terms of the REDPSA and therefore in accordance with FRS3 ("Business Combinations") form part of the acquisition amount.

D&P assets

The estimated value of the D&P assets acquired was determined using both estimates and an independent reserve evaluation based on oil and gas reserves discounted at 10%.

Decommissioning provisions

The fair value of decommissioning obligation assumed was determined using the timing and estimated costs associated with the abandonment, restoration, and reclamation of the wells and facilities acquired, discounted at a credit adjusted rate.

On 15 June 2016, the day immediately following the acquisition date, the decommissioning obligation assumed was remeasured using a long term risk free rate based on the expected timing of cash flows, in accordance with IAS 37 ("Provisions, Contingent Liabilities and Contingent Assets"). The result was a CAD $1,943,339 increase in the decommissioning obligation associated with the acquired assets and the net result of the acquisition and recognition of decommissioning liability recognition being a gain of CAD $711,189,197 measurement adjustment in the first quarter of year 2017 consolidated statement of income and comprehensive income using prevailing exchange rates.

Compensatory oil

The Company has an obligation by contract to:

1. within one year following the Effective Date, deliver at no charge to SOCAR 5% of the total production of petroleum produced from the contract rehabilitation area in each calendar quarter; and

2. commencing on the first anniversary of the Effective Date, start delivering, at no charge to SOCAR, 15% of the total production of petroleum produced from the contract rehabilitation area in each calendar quarter, until the amount delivered is the equivalent of 45,000 tons of "compensatory" crude oil to SOCAR.

The amount, stated as a liability, reflects the aforementioned quantity of production to be delivered to SOCAR, valued at an estimated production price of US$20 per barrel.

Capital Costs

At the time of the formal finalisation of the transaction the production in Azerbaijan was approximately 275 barrels of oil per day. Historically, production has been much greater in quantity (Source: SOCAR). Gas is also produced, but in low quantity and is used on-site.

The Company, which is free to sell/export oil without restrictions, sells its oil through the Marketing and Operations Department of SOCAR ("SOCARMO"). A commission of 1% of total sales is payable to SOCARMO.

Between 2017 and 2019, the Company plans to workover a total of 44 existing wells in Azerbaijan which are currently inactive or produce at low rates (˂ 5 STB/d) to bring rates up to 10 to 15 STB/d per well using improved technology, non damaging fluids and optimised treatments. It is estimated that 10 wells will be worked over in 2017, 16 wells in 2018 and 18 wells in 2019. This programme has commenced using the existing workover rig in the field and the Company intends to purchase an additional modern workover rig to optimise the workover of the wells, within the next four years.

In addition to the marginal producing wells, five non-producing wells in the Maykop zone in the Zardab field in Azerbaijan are expected to be worked over in 2017 and to be returned to production once the existing wellbore and sand production issues have been resolved.

The Company intends to acquire one modern drilling rig capable of drilling 4,500m to carry out a fifteen year drilling programme. It is anticipated that five new wells will be drilled in 2018 and ten wells in each year thereafter until the anticipated drilling programme is complete in 2032.

During the first four years of the REDPSA it is estimated that US$2,500,000 will be spent upgrading the gathering system and central facilities in Azerbaijan to improve safety, efficiency and handle higher production rates. During the same period, 39 active wells currently producing at marginal rates will be worked over at an estimated cost averaging $50,000 per well, using the existing workover rig.

It is anticipated that in 2017 five shut-in wells completed in the Maykop formation will be worked over to control sand production, at an estimated cost of US$100,000 per well, and returning to an increase of production at a total of 200STBl/d.

It is envisaged that development drilling will commence in 2018 and continue until 2032. It has been estimated that each well with proved reserves will cost approximately US$4,300,000. This cost will include the direct cost of materials, fuel, salaries, etc. to drill the well and an allocation for the purchase of one drilling rig, well completion and tie-in.

Proved reserves are those reserves that can be estimated, by competent professional, with a high degree of certainty to be recoverable. The estimate of the reserves are related to a given date, based on analysis of drilling, geological, geophysical and engineering data; the use of established technology, and; specified economic conditions, which are generally accepted and being reasonable, and shall be disclosed.

Each well in the proved plus probable category is expected to cost approximately US$5,000,000. This category of reserves includes those additional reserves that are less certain to be recovered than proved reserves.

In addition to the costs anticipated for the wells with proved reserve, wells in the proved plus probable category have an additional allocation of US$700,000 for the purchase and maintenance of a second drilling rig and expansion and modernisation of the field facilities.

In all 145 wells are expected to be drilled over 16 years, of which 58 of these are anticipated to be horizontal wells.

DEFERRED CONSIDERATION PAYABLE
	December 31, 2016	March 31, 2016

Compensatory Oil
Current portion	27,780	-
Non-Current portion	1,969,577	-
Capital costs
Current portion	474,056	-
Non-Current portion	285,074,839	-
As of 31 December	287,546,252	-

Deferred Condideration payable current	501,836	-
Deferred Condideration payable non-current	287,044,416	-
Total	287,546,252	-

5. Property and equipment

	D&P assets	Furniture & Fixtures		Total
Cost
Balance - March 31, 2016	$ 21,612,271	$ 51,921		$ 21,664,192
Acquisition	1,052,765,084	-		1,052,765,084
Additions	84,313	19,537		103,850
Decommissioning obligations	(2,142)	-		(2,142)
Foreign currency translation	(822,905)	(2,080)		(824,985)
Balance - December 31, 2016	$ 1,073,636,621	$ 69,378		$ 1,073,705,999
Accumulated depletion and depreciation
Balance - March 31, 2016	$ (7,027,156)		$ (38,947)	$ (7,066,103)
Depletion and depreciation	(519,762)		(3,250)	(523,012)
Foreign currency translation	279,695		1,664	281,359
Balance - December 31, 2016	$ (7,267,223)		$ (40,533)	$ (7,307,756)
Carrying amount
March 31, 2016	$ 14,585,115		$ 12,974	$ 14,598,089
December 31, 2016	$ 1,066,369,398		$ 28,845	$ 1,066,398,243

The depletion calculation for the nine months ended December 31, 2016 included estimated future development costs of $2.7 million for proved and probable reserves (March 31, 2016 - $2.7 million).

The Company did not identify any indicators of impairment at December 31, 2016.

6. Loans payable

		December 31 2016		March 31 2016
USD loan payable (a)	$	2,934,252	$	2,834,600
Euro bank debt (b)		234,143		288,422
Euro bank debt (c)		213,411		282,457
Euro loan payable (d)		309,312		478,282
First Credit Agreement (e)		215,650		-
Second Credit Agreement (f)		267,696		-
Third Credit Agreement (g)		74,131		-
Fourth Credit Agreement (h)		74,131		-
		4,322,726		3,883,761
Current portion of loans payable		(1,946,338)		(3,210,114)
Long-term portion of loans payable	$	2,376,387	$	673,647

a) USD loan payable

As at March 31, 2016, the Company was indebted to a third party lender for a USD 2,185,337 ($2,866,506) loan payable secured by the shares of its wholly owned subsidiary, IPP, and bearing fixed interest at 10% per annum.

The loan maturity date is March 31, 2018 and the repayment scheduled was amended in December 2016 to require a USD 700,000 (CAD$943,467) payment on January 2017 and a final payment of approximately USD 1,485,337 on March 31, 2018.

As at December 31, 2016, $943,467 (March 31, 2016 - $2,834,600) of principal is classified as a current liability; $2,001,952 (March 31, 2016 - $nil) of principal is classified as long-term and $292,061 (March 31, 2016 - $156,874) of accrued interest is included in trades and other payables.

In January 2017 the Company paid the USD 700,000 (CAD$943,467) of the USD loan, utilising part of the proceeds from the fundraising aligned with the listing on the London Stock Exchange of January 11, 2017. The President, CEO and Director of the Company, has provided a personal guarantee to the lender in respect of the repayment of the USD Loan by the Company.

b) Euro bank debt

On August 6, 2015, the Company obtained a €220,000 loan (CAD$315,986) from the GBM Banca of Rome. The loan is unsecured, bears fixed interest at 7% per annum and is repayable in 60 monthly payments of principal and interest until August 6, 2020.

As at December 31, 2016, the principal balance of the loan was €165,250 (CAD$234,143) of which $59,587 is classified as a current liability and $174,556 is classified as long-term.

c) Euro bank debt

On December 17, 2015, the Company obtained a €200,000 loan (CAD$301,880) from Credito Valtellinese Bank of Tortona. The loan is unsecured, bears fixed interest at 4.5% per annum and is repayable in 42 monthly payments of principal and interest until July 17, 2019.

As at December 31, 2016, the principal balance of the loan was €150,610 (CAD$213,411) of which $80,336 is classified as a current liability and $133,075 is classified as long-term.

d) Euro loan payable

On October 1, 2015, the Company acquired a co-generation plant from a third party of which €401,148 (CAD$594,943) of the purchase price was in the form of a loan from the seller. The loan is secured by the co-generation plant and bears interest at 3.5% and is repayable in 30 monthly payments of principal and interest until March 31, 2018.

As at December 31, 2016, the principal balance of the loan was €218,302 (CAD$309,312) of which $231,341 is classified as a current liability and $77,971 is classified as long-term.

e) USD $320,000 General Line of Credit Agreement

On August 9, 2016, the Company's wholly-owned subsidiary, Zenith Aran, entered into a general line of credit agreement with Rabitabank Open Joint Stock Company ("Rabitabank") (the "First Credit Agreement") up to an amount of USD $320,000, for industrial and production purposes. The loan could be drawn down in tranches and as at 30 September 2016 it was fully drawn down. Rabitabank can postpone or suspend the facility if there is a decline in oil production under the REDPSA of more than 30% from production levels as at the date of first drawdown or if the REDPSA is terminated. The First Credit Agreement bears interest at a rate of 12% per annum. The loan is guaranteed by the Company. In November 2016 the Company repaid the first tranche of the loan for the amount of USD160,000, and as at December 31, 2016, the balance of the loan outstanding was USD $160,000 (plus accrued interest) (CAD$215,650) that is classified as a current liability. The loan is repayable on February 22, 2017.

On February 22, 2017 the terms of the repayment of the First Credit Agreement were amended and the amount of USD $160,000 (plus accrued interest)(CAD $215,650) will be paid on March 27, 2017

f) USD $200,000 General Line of Credit Agreement

On September 30, 2016, Zenith Aran entered into a second general line of credit agreement with Rabitabank (the "Second Credit Agreement") up to an amount of USD $200,000. The Second Credit Agreement bears interest at a rate of 12% per annum. The loan is repayable in two tranches; USD $100,000 (plus accrued interest) (CAD$133,848) is payable on January 3, 2017 and the remaining USD $100,000 (plus accrued interest) (CAD$133,848) is payable on April 3, 2017. The loan is guaranteed by the Company. As at December 31, 2016, the full balance of the loan was outstanding and it is all classified as a current liability.

At the date of this document the first tranche of the repayment of the Second Credit Agreement was totally paid.

g) USD $55,000 General Line of Credit Agreement

On November 21, 2016, Zenith Aran entered into a third general line of credit agreement with Rabitabank (the "Third Credit Agreement") up to an amount of USD $55,000 (CAD$74,131). The Third Credit Agreement bears interest at a rate of 12% per annum and is repayable on February 21, 2017. The loan is guaranteed by the Company. As at December 31, 2016, the full balance of the loan was outstanding and it is classified as a current liability .

On February 21, 2017 the terms of the repayment of the Third Credit Agreement were amended and the amount of USD $55,000 (plus accrued interest)(CAD $74,130) will be paid on March 27, 2017.

h) Second USD $55,000 General Line of Credit Agreement

On November 22, 2016, Zenith Aran entered into a fouth general line of credit agreement with Rabitabank (the "Fourth Credit Agreement") up to an amount of USD $55,000 (CAD$74,131). The Fourth Credit Agreement bears interest at a rate of 12% per annum and is repayable on February 21, 2017. The loan is guaranteed by the Company. As at December 31, 2016, the full balance of the loan was outstanding and it is classified as a current liability .

On February 22, 2017 the terms of the repayment of the Fourth Credit Agreement were amended and the amount of USD $55,000 (plus accrued interest)(CAD $74,130) will be paid on March 27, 2017

i) Cayman loan payable

On November 13, 2015, the Company secured a £20,000,000 (CAD$40,250,000) unsecured loan facility (the "Loan") for general corporate purposes with a Cayman Islands based Fund (the "Lender"). The Loan can be drawn by written notice given by the Company. Subject to a satisfaction of certain conditions precedent and the approval of the Lender, a minimum sum of £100,000 and up to a maximum sum of £2,000,000 for each tranche can be drawn at any time from the date of the Loan agreement for a period of 18 months after such date. The Loan accrues interest at the rate of 12% per annum on the amount drawn and is payable quarterly in arrears. Each outstanding draw down is repayable on the third anniversary of the first draw down date. The Company may prepay the loan, in whole or in part, at any time and without penalty. A one-time fee of £25,000 is payable in cash or by issuing the Lender common shares of the Company.

As at December 31, 2016 the Company had not made any drawns on the Loan.

7. Convertible notes

	Face value $	Debt component $		Derivative liability $
Balance - March 31, 2016	730,915	697,046		357,936
Conversion	(300,300)	(275,000)	(25,300)
New Subscriptions	167,030	140,305		26,725
Change in fair value	-	-		39,531
Accretion	-	419		-
Foreign exchange	(18,954)	(36,778)		-
Balance - December 31, 2016	578,691	525,992		398,892

Swiss Franc Convertible Note

As at December 31, 2016, the Company held CHF312,586 Swiss Francs ($413,051) (March 31, 2016 - CHF540,000 Swiss Francs ($730,915)) principal amount of unsecured convertible notes bearing interest at 1% per annum, payable in arrears in equal quarterly installments on January 11, 2019. At any time prior to maturity and at the option of the note holder, the principal and any unpaid interest of a note may be converted into common shares of the Company at a price of $0.11 per share.

Interest is accrued and presented in the amount of $337,345 as at December 31, 2016 (March 31, 2016 - $314,597).

In June 2016, the Company issued 2,730,000 common shares on the conversion of 225,047 Swiss Francs ($300,300) principal amount of convertible notes (Note 10).

On November 28, 2016, the Company formalized the previously reached agreement for the amendments of the terms of its 5% convertible notes. The proposed amendments to the notes included an extension of two years to the maturity date from January 11, 2017 to January 11, 2019, a reduction to the conversion price from $0.125 per common share to $0.11 per common shares and a reduction to the interest rate payable by the Company from 5% to 1% for the remainder of the term. The proposed extension to the notes, and the reduction in the conversion price and interest rate remains subject to approval of the TSX Venture Exchange.

On January 25, 2017 the Company issued 3,700,000 shares on the conversion of 311,067 Swiss Francs (CAD$407,000) principal amount of convertible notes.

Outstanding debt As of January 25, 2017	CHF	CAD$
Principal	CHF 314,953	$ 412,084
Accrued Interest	CHF 249,758	$ 327,730
Total to be paid	CHF 564,711	$ 739,814

Conversion of notes	Shares	CHF	CAD$
Outstanding principal As of January 25, 2017		CHF 314,953	$ 412,084
Issued January 2017	3,700,000	-CHF 311,067	$ -407,000
Remaining		CHF 3,886	$ 5,084

Changes calculated using the following current change rate conversion (January 25, 2017)
Change Rate
CAD$/CHF	1.3084
CHF/CAD$	0.7643

The outstanding amount of convertible note, at the date of this document, is CHF3,886 Swiss Francs ($5,084) of principal, and CHF249,758 (CAD$327,730) of accrued interest.

Pound Convertible Note

On November 22, 2016, Gunsynd Plc ("Gunsynd"), a company listed on the London Stock Exchange's AIM market for listed securities, invested GBP£100,000 (CAD$165,640) by way of subscription for convertible unsecured loan notes bearing interest of 3% per annum (the "GBP Convertible Notes"). The GBP Convertible Notes are payable in arrears in quarterly instalments. At the option of Gunsynd, the principal of the GBP Convertible Notes may be converted into Common Shares of the Company at any time prior to the expiry of 36 months from issuance at a price equal to CAD $0.10 per Common Share (or the initial listing price of the Common Shares if the Company is listed on another senior stock exchange at the time of such conversion). Subject to the GBP Convertible Notes not having been converted, the GBP Convertible Notes mature 36 months from the date of issuance. Unless permitted under Canadian securities legislation, the GBP Convertible Notes cannot be traded before the date that is four months and a day after the date of issuance.

Interest is accrued and presented in the amount of $531 as at December 31, 2016 (March 31, 2016 - $nil).

8. Bonds and notes payable

BONDS

Balance - March 31, 2016	$	563,103

Fair value of warrants		-
Finder's warrants		-
Finder's fees		-
Liability portion		563,103
Interest		49,694
Accretion		7,668
Conversion		(121,411)
Repayments		(43,624)
Foreign currency translation		(72,341)
Balance - December 31, 2016	$	383,090

The bonds are secured by 99% of the oil and gas properties owned by the Company's subsidiary, Canoel Italia SRL. The bonds bear interest at 12% per annum, payable quarterly, until the maturity date 36 months from the date of issuance at which time the principal amount of bonds is repayable in full.

Each common share purchase warrant entitles the holder thereof to purchase, subject to adjustment, one additional common share at an exercise price of $0.25 per share for a period of 36 months from the date of issuance. In connection with the private placement, the Company paid a finder's fees of GBP 11,250 ($21,169) and granted 67,500 finder's warrants exercisable at $0.25 until for a period of 36 months from the date of issuance.

The grant date weighted average fair value of warrants was $0.03 per warrant ($50,900) estimated using the Black-Scholes pricing model calculations based on the following significant assumptions:

Risk-free interest rate	0.50% - 0.70%
Expected volatility	75%
Expected life	3 years
Dividends	nil

On November 2016 the bond was partially repaid for CAD$121,411 (with related accrued interest), and within December 31, 2016 all the outstanding accrued bond interests were paid for CAD$70,641.

NOTES PAYABLE

On July 16, 2016, the Company's wholly owned subsidiary in Argentina, Petrolera Patagonia S.r.l. ("PPSRL"), entered into a loan agreement with Arpenta Sociedad de Bolsa S.A. ("Arpenta"), pursuant to which PPSRL borrowed USD $154,000 of Bonar 2017 Argentine sovereign bonds (the "Bonds") (the "Arpenta Bond Loan"). PPSRL subsequently sold the Bonds in the market (for Argentine pesos) to address cashflow requirements. Interest is payable on the Arpenta Bond Loan at a rate of 4% per annum. The Arpenta Bond Loan had a bullet repayment date of 15 December 2016, although management at PPSRL has taken steps for the Arpenta Bond Loan to be rolled-over (in whole) for an additional 180 day period. Repayment of the Arpenta Bond Loan is required to be made to Arpenta in the same Bonar 2017 Argentine sovereign bonds as were borrowed.

As at December 31, 2016, the Company had US$154,000 (CAD$207,563) (March 31, 2016 - US$nil) of notes payable.

As at December 31, 2016, the balance of notes payable is $211,384 including accrued interest (March 31, 2016 - $nil).

Balance - March 31, 2016	$	nil

Liability portion		198,787
Interest		3,821
Foreign currency translation		9,226
Balance - December 31, 2016	$	213,608

9. Decommissioning obligation

The following table presents the reconciliation of the carrying amount of the obligation associated with the reclamation and abandonment of the Company's oil and gas properties:

Balance - March 31, 2016	$	7,896,671
Acquisition		1,943,339
Accretion		128,030
Foreign currency translation		(264,265)
Balance -December 31, 2016	$	9,703,775

The following significant weighted average assumptions were used to estimate the decommissioning obligation:

Undiscounted cash flows - uninflated	$17 million
Undiscounted cash flows - inflated	$1,223 million
Risk free rate	35.2%
Inflation rate	25.4%
Expected timing of cash flows	16 - 20 years

10. Share capital

	Number of shares		Amount
Balance - March 31, 2016	43,594,406	$	9,578,270
Unit private placement proceeds	20,979,747		1,877,660
Fair value of warrants	-		-
Balance - December 31, 2016	64,574,153	$	11,455,930

(a) On April 11, 2016, the Company completed the private placement of 6,674,775 shares at CAD$0.08 per unit for gross proceeds of CAD$533,982. Of the 6,674,775 shares, 5,000,000 shares were issued forming part of a unit comprising one common share and one common share purchase warrant. Each whole common share purchase warrant entitles the holder to acquire one common share at CAD$0.15 per common share for a period of 24 months from the date of issuance. The remaining 1,674,775 shares were not issued with accompanying warrants. The Company also paid aggregate finders' fees of CAD$26,000.

(b) On April 21, 2016, the Company completed the private placement of 3,892,875 shares at CAD$0.08 per unit for gross proceeds of CAD$311,430. Each unit is comprised of one common share and one common share purchase warrant. Each whole common share purchase warrant entitles the holder to acquire one common share at CAD$0.15 per common share for a period of 24 months from the date of issuance. The Company also paid aggregate finders' fees of CAD$14,181.95 and issued 179,712 warrats to certain arm's-length parties in the connection with the Private Placement.

(c) On June 9, 2016, the Company issued 2,730,000 shares at a deemed price of $0.11 per share in partial conversion of convertible notes $300,300 (Note 7), and 312,500 shares at a price of $0.10 per share creditors of the Corporation to settle debts owing by the Company totalling $31,250.

(d) On June 16, 2016, the Company closed a non-brokered private placement of 1,519,250 shares of the Company at a price of $0.08 per Unit for aggregate gross proceeds of $121,540. Each unit is comprised of one common share and one common share purchase warrant. Each Warrant will be exercisable for one Common Share at a price of $0.15 per share for a period of 24 months from the date of closing of the offering.

(e) On October 10, 2016, the Company closed a non-brokered private placement of 1,906,050 Common Shares at a price of CAD $0.10 per unit for aggregate gross proceeds of CAD $190,605. Each unit is comprised of one Common Share and one common share purchase warrant. Each common share purchase warrant will be exercisable for one Common Share at a price of CAD $0.20 per share for a period of 24 months from the date of closing of the offering.

(f) On October 19, 2016, the Company issued 724,235 Common Shares at a deemed price of CAD $0.085 per Common Share to certain debtholders and creditors of the Company to settle debts owing by the Company, representing an aggregate of CAD $61,585.48.

(g) On November 7, 2016, the Company closed a non-brokered private placement of 2,745,062 Common Shares at a price of CAD $0.12 per unit for aggregate gross proceeds of CAD $329,407.44. Insiders of the Company subscribed for an aggregate of 2,195,475 units for aggregate subscription proceeds of CAD $263,457. Each common share purchase warrant will be exercisable for one Common Share at a price of CAD $0.20 per share for a period of 24 months from the date of closing of the offering.

(h) On November 30, 2016, the Company issued 150,000 Common Shares to certain debtholders and creditors of the Company (based on a price of CAD$ $0.08 per share Common Share) in settlement of a debt of GBP £7,000 (inclusive of accrued interest) owed by the Company in respect of services.

11. Warrants

	Number of warrants	Amount $	Weighted average exercise price
Balance - March 31, 2016	29,638,898	1,509,537	$ 0.23
Unit private placements (Note 10)	17,242,724	-	0.16
Balance - December 31, 2016	46,881,622	1,509,537	$ 0.21

As at December 31, 2016 the Company had 46,881,622 warrants outstanding and exercisable at a weighted average exercise price of $0.21 per share with a weighted average life remaining of 2 years.

12. Stock options

The Company has a stock option plan (the "Plan") for the benefit of directors, employees and consultants. The maximum number of shares available under the Plan is limited to 10% of the issued and outstanding common shares at the time of granting options. Granted options are fully vested on the date of grant, at which time all related share-based payment expense is recognized in the consolidated statements of loss and comprehensive loss. Stock options expire five years from the date of grant.

On November 18, 2016, the Company granted Options to certain of its Directors and employees to acquire a total of 6,000,000 Common Shares pursuant to its Stock Option Plan. Each Option granted entitles the relevant holder to acquire one Common Share for an exercise price of CAD $0.10 per Common Share. The expiry date of the Options is the date falling five years from the date of granting, namely November 18, 2021.

The following table summarizes information about the Company's stock options outstanding as at December 31, 2016:

Number of options	outstanding and exercisable	Weighted average exercise price ($)
Balance - March 31, 2016	-	-
Granted	6,000,000	0.10
Balance - December 31, 2016	6,000,000	0.10

The Stock Options Plan was approved by shareholders of the Company at the Annual General Meeting held on January 20, 2017

On February 22, 2017 the Company announced that a Director of the Company has exercised his stock options to purchase 1,000,000 common shares in the capital of the Company at a price of CAD$0.10 per Common Share and a total cost of CAD$100,000.

13. Per share amounts

Three months ended December 31					Nine months ended December 31
	2016			2015	2016			2015
	$			$	$			$
Net Profit (loss)	(1,789,281)			(889,470)	606,284,617			(2,106,182)
Weighted average number of shares - basic:
Issued common shares as at April 1	43,594,406			29,292,081	43,594,406			29,292,081
Effect of common shares issued during the year	19,689,938			4,331,733	15,024,903			1,566,979
63,284,344				33,623,814	58,619,309			30,859,060
Basic weighted average number of shares		63,284,344	33,623,814			58,619,309	30,859,060
Potential dilutive effect on shares issuable under warrants		45,628,117	24,150,477			45,628,117	24,150,477
Potential diluted weighted average number of shares		108,912,461	57,774,291			104,247,426	55,009,537
Net Profit (loss) per share - basic (1)		(0.03)	(0.03)			10.59	(0.07)
Net Profit (loss) per share - diluted		(0.02)	(0.02)			5.90	(0.04)

(1) The Company did not have any in-the-money convertible notes, warrants and stock options during the three and nine months ended December 31, 2016 and 2015. The effect of convertible notes, warrants and stock options is anti-dilutive in loss periods.

14. Finance expense

Three months ended December 31			Nine months ended December 31
	2016	2015	2016	2015
	$	$	$	$
Interest expense	194,535	129,046	434,237	372,961
Accretion of convertible notes (Note 7)	419	74,469	419	181,757
Accretion of bonds (Note 8)	2,547	6,049	7,668	17,228
Accretion of decommissioning obligation (Note 9)	128,030	62,741	128,030	203,478
	325,531	272,305	570,354	775,424

15. Supplemental disclosure

The condensed interim consolidated statements of profit and comprehensive profit are prepared primarily by nature of expense with the exception of employee compensation cost which is included in operating and general and administrative expenses. As at December 31, 2016 the Company and its subsidiaries had 15 full time employees and three part time employees or consultants based in its offices in Buenos Aires and Comodoro Rivadavia in Argentina and in Genoa, Italy. Subsequently to the handover, dated August 11, 2016, the Company hired an additional 201 full time employees and 1 part time employee/consultant all based in Azerbaijan.

The following table details the amounts of total employee compensation:

Three months ended December 31			Nine months ended December 31
	2016	2015	2016	2015
	$	$	$	$
Operating	366,342	309,635	642,617	820,415
General and administrative	150,886	76,563	449,423	323,747
Total employee compensation cost	517,228	386,198	1,092,041	1,144,162

16. Change in non-cash working capital

For the nine months ended December 31		2016		2015
Trade and other receivables	$	(1,284,754)	$	(209,466)
Inventory		(288,088)		(154,207)
Prepaid expenses		80,355		(137,243)
Prepaid property and equipment insurance		38,635		133,973
Trade and other payables		1,750,271		497,721
Total change in non-cash working capital	$	296,419	$	130,778

The change in non-cash working capital has been allocated to the following activities:

		2016		2015
Operating	$	285,031	$	89,666
Financing		-		(30,660)
Investing		11,388		71,772
Total change in non-cash working capital	$	296,419	$	130,778

17. Related party transactions

a) Included in general and administrative expenses for the three and nine months ended December 31, 2016 is $41,983 and $121,445 (three and nine months ended December 31, 2015 - $34,902 and $147,645), respectively, charged by a company controlled by an officer and director of the Company for administrative services. As at December 31, 2016, $22,961 (March 31, 2016 - $nil) was included in trade and other payables in respect of these charges.

b) Included in trade and other payables is $nil (March 31, 2016 - $8,966) due to officers and directors of the Company in respect of general and administrative expenditures made on behalf of the Company for which the officers and directors will be reimbursed.

18. Taxation

	December 31, 2016	March 31, 2016
	CAD$	CAD$
Current tax	-	-
Deferred tax	153,927,334	883,567
Total tax	153,927,334	883,568

The deferred tax charge for the period has arise as a result of the acquistition of the assets in Azerbaijan.

No tax charge or credit arises on the loss for the period.

The difference between tax expense for the year and expected income taxes based on the statutory tax rate arises as follows:

TAXATION
	December 31, 2016	March 31, 2016
	CAD$	CAD$
Initial Balance	883,567	2,397,623
Deferred tax reduction	-	(1,516,046)
Expected tax provision on business combination	153,043,767	-
As of 31 December	153,927,334	883,567

The provision for the nine months ended December 31, 2016 is related to the expected taxation of the profitability of the assets that the Company acquired in Azerbaijan (see note 4).

The tax (reduction) provision for the year ended March 31, 2016 is comprised of $nil of current tax expense and a $1,514,056 deferred tax reduction.

As at March 31, 2016, the Company has accumulated non-capital losses in Canada totaling $15.2 million (2015 - $11.6 million) which expire in varying amounts between 2028 and 2036 and $0.4 million (2015 - $0.5 million) of non-capital losses in Italy.

19. Financial risk management

The Company's activities expose it to a variety of financial risks that arise as a result of its exploration, development, production, and financing activities such as credit risk, liquidity risk and market risk. This note presents information about the Company's exposure to each of the above risks, the Company's objectives, policies and processes for measuring and managing risk, and the Company's management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.

a) Credit risk

Credit risk is the risk of an unexpected loss if a customer or counter party to a financial instrument fails to meet its commercial obligations. The Company's maximum credit risk exposure is limited to the carrying amount cash of $18,476 (March 31, 2016 - $137,982) and trade and other receivables of $1,956,334 (March 31, 2016 - $787,477).

The composition of trade and other receivables is summarized in the following table:

December 31 2016				March 31 2016
Oil and natural gas sales	$	1,025,306	$	475,219
Stamp tax and other tax withholdings		731,179		216,926
Goods and services tax		96,357		12,261
Other		103,492		83,071
	$	1,956,334	$	787,477

The receivables related to the sale of oil and natural gas are due from large companies who participate in the oil and natural gas industry in Argentina, Azerbaijan and Italy. Oil and natural gas sales receivables are typically collected in the month following the sales month.

The Company considers its receivables to be aged as follows:

December 31 2016				March 31 2016
Current	$	1,749,136	$	542,962
90 + days		207,198		244,515
	$	1,956,334	$	787,477

b) Liquidity risk

Liquidity risk is the risk that the Company will incur difficulties meeting its financial obligations as they are due. The Company's approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and distressed conditions without incurring unacceptable losses or risking harm to the Company's reputation.

As at December 31, 2016, the Company had $8,618,257 (March 31, 2016 - $8,201,167) of current liabilities for which the Company's $18,476 (March 31, 2016 - $137,982) cash balance is insufficient to settle the current liabilities. It is expected that further debt and equity financings will be required in order to settle existing current liabilities, continue development of the Company's assets and meet future obligations. There can be no assurance that such financings will be available to the Company.

As of December 31, 2016, the contractual cash flows, including estimated future interest, of current and non- current financial liabilities mature as follows:

		Carrying amount	Contractual cash flows	Due on or before December 31 ,2017	Due on or before December 31, 2018	Due between January 2018 and November 2020
Trade and other payables	$	4,892,846	4,892,846	4,892,846	-	-
Oil share agreement		1,063,629	1,063,629	1,063,629	-	-
Loans payable		4,322,726	5,264,699	1,973,367	3,123,648	167,684
Convertible notes		525,992	940,058	6,313	7,035	926,710
Notes payable		213,608	213,608	213,608	-	-
Bonds payable		383,090	443,511	55,995	387,516	-
	$	11,401,891	12,818,351	8,205,758	3,518,199	1,094,394

c) Market risk

Market risk is the risk that changes in foreign exchange rates, commodity prices, and interest rates will affect the Company's net income (loss) or the value of financial instruments.

i) Currency risk

Foreign currency exchange risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign exchange rates. Foreign exchange rates to Canadian dollars for the noted dates and periods are as follows:

	Closing rate December 31		Average rate Nine months ended December 31
	2016	2015	2016	2015
Argentine Peso	0.0853	0.1069	0.0881	0.1375
US dollar	1.3427	1.3840	1.3087	1.2908
Euro	1.4169	1.5029	1.4502	1.4256
Swiss Franc	1.3214	1.3805	1.3328	1.3365
British Pound	1.6564	2.0407	1.74064	1.9790
Azerbaijani New Manat	0.7586	-	0.8201	-

The following represents the estimated impact on net income (loss) of a 10% change in the closing rates as at December 31, 2016 and 2015 on foreign denominated financial instruments held by the Company, with other variables such as interest rates and commodity prices held constant:

For the nine months ended December 31	2016	2015
Argentine Peso	88,700	$ 57,150
US dollar	417,600	294,090
Euro	117,700	108,760
Swiss Franc	75,000	116,350
British Pound	53,800	55,720
Azerbaijani New Manat	(53,100)	-
	699,700	$ 632,070

i) Commodity price risk

Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity prices.

As at December 31, 2016, a 5% change in the price of natural gas produced in Italy would represent a change in net profit (loss) for the nine months ended December 31, 2016 of approximately $2,700 (2015 loss - ($23,800)) and a 5% change in the price of electricity produced in Italy would represent a change of net profit for the nine months ended December 31, 2016 of approximately $24,000 (2015 - not applicable).

Oil prices in Argentina are set by the international market, with certain variation for logistical problems and delivery date. As at December 31, 2016, a 5% change in the price of oil would represent a change in net income (loss) for the nine months ended December 31, 2016 of approximately $4,000 (2015 - loss ($64,300)).

As at December 31, 2016, a 5% change in the price of crude oil produced in Azerbaijan would represent a change in net profit (loss) for the nine months ended December 31, 2016 of approximately $118,600 (2015 - not applicable).

ii) Interest rate risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company has fixed interest convertible notes (Note 7) and bonds payable (Note 8) and therefore is not exposed to interest rate risk.

20. Inventory

As at December 31, 2016, there were 2,462 bbls of unsold oil production in Argentina held in inventory, and there were 189 bbls of unsold oil production in Azerbaijan held in inventory which were sold in subsequent months, valued at the lower of cost or net realizable value based on the selling prices.

The Company also have materials for maintence in inventory in Azerbaijan, for an amount of CAD$132,231, valued at the purchase cost.

As at March 31, 2016, inventory was comprised of 2,267 barrels of oil valued at the lower of cost or net realizable value based on a selling price of USD 59 (2015 - USD 60) per barrel.

INVENTORY
	December 31, 2016		March 31, 2016
	Barrels	Inventory CAD$	Barrels	Inventory CAD$
Argentina	2,462	183,852	2,267	173,547
Azerbaijan oil in stock	189	5,595	-	-
Azerbaijan materials in stock	-	132,231
Balance	2,651	321,678	2,267	173,547

21. Subsequent events

(a) On February 22, 2017 the terms of the repayment of the First Credit Agreement were amended and the amount of USD $160,000 (plus accrued interest)(CAD $215,650) will be paid on March 27, 2017

(b) On February 21, 2017 the terms of the repayment of the Third Credit Agreement were amended and the amount of USD $55,000 (plus accrued interest)(CAD $74,130) will be paid on March 27, 2017

(c) On February 22, 2017 the terms of the repayment of the Fourth Credit Agreement were amended and the amount of USD $55,000 (plus accrued interest)(CAD $74,130) will be paid on March 27, 2017

(d) On January 5, 2017 - The Company announced that the Prospectus dated January 5, 2017 has been approved by the UK Listing Authority (the "Prospectus"). The Prospectus relates to admission of the Company's Common Shares to the standard listing segment of the Official List and to trading on the London Stock Exchange's Main Market ("Admission"). Admission and commencement of dealings in the Company's Common Shares did occur on 11 January 2017.

In connection with Admission, the Company successfully placed 33,322,143 Common Shares (the "UK Placing"). Following its book-building process, in which Common Shares were placed at £0.07 (CAD$0.11) per Common Share, on completion of the UK Placing the gross proceeds available to the Company were approximately £2,332,550 (CAD$3,823,848) and the net proceeds were approximately £2,015,922 (CAD$3,304,786). The Company paid finder's fees of GBP 113,500 and issued 1,114,286 broker warrants exercisable for 24 months from closing at a price of GBP 0.07 per common share to certain arm's-length parties under the private placement undertaken as part of the dual listing on the London Stock Exchange on 11 January 2017.

(e) On January 11, 2017 - The Company announced that its entire Common Share capital, consisting of 98,564,867 Common Shares, were admitted to the standard listing segment of the Official List of the FCA and to trading on the London Stock Exchange's Main Market under the ticker symbol "ZEN".

Admission became effective and dealings commenced at 8.00 a.m. on January 11, 2017.

The net proceeds of the UK Placing will be used by the Company to provide additional funding for debt repayment, to provide additional funding for the Company's development and appraisal activities in Azerbaijan, Italy and Argentina and to provide additional working capital.

(f) On January 24, 2017, the Company announced the signing of a well workover contract and engagement of highly experienced local drilling company to initiate and execute the workover of first two wells in the programme (M-195 and M-45).

(g) In January 2017, the Company paid USD$ 700,000 (CAD$943,467) of the USD loan, utilising part of the proceeds from the fundraising aligned with the listing on the London Stock Exchange of January 11, 2017.

(h) In January 2017, the Company issued 668,571 shares, at a deemed price of £0.07 per share, for the settlement of a debt for services of a senior manager of the Companty, for an amount of £46,800.

(i) In January 2017, the Company incurred expenses for a total amount of £306,628 (CAD$505,476) related to admission to the London Stock Exchange listing, as follow:

Role	Cost (£)	Cost (CAD$)
UK Legal Counsel to the Company	£ 100,000	$ 164,850
TSX - V share issue costs	£ 18,000	$ 29,673
Auditors & Reporting Accountants	£ 70,000	$ 115,395
Registrar	£ 1,300	$ 2,143
Legal opinion Crest	£ 5,000	$ 8,243
Prospectus Printers	£ 8,000	$ 13,188
placings payable	£ 96,128	$ 158,467
LSE Admission Fees	£ 8,200	$ 13,518
Total	£ 306,628	$ 505,476

(j) In January 2017, the Company entered into an agreement to proceed with a brokered private placement (the "Private Placement") to raise gross proceeds of GBP 855,000 (approximately CAD$ 1,408,000) through the issue of nine million (9,000,000) new common shares of the Company ("New Common Shares") at a price of GBP 0.095 (approximately CAD$ 0.1565) per share.

In addition to the New Common Shares, under the Private Placement each subscriber received one warrant (the "Warrant") for every New Common Share purchased. Each Warrant shall entitle the Warrant holder to subscribe for new Common Shares in the Company at a price of GBP 0.15 per common share (approximately CAD$ 0.247), exercisable at any time until 1 February 2019. The proceeds of the Private Placement will be used to accelerate the Company's field rehabilitation activities in Azerbaijan and increase the number of well workovers scheduled for completion by 31 March 2018.

(k) On January 25, 2017, the Company issued 3,700,000 shares on the conversion of 311,067 Swiss Francs (CAD$407,000) principal amount of convertible notes.

Outstanding debt As of January 25, 2017	CHF	CAD$
Principal	CHF 314,953	$ 412,084
Accrued Interest	CHF 249,758	$ 327,730
Total to be paid	CHF 564,711	$ 739,814

Conversion of notes	Shares	CHF	CAD$
Outstanding principal As of January 25, 2017		CHF 314,953	$ 412,084
Issued January 2017	3,700,000	-CHF 311,067	$ -407,000
Remaining		CHF 3,886	$ 5,084

Changes calculated using the following current change rate conversion (January 25, 2017)
Change Rate
CAD$/CHF	1.3084
CHF/CAD$	0.7643

The outstanding amount of convertible note, at the date of this document, is CHF3,886 Swiss Francs ($5,084) of principal, and CHF249,758 (CAD$327,730) of accrued interest.

(l) On February 20, 2017 the Company announced the sale of its operations in Argentina to a group of local energy investors.

Due to a series of circumstances beyond the Company's control, caused by the collapse of a major storage tank owned by the Argentina's national oil company production, Zenith's Argentine operations was still suspended and its oil production could no longer be transported through YPF pipelines.

To date, the issues affecting the transportation of oil have not been fully resolved and a persisting uncertainty on the recommencement of operations has led Zenith to reconsider its operational involvement in Argentina.

The sale of the Company's Argentina subsidiary has been fixed at a nominal sum in recognition of the costs the new owner is expected to incur to return these fields to production. In addition, Zenith will no longer be liable for any environmental responsibilities or future well abandonment obligations for the Don Alberto and Don Ernesto fields.

Termination of activities in Argentina will enable Zenith's management to more effectively direct its focus on its Italian operations and especially towards Azerbaijan, where the Company's most important assets are located, and where a systematic programme of field rehabilitation has begun. This re-alignment reflects the Board's aversion to operational overstretch and the Company's preference for a strong, concentrated focus towards the achievement of its production objectives in Azerbaijan.

(m) The Stock Options Plan (note 12) has been approved by shareholders of the Company at the Annual General Meeting held on January 20, 2017

(n) On February 22, 2017 the Company announced that a Director of the Company has exercised his stock options to purchase 1,000,000 common shares in the capital of the Company at a price of CAD$0.10 per Common Share and a total cost of CAD$100,000.

22. Operating segments

The Company's operations are conducted in one business sector, the oil and natural gas industry. Geographical areas are used to identify Company's reportable segments. A geographic segment is considered a reportable segment once its activities are regularly reviewed by the Company's management. The Company has four reportable segments which are as follows:

§ Argentina (until February 19, 2017);

§ Azerbaijan;

§ Italy; and,

§ Other, includes corporate assets and the operations in the Canadian and US entities. None of these individual segments meet the quantitative thresholds for determining reportable segments in 2016 or 2015.

	December 31, 2016					March 31, 2016
	Argentina	Azerbaijan	Italy	Other	Total	Argentina	Azerbaijan	Italy	Other	Total
Property and equipment $	3,060,005	1,052,488,882	10,849,356	-	1,066,398,243	3,177,155	-	11,420,934	-	14,598,089
Other assets $	408,794	1,190,239	905,063	249,330	2,753,426	504,125	-	958,825	236,102	1,699,052
Total liabilities $	4,350,857	443,662,115	7,419,521	7,545,651	462,978,144	5,377,969	-	7,134,198	6,063,924	18,576,091
Capital expenditures $	-	19,537	84,313	-	103,850	(236,515)	-	(178,406)	-	(414,921)

					Three months ended December 31
	2016	2015	2016	2015		2016	2015	2016	2015	2016	2015
	Argentina		Azerbaijan			Italy		Other		Total
Revenue	-	83,904	1,713,838	-		203,490	187,358	-	-	1,917,328	271,262
Royalties	-	7,521	-	-		-	-	-	-	-	7,521
Operating and transportation	278,335	441,855	650,645	-		216,557	20,798	-	-	1,145,537	462,653
General and administrative	122,570	90,960	518,648	-		199,003	159,046	1,058,848	391,106	1,899,069	641,112
Depletion and depreciation	3,261	1,325	210,170	-		107,908	54,273	-	-	321,339	55,598
Transaction costs	-	-	-	-		-	35,536	-	-	-	35,536
Finance and other (income) expenses	(2,822)	(319,900)	(7,599)	-		11,667	51,340	105,829	226,872	107,075	(41,688)
Segment income (loss)	(401,344)	(137,857)	341,974	-		(331,645)	(133,635)	(1,164,677)	(617,978)	(1,555,692)	(889,470)

					Nine months ended December 31
	2016	2015	2016	2015		2016	2015	2016		2015	2016	2015
	Argentina		Azerbaijan			Italy		Other			Total
Revenue	78,527	1,283,940	2,372,160	-		533,352	519,232	-	-		2,984,039	1,803,172
Royalties	7,521	115,408	-	-		-	-	-	-		7,521	115,408
Operating and transportation	546,837	1,111,690	1,021,712	-		363,018	217,782	-	-		1,931,567	1,329,472
General and administrative	301,714	501,223	790,649	-		416,572	360,136	2,185,551	1,120,516		3,694,486	1,981,875
Depletion and depreciation	13,459	58,204	319,715	-		191,980	190,998	-	-		525,154	249,202
Transaction costs	-	-	-	-		-	35,536	-	-		-	35,536
Finance and other (income) expenses	(7,260)	(391,070)	(618,153,818)	-		36,157	87,746	236,851	501,185		(617,888,070)	197,861
Segment income (loss)	(783,744)	(111,515)	618,393,902	-		(474,376)	(372,966)	(2,422,402)	(1,621,701)		614,713,380	(2,106,182)

ZENITH ENERGY LTD.

MANAGEMENT'S DISCUSSION AND ANALYSIS

THREE AND NINE MONTHS ENDED DECEMBER 31, 2016

This management's discussion and analysis (the "MD&A") dated February 28, 2017 of Zenith Energy Ltd. ("Zenith" or the "Company", is presented in Canadian dollars and should be read in conjunction with the December 31, 2016 unaudited condensed interim consolidated financial statements as well as the March 31, 2016 audited consolidated financial statements of Zenith, together with the accompanying notes.

The consolidated financial statements have been prepared by management and approved by Zenith's Board of Directors on the recommendation of the Audit Committee. These statements are based on certain estimates and assumptions and involve risks and uncertainties. Actual results may differ materially. The financial data included in this MD&A is in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and interpretations of the International Financial Reporting Interpretations Committee ("IFRIC") that are effective as at April 1, 2015. The Company has presented its financial statements on a going concern assumption, which assumes that the Company will be able to continue to finance its operations for the foreseeable future and will be able to realize its assets and
discharge its liabilities in the normal course of business. Refer to the Business Risks and Uncertainties section of this MD&A for additional information related to identified risks, estimates and uncertainties.

The functional currency of the Company is the Canadian dollar ("CAD"); the functional currency Company's Argentine subsidiaries is the Argentine Peso; the functional currency of the Company's Italian subsidiary is the Euro; the functional currency of the Company's Azerbaijan subsidiary is the Manat; and the functional currency of the Company's United States subsidiaries
is the United States dollar. The Company's presentation currency is the CAD. In this MD&A, unless otherwise noted, all dollar
amounts are expressed in CAD. References to "US$" are to United States dollars, references to "GBP" are to Great Britain
Pounds, references to "AZN" are to Azerbaijan Manat.

Additional information related to the Company's business and activities can be found on SEDAR at www.sedar.com.

BOE Presentation - Production information is commonly reported in units of barrels of oil equivalent ("boe"). For purposes of computing such units, natural gas is converted to equivalent barrels of oil using a conversion factor of six thousand cubic feet ("mcf") to one barrel of oil ("bbl"). This conversion ratio of 6:1 is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Such disclosure of boe
may be misleading, particularly if used in isolation. Readers should be aware that historical results are not necessarily indicative of future performance.

Special Note Regarding Non-IFRS Measures - This MD&A may include references to certain financial measures, as described below, which do not have standardized meanings prescribed by IFRS, however, as these measures are commonly used in the oil and gas industry, the Company believes that their inclusion is useful to investors and they are measures that the Company uses to evaluate its performance. Investors are cautioned that these non-IFRS measures should not be construed as an alternative to the measures calculated in accordance with IFRS, given their non-standardized meanings; they may not be comparable to similar measures presented by other issuers. The term "field netback" is defined as petroleum and natural gas sales less royalties and less operating and transportation costs. The term "funds from (used in) operations", defined as the cash flow from operating activities, before the change in non-cash working capital and abandonment expenditures, should
not be considered an alternative to, or more meaningful than, cash flow from operating activities or net income (loss)
as determined in accordance with IFRS as an indicator of performance. The Company's determination of funds from operations may not be comparable to that reported by other companies.

Cautionary Statement regarding Forward-Looking Information

Certain information in this MD&A is forward-looking and related to anticipated financial performance, events and strategies. When used in this context, words such as "will", "anticipate", "believe", "plan", "intend", "target" and "expect" or similar words suggest future outcomes. By their nature, such statements are subject to significant risks, assumptions and uncertainties, which could cause the Company's actual results and experience to be materially different than the anticipated results. In particular, forward-looking information and statements include, but are not limited to: (i) expectations related to crude oil and petroleum products prices and demand; (ii) the state of capital markets; (iii) expectations related to operating costs in Azerbaijan and Italy; (iv) variations in the US dollar, Euro, Manat, and Canadian dollar exchange rates; (v) expectations related to regulatory approvals; (vi) management's analysis of applicable tax legislation; (vii) expectations that the currently applicable and proposed tax laws will not change and will be implemented; (viii) expectation that management will continue to focus its efforts towards acquiring large exploration permits, which offer high exploration potential and the opportunity to act as operator at least for the initial exploration period; (ix) expectation that management will consider acquiring additional producing assets; (x) the capital expenditures required in order to re-commence production on both the Torrente Vulgano and Canaldente properties; (xi) the ability of the Company to re-commence production on both the Torrente Vulgano and Canaldente properties by late 2017; (xii) the price of natural gas and of the electricity in Italy; (xiii) the ability of the Company to comply with certain regulatory requirements in Italy; (xiv) the Company's ability to increase its oil and gas production in the year 2017; (xv) expectations related to the properties producing oil in Azerbaijan named Muradkanly, Yafarli and Zardob, owned by Zenith Aran Oil Company and (xvi) business strategy and outlook.

These statements are based on certain assumptions and analysis made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments and other factors it believes are appropriate. The material factors and assumptions used to develop these forward-looking statements include, but are not limited to: (i) increased competition; (ii) assumption that operating costs in Azerbaijan and Italy may be reduced in future months and that the oil price in the international markets will continue to improve; (iii) additional financing of the Company is subject to the global financial markets and economic conditions; (iv) the Company will evaluate certain properties located
within Azerbaijan and will focus on managing the properties acquired in 2016 with the intention to increase production and cash flows; (v) assumptions related to international oil and natural gas prices; (vi) ability to obtain regulatory approvals; (vii) costs of exploration and development; (viii) availability and cost of labour and management resources; (ix) performance of contractors and suppliers; (x) availability and cost of financing; and (xi) the Company's business strategy and outlook.

Whether actual results, performance or achievements will conform to the Company's expectations and predictions is subject to a number of known and unknown risks and uncertainties which could cause actual results to differ materially from the Company's expectations. Such risks and uncertainties include, but are not limited to risks and uncertainties relating to: (i) volatility of and assumptions regarding commodity prices; (ii) product supply and demand; (iii) market competition; (iv) risks inherent in the Company's operations; (v) potential disruption or unexpected technical difficulties in developing or maintaining facilities; (vi) risks associated with technology; (vii) Company's ability to generate sufficient cash flow from operations to meet its current and future obligations; (viii) the Company's ability to secure external sources of debt and equity as needed; (ix) changes in royalty, tax, environmental, greenhouse gas, carbon, accounting and other laws or regulations or the interpretation of such laws or regulations; (x) political and economic conditions in the countries in which the Company operates; (xi) terrorist threats; (xii) risks associated with potential future lawsuits and regulatory actions made against the Company; (xiii) the performance of counterparties in meeting their obligations under agreements; (xiv) economic conditions; (xv) equipment and labour shortages and inflationary costs; (xvi) fluctuations in foreign exchange rates; (xvii) the effect of weather conditions on operations and facilities; and (xviii) stock market volatility.

Readers are cautioned not to place undue reliance on forward-looking statements as actual results could differ materially from the plans, expectations, estimates or intentions expressed in the forward-looking statements. Forward-looking statements are provided for the purpose of presenting information about management's current expectations and plans relating to the future and readers are cautioned that such statements may not be appropriate for other purposes.

Except as required by law, the Company disclaims any intention and assumes no obligation to update any forward-looking statement.

Critical Accounting Estimates and Judgements

Valuation of the assets and liabilities associated with the Azerbaijan acquisition this assessment involves:

· Future revenues and estimated development and exploration costs;

· The discount rate to be applied for the purposes of deriving a recoverable value;

· The expected tax rate; and

· The expected oil price.

During the nine months ended December 31, 2016 the Company recognised a value of assets and associated liabilities for its Azerbaijan Assets acquired, including the payments due in respect of the acquisition relating to royalties, work and exploration programmes and taxation. The valuations of the assets and of the liabilities have been based on the Net Present Value ("NPV") of future cash flows included in the Competent Persons Report prepared on behalf of the Company by Chapman Petroleum Engineering Ltd. ("Chapman") and published on 15 June 2016 ("Original CPR"). The NPV of future cashflows was discounted at a rate of 10%. The Board considers 10% an appropriate rate of discount for the following reasons:

· The Asset has a verified producing history as well as current production;

· The asset is production & development with 2P reserves (made by way of a National Instrument 51-101) based over an acreage of 642 square kilometres comprised of different structures;

· The Asset is low cost and onshore presenting a low operational risk;

· Azerbaijan has one of the world's oldest established Oil & Gas industries;

· Azerbaijan has a stable political environment with a government that has guaranteed and supported the licence rights of companies operating in the Oil & Gas industry since its independence in 1992

· Crude oil is exported via two different pipelines, one delivering oil to the Mediterranean Sea and the other to the Black Sea, thereby derisking routes to market from both a political and logistical perspective.

Any changes to the estimates may result in a material impact to the carrying value of both the assets and liabilities, arising in respect of the acquisition.

Nature of Operations, Acquisition and Exploration Activities

The Company was incorporated under the Business Corporations Act (British Columbia) ("BCBCA") on September 20, 2007. The registered business address is 15th Floor, Bankers Court, 850 - 2nd Street S.W., Calgary, Alberta T2P 0R8, Canada. Zenith's website is www.zenithenergy.ca. The Company is involved in the development and production of petroleum and natural gas fields in Azerbaijan and Italy.

On March 10, 2010, Zenith formed Ingenieria Petrolera del Rio de la Plata S.r.l. ("IPRP"), a wholly owned subsidiary of Zenith. IPRP was initially incorporated in Buenos Aires, Argentina, to negotiate management agreements to operate existing producing properties. However, as described in following paragraphs, after Petrolera Patagonia S.r.l. was acquired, management saw no immediate needs for IPRP and the company was kept in a dormant state and held in trust by Zenith's trustees in Argentina until late 2011.

On July 20, 2010, Zenith incorporated a wholly owned US subsidiary, Ingenieria Petrolera Patagonia Ltd. ("IPP"), to act as the potential acquirer of two US based companies controlling Central Patagonia S.r.l., the owner of two producing oil fields in the Chubut Province in Argentina.

On July 22, 2010, Zenith acquired two US based companies, namely Central Patagonia Corporation (renamed Petrolera Patagonia Corporation or "PPC") and CPC Holdings (renamed PP Holdings Inc. or "PPH") owning respectively 95% and 5% of Central Patagonia

S.r.l. (renamed Petrolera Patagonia S.r.l. or "PPS"), thereby acquiring two adjacent oil producing properties in Argentina.

On March 23, 2011, Zenith established Canoel Italia S.r.l. ("Italia Srl"), a wholly owned subsidiary of the Company, so that it would have an operating entity if the Company was awarded the oil and gas properties being posted for auction by the Ministry of Economic Development.

On August 27, 2011, Italia Srl was awarded two gas properties, which were previously on production but currently shut-in, at the auction. Zenith's bid was accepted on the basis of its technical presentation and proposed program to place the properties back on stream. The properties are Torrente Vulgano, located in the Puglia region, and Canaldente, located in the Basilicata region. Both regions are located in southern Italy, which is where the majority of hydrocarbons are produced.

In October 2011, Zenith recognized the opportunity to implement its own completion operations and consequently decided to use the dormant company IPRP for these operations. Management commenced the process to transfer the shares of IPRP from Zenith's trustees to PPC (95%) and to PPS (5%). This process was completed in May 2012.

In mid-2012, in line with the Company's strategy to increase its involvement in Italy through its Italian subsidiary, Zenith commenced negotiations to purchase producing and exploratory permits from a well-established gas producing company, Mediterranean Oil & Gas Plc, a British company with activities in Italy, France and Malta whose shares trade on the London AIM Stock Exchange.

On June 6, 2013, the Company completed the acquisition of various working interests in 13 Italian producing and exploration properties (the "Assets") from Medoilgas Italia S.P.A. and Medoilgas Civita Limited, each a subsidiary of Mediterranean Oil and Gas Plc (collectively, "MOG") after receiving the final approval from the Italian Ministry of Economic Development to the change of ownership. The Assets are comprised of (i) 6 operated onshore gas production concessions: Masseria Grottavecchia (20% working interest), San Teodoro (100% working interest), Torrente Cigno (45% working interest), Misano Adriatico (100% working interest), Sant'Andrea (40% working interest) and Masseria Petrilli (50% working interest); (ii) 3 non-operated onshore gas production concessions: Masseria Acquasalsa (8.8% working interest), Lucera (13.6% working interest) and San Mauro (18% working interest) (collectively, the "Gas Licenses"); (iii) an operated exploration permit: Montalbano (57.15% working interest) (the "Exploration Permit"); and (iv) 3 exploration permit applications: Serra dei Gatti (100% working interest), Villa Carbone (50% working interest) and Colle dei Nidi (25% working interest) (the "Exploration Applications").

Most of the Gas Licenses are located onshore in southern Italy, in the Regions of Puglia, Basilicata, Molise, Abruzzo and Marche. The Exploration Permit and Exploration Applications are located in southern Italy and cover an area of 1,285 square kilometres.

On October 1, 2015, the Company acquired co-generation equipment and facilities from the owner of the plant that treats gas from the Masseria Vincelli 1 well in the Torrente Cigno concession in Italy. The acquisition enables the company to produce electricity from the gas produced by the Masseria Vincelli 1 well and sell it directly into the national energy grid.

In September 2015, the Company opened an office in Baku, the capital of Azerbaijan. In October 2015, the Republic of Azerbaijan issued a Presidential Decree which authorized the State Oil Company of the Republic of Azerbaijan ("SOCAR") to negotiate a Rehabilitation, Exploration, Development and Production Sharing Agreement ("REDPSA") with Zenith pursuant to which Zenith would receive the rights and obligations to an 80% participating interest in current and future production from three producing onshore oil fields named Muradkhanli, Jafarli and Zardab, known as the Muradkhanli Block (the "Block"), covering an area of 642.4 square kilometres.

On June 24, 2016 the President of the Republic of Azerbaijan signed the REDPSA into law, after the approval by Parliament on the 14th of June 2016.

On August 11, 2016 the handover of the Azerbaijan assets, physicallycompleted in June 2016, was formally completed with the necessary signatures on related documents and the Company commenced crude oil production of approximately 275 barrels of oil per day in Azerbaijan under Zenith's ownership.

See Operational Update - Azerbaijan for further details.

On February 20, 2017 the Company announced the sale of its operations in Argentina to a group of local energy investors.

The Company conducted the following development and exploration activities in Argentina, Azerbaijan and Italy as noted below:

Nine months ended December 31
Capital additions	2016	2015
Argentina	$ -	$ 256,070
Azerbaijan	19,537	-
Italy	84,313	261,923
	$ 103,850	$ 517,993

Highlights for the nine months ended December 31, 2016 include the following:

Operational:

· During the nine months ended December 31, 2016, the Company sold 20,337 mcf of natural gas and 599 bbls of condensate from its Italian properties as compared to 89,131 mcf of natural gas and 671 bbls of condensate in the 2015 comparative period, a decrease of 77% and 11% respectively. The predominant reason for the decrease is a change in classification from gas to electricity from the Torrente Cigno concession. Prior to October 1, 2015, the Company sold its 45% share of this gas to the previous electricity producer and included such sales in oil and gas revenues. Following the Company's acquisition of co-generation equipment and facilities on October 1, 2015, the
Company became a new electricity producer and now classifies its 45% share of Torrente Cigno gas production as
gas sales volumes for electricity.

· During the three and nine months ended December 31, 2016, the Company sold 2,774 and 8,112 MWh of electricity from its Italian properties as compared to 1,757 MWh of electricity in the three months ended December 31, 2015 with an increase of 57%. The electricity production in Italy started on October 1, 2015 so the data relating the 9 months are comparable.

· On August 11, 2016 the handover of the Azerbaijan assets, physically completed in June 2016, was formally completed with the necessary signatures on related documents and the Company commenced crude oil production of approximately 275 barrels of oil per day in Azerbaijan under Zenith's ownership. During the period from August 11 to ended December 31, 2016, the Company sold 37,583 bbls of oil from its Azerbaijan properties. There is no comparable data for the prior year.

The acquistition of the assets in Azerbaijan was reflected in an immediate accretion of the gross revenues of CAD$2,372,160 for the period from August 11 to December 31, 2016.

Financial:

· The Company generated oil and natural gas revenue, net of royalties, of $2,504,044 and $479,995 of electricity revenue in the nine months ended December 31, 2016 versus $1,424,023 and $100,767, respectively, in the comparative period. The electricity production started on October 1, 2015, so the nine months data of the year 2015 is only related to the last three months of production.

· The Company incurred $103,850 of capital expenditures in the nine months ended December 31, 2016.

· In July 2016, the Company sold 116,913 shares of GRIT for gross cash proceeds of CAD $10,818.

· On June 14, 2016, the Company received notice that the Parliament of the Republic of Azerbaijan ratified the Rehabilitation, Exploration, Development and Production Sharing Agreement ("REDPSA") for certain blocks of Azerbaijan oil fields in which the Company holds an 80% participating interest in current and future production.

· In June 2016, the Company started the operation to establish Aran Oil Operating Company Ltd., an 80% owned subsidiary of Zenith Aran, to serve as operator of the REDPSA.

· On August 11, 2016 the handover of the Azerbaijan technical assets of the three fields, Muradkhanli, Jafarli and Zardab, physicallycompleted in June 2016, was formally completed. The delivery of the capital assets previously used in respect of the petroleum operations at the Azerbaijani Operations, from the previous operating company to Aran Oil, officially completed on that date. Aran Oil now has operational control of the Azerbaijani Operations. The transfer of operational control did not involve any interruption of petroleum production operations at the Azerbaijani Operations.

As a part of the Handover, an inventory of equipment and material was prepared and the volumes of oil in the pipelines and tanks were recorded. Any revenues related to the existing oil as at the date of Handover were allocated to SOCAR. At the time of the formal finalitasion of the transaction the production in Azerbaijan was about 275 barrels per day of oil, the assets have generated revenues for the Company since the completion of the transfer to Aran Oil.

The Handover involved the transfer of certain individuals employed by the current operator of the Azerbaijani Operations to Aran Oil. In accordance with the laws of Azerbaijan, the transfer process involved the relevant employees being dismissed by their previous employer (the outgoing operator of the Azerbaijani Operations) and entering into new employment contracts with Aran Oil. Any payments to the relevant employees arising as a result of their dismissal by the previous operating company were for the account of the previous operating company. In accordance with the laws of Azerbaijan, the relevant employees have been employed by Aran Oil with effect from the Effective Date of the transaction. The form of employment agreement follows the template prescribed by the Azerbaijani labour code.

The valuations of the Asset and of the liabilities have been based on the Net Present Value ("NPV") of future cash flows included in the Competent Persons Report prepared on behalf of the Company by Chapman Petroleum Engineering Ltd. ("Chapman") and published on 15 June 2016 ("Original CPR"), and in particular the financial and economic data from page 93 to page 128.

The amount, stated as a liability, reflects this part of production that has to be delivered to Socar, valued at the estimated production price of US$20 per barrel.

The acquisition of Assets has been brought to account as a business combination using the acquisition method of accounting and resulted in a bargain purchase arising as follows:

Fair value of net assets acquired CAD$

D&P assets 1,052,765,084

Compensatory Oil* (1,997,357)

Capital Costs* (285,548,895)

Foreign Currency Translation 7,913,703

Decommissioning Obligations* (1,943,339)

Gain on business combination 771,189,197

Taxation (153,043,767)

Net NPV of the assets 618,145,430

Amounts required to be paid under the terms of the REDPSA ("Rehabilitation, Exploration, Development and Production Sharing Agreement") and therefore in accordance with FRS3 ("Business Combinations") form part of the acquisition amount.

D&P assets

The estimated value of the D&P assets acquired was determined using both estimates and an independent reserve evaluation based on oil and gas reserves discounted at 10%.

Decommissioning provisions

On June 15, 2016, the day immediately following the acquisition date, the decommissioning obligation assumed was remeasured using a long term risk free rate based on the expected timing of cash flows, in accordance with IAS 37 ("Provisions, Contingent Liabilities and Contingent Assets"). The result was a CAD $1,943,339 increase in the decommissioning obligation associated with the acquired assets and the net result of the acquisition and recognition of decommissioning liability recognition being a gain of CAD $711,189,197 measurement adjustment in the first quarter of year 2017 consolidated statement of income and comprehensive income using prevailing exchange rates.

Compensatory oil

The Company have an obligation, as per the REDPSA, to:

1. within one year following the Effective Date, deliver at no charge to SOCAR 5% of the total production of petroleum produced from the contract rehabilitation area in each calendar quarter; and

The amount, stated as a liability, reflects this part of production that has to be delivered to SOCAR, valued at the estimated production price of US$20 per barrel.

Capital Costs

It is envisaged that development drilling will commence in 2018 and continue until 2032. It has been estimated that each well with proved reserves will cost approximately US$4,000,000. This cost will include the direct cost of materials, fuel, salaries, etc. to drill the well and an allocation for the purchase of one drilling rig, well completion and tie-in.

Proved reserves are those reserves that can be estimated, by a competent professional, with a high degree of certainty to be recoverable. The estimate of the reserves are related to a given date, based on analysis of drilling, geological, geophysical and engineering data; the use of established technology, and; specified economic conditions, which are generally accepted and being reasonable, and shall be disclosed.

In addition to the costs anticipated for the wells with proved reserve, wells in the proved plus probable category have an additional allocation for the purchase and maintenance of a second drilling rig and expansion and modernisation of the field facilities.

In all, 145 wells are expected to be drilled over 16 years, of which 58 of these are anticipated to be horizontal wells.

· On July 16, 2016, the Company's wholly owned subsidiary in Argentina, Petrolera Patagonia S.r.l. ("PPSRL"), entered into a loan agreement with Arpenta Sociedad de Bolsa S.A. ("Arpenta"), pursuant to which PPSRL borrowed USD $154,000 (CAD$191,183) of Bonar 2017 Argentine sovereign bonds (the "Bonds") (the "Arpenta Bond Loan"). PPSRL subsequently sold the Bonds in the market (for Argentine pesos) to address cashflow requirements. Interest is payable on the Arpenta Bond Loan at a rate of 4% per annum. The Arpenta Bond Loan has a bullet repayment date of 15 December 2016, although management at PPSRL has taken steps for the Arpenta Bond Loan to be rolled-over (in whole) for an additional 180 day period. Repayment of the Arpenta Bond Loan is required to be made to Arpenta in the same Bonar 2017 Argentine sovereign bonds as were borrowed.

· On August 9, 2016, the Company's wholly-owned subsidiary, Zenith Aran, entered into a general line of credit agreement with Rabitabank Open Joint Stock Company ("Rabitabank") (the "First Credit Agreement") up to an amount of USD $320,000, for industrial and production purposes. The loan could be drawn down in tranches and as at 31 December 2016 it was fully drawn down. Rabitabank can postpone or suspend the facility if there is a decline in oil production under the REDPSA of more than 30% from production levels as at the date of first drawdown or if the REDPSA is terminated. The First Credit Agreement bears interest at a rate of 12% per annum. The loan is guaranteed by the Company. In November 2016 the Company repaid the first tranche of the loan for the amount of USD160,000, and as at December 31, 2016, the balance of the loan outstanding was USD $160,000 (plus accrued interest) (CAD$215,650). The loan is repayable on February 22, 2017.

· On August 29, 2016, the Company amended the terms of repayment of the USD loan such that a USD $700,000 payment is payable on 15 October 2016 and a final payment of approximately USD $1,485,337 is due on 31 March 2018.

· On 10 October, 2016 the Company closed a non-brokered private placement of 1,906,050 Common Shares at a price of CAD $0.10 per unit for aggregate gross proceeds of CAD $190,605. Each unit is comprised of one Common Share and one common share purchase warrant. Each common share purchase warrant will be exercisable for one Common Share at a price of CAD $0.20 per share for a period of 24 months from the date of closing of the offering.

· On 19 October, 2016, the Company issued 724,235 Common Shares at a deemed price of CAD $0.085 per Common Share to certain debtholders and creditors of the Company to settle debts owing by the Company, representing an aggregate of CAD $61,585.48.

· On September 30, 2016, Zenith Aran entered into a second general line of credit agreement with Rabitabank (the "Second Credit Agreement") up to an amount of USD $200,000. The Second Credit Agreement bears interest at a rate of 12% per annum. The loan is repayable in two tranches; USD $100,000 (plus accrued interest) (CAD$134,781) is payable on January 3, 2017 and the remaining USD $100,000 (plus accrued interest) (CAD$134,781) is payable on April 3, 2017. The loan is guaranteed by the Company. As at December 31, 2016, the full balance of the loan was outstanding. The first tranche of the Second Credit Agreement, for an amount of USD $100,000 (plus accrued interest) (CAD$134,781) was paid.

· On November 7, 2016, the Company completed a non-brokered private placement of 2,745,062 units of the Company at a price of $0.12 per Unit for aggregate gross proceeds of $329,407.44. Insiders of the Company subscribed for an aggregate of 2,195,475 Units for aggregate subscription proceeds of $263,457. Each Unit is comprised of one common share in the capital of Zenith and one Common Share purchase warrant. Each Warrant will be exercisable for one Common Share at a price of $0.20 per share for a period of 24 months from the date of closing of the offering.

· On November 21, 2016, Zenith Aran entered into a third general line of credit agreement with Rabitabank (the "Third Credit Agreement") up to an amount of USD $55,000 (CAD$74,130). The Third Credit Agreement bears interest at a rate of 12% per annum and is repayable on February 21, 2017. The loan is guaranteed by the Company. As at December 31, 2016, the full balance of the loan was outstanding..

· On November 22, 2016, Zenith Aran entered into a fouth general line of credit agreement with Rabitabank (the "Fourth Credit Agreement") up to an amount of USD $55,000 (CAD$74,130). The Fourth Credit Agreement bears interest at a rate of 12% per annum and is repayable on February 21, 2017. The loan is guaranteed by the Company. As at December 31, 2016, the full balance of the loan was outstanding .

· In December 2016 the Company amended the repayment of the USD 700,000 of the USD loan to January 2017.

· On November 22, 2016, Gunsynd Plc ("Gunsynd") a company listed on the London Stock Exchange's AIM market for listed securities, invested £100,000 by way of subscription for convertible unsecured loan notes bearing interest of 3% per annum. Interest on the New Convertible Notes is payable in arrears in quarterly instalments. At the option of Gunsynd, the principal of the New Convertible Notes may be converted into Common Shares of the Company at any time prior to the expiry of 36 months from issuance at a price equal to CAD $0.10 per Common Share (or the initial listing price of the Common Shares if the Company is listed on another senior stock exchange at the time of such conversion). Subject to the New Convertible Notes not having been converted, the New Convertible Notes mature 36 months from the date of issuance. Unless permitted under Canadian securities legislation, the New Convertible Notes cannot be traded before the date that is four months and a day after the date of issuance. This operation is subject to TSXV approval.

· On November 23, 2016, the Company issued 150,000 Common Shares to a certain debtholder of the Company to settle debts owing by the Company (based on a price of CAD$ $0.08 per share Common Share) in settlement of a debt of GBP £7,000 (inclusive of accrued interest) owed by the Company in respect of services provided by the debtholder.

· On November 28, 2016, the Company formalized the previously reached agreement for the amendments of the terms of its 5% convertible unsecured debenture (convertible notes). The proposed amendments to the Debenture will include an extension of two years to the maturity date from January 11, 2017 to January 11, 2019, a reduction to the conversion price from $0.125 per common share to $0.11 per common shares and a reduction to the interest rate payable by the Company from 5% to 1% for the remainder of the term. The proposed extension to the Debenture, and the reduction in the conversion price and interest rate remains subject to approval of the TSX Venture Exchange.

· In November 2016 the bond was partially repaid for CAD$121,411 (with related accrued interest), and by December 31, 2016 all the outstanding accrued bond interests were paid for CAD$70,641.

Corporate and Administrative:

· The Company continues to improve its accounting and administrative functions within the organization.

· In November 2016 the Company hired Mr. Alan Hume as its new CFO.

· On November 21, 2016 the Company granted Options to certain of its Directors and employees to acquire a total of 6,000,000 Common Shares pursuant to its Stock Option Plan. Each Option granted entitles the relevant holder to acquire one Common Share for an exercise price of CAD $0.10 per Common Share. The expiry date of the Options is the date falling five years from the date of grant, being 21 November 2021.

Subsequent event highlights:

(m) On January 5, 2017 - The Company announced that the Prospectus dated January 5, 2017 has been approved by the UK Listing Authority (the "Prospectus"). The Prospectus relates to admission of the Company's Common Shares to the standard listing segment of the Official List and to trading on the London Stock Exchange's Main Market ("Admission"). Admission and commencement of dealings in the Company's Common Shares did occur on 11 January 2017.

(n) On January 11, 2017 - The Company announced that its entire Common Share capital, consisting of 98,564,867 Common Shares, were admitted to the standard listing segment of the Official List of the FCA and to trading on the London Stock Exchange's Main Market under the ticker symbol "ZEN".

Admission became effective and dealings commenced at 8.00 a.m. on January 11, 2017.

(o) On January 24, 2017 the Company announced the signing of a well workover contract and engagement of highly experienced local drilling company to initiate and execute the workover of first two wells in the programme (M-195 and M-45).

(p) In January 2017 the Company paid the USD 700,000 (CAD$943,467) of the USD loan, utilising part of the proceeds from the fundraising aligned with the listing on the London Stock Exchange of January 11, 2017.

(q) In January 2017 the Company issued 668,571 shares, at a deemed price of £0.07 per share, for the settlement of a debt for services of a senior manager of the Companty, for an amount of £46,800.

(r) In January 2017 the Company incurred in expenses for a total amount of £306,628 (CAD$505,476), related to the admission to the London Stock Exchange listing, as follow:

Role	Cost (£)	Cost (CAD$)
UK Legal Counsel to the Company	£ 100,000	$ 164,850
TSX - V share issue costs	£ 18,000	$ 29,673
Auditors & Reporting Accountants	£ 70,000	$ 115,395
Registrar	£ 1,300	$ 2,143
Legal opinion Crest	£ 5,000	$ 8,243
Prospectus Printers	£ 8,000	$ 13,188
placings payable	£ 96,128	$ 158,467
LSE Admission Fees	£ 8,200	$ 13,518
Total	£ 306,628	$ 505,476

(s) In January 2017 the Company entered into an agreement to proceed with a brokered private placement (the "Private Placement") to raise gross proceeds of GBP 855,000 (approximately CAD$ 1,408,000) through the issue of nine million (9,000,000) new common shares of the Company ("New Common Shares") at a price of GBP 0.095 (approximately CAD$ 0.1565) per share.

(t) On January 25, 2017 the Company issued 3,700,000 shares on the conversion of 311,067 Swiss Francs (CAD$407,000) principal amount of convertible notes.

Outstanding debt As of January 25, 2017	CHF	CAD$
Principal	CHF 314,953	$ 412,084
Accrued Interest	CHF 249,758	$ 327,730
Total to be paid	CHF 564,711	$ 739,814

Conversion of notes	Shares	CHF	CAD$
Outstanding principal As of January 25, 2017		CHF 314,953	$ 412,084
Issued January 2017	3,700,000	-CHF 311,067	$ -407,000
Remaining		CHF 3,886	$ 5,084

Changes calculated using the following current change rate conversion (January 25, 2017)
Change Rate
CAD$/CHF	1.3084
CHF/CAD$	0.7643

The outstanding amount of the convertible note at the date of this document is CHF3,886 Swiss Francs ($5,084) of principal, and CHF249,758 (CAD$327,730), of accrued interest.

(u) On February 20, 2017 the Company announced the sale of its operations in Argentina to a group of local energy investors.

Due to a series of circumstances beyond the Company's control, caused by the collapse of a major storage tank owned by Yacimientos Petrolíferos Fiscales ("YPF"), Argentina's national oil company, Zenith's Argentine operations were still suspended and its oil production could no longer be transported through YPF pipelines.

(v) The Stock Options Plan (note 12 of the Financial Statement) has been approved by shareholders of the Company at the Annual General Meeting held on January 20, 2017

(w) On February 22, 2017 the Company announced that a Director of the Company has exercised his stock options to purchase 1,000,000 common shares in the capital of the Company at a price of CAD$0.10 per Common Share and a total cost of CAD$100,000.

(x) On February 22, 2017 the terms of the repayment of the First Credit Agreement were amended and the amount of USD $160,000 (plus accrued interest)(CAD $215,650) will be paid on March 27, 2017

(y) On February 21, 2017 the terms of the repayment of the Third Credit Agreement were amended and the amount of USD $55,000 (plus accrued interest)(CAD $74,130) will be paid on March 27, 2017

(z) On February 22, 2017 the terms of the repayment of the Fourth Credit Agreement were amended and the amount of USD $55,000 (plus accrued interest)(CAD $74,130) will be paid on March 27, 2017

OPERATIONAL UPDATE

ARGENTINA

The main assets of PPS on which the Company has focused its development efforts, are two producing fields, Alberto and Don Ernesto, (the "Producing Fields"). The two Producing Fields are located in the Patagonia region of Southern Argentina, and specifically in the San Jorge basin, Chubut Province, within the area of Comodoro Rivadavia. The ownership of these two fields were granted to PPS under old mining codes (the "Mining Codes") under which the licenses do not have an expiry date. The wells on the Producing Fields are connected to battery tanks through existing infrastructure, which is now partially owned by PPS.

The Company's share of estimated total proved plus probable oil net reserves were assessed at 545,000 bbls as of March 31, 2016.

Proved reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. Probable reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved + probable reserves.

Oil prices in Argentina were the result of complicated formulas that are set by refineries based on instructions or decrees from the government as crude oil and petroleum products prices are set by the Government at variable levels in Argentina. The price for the oil produced in the Chubut province, called Escalante, which represents the largest quantity of oil produced in Argentina, has gradually increased from US$42.00 per bbl in early 2010 to US$63.00 per bbl in December 2013 followed by an increase to US$67.00 per bbl for the majority of 2014 and a decrease to an average of US$60.00 per bbl in 2015. In December 2015 through March 2016, Escalante crude was set at US$59 per bbl. From April 2016 oil prices in Argentina are set by the international market, with certain variation for logistical problems and delivery date.

On February 20, 2017 the Company announced the sale of its operations in Argentina to a group of local energy investors. Due to a series of circumstances beyond the Company's control, caused by the collapse of a major storage tank owned by the Argentina's national oil company production, Zenith's Argentine operations was still suspended and its oil production could no longer be transported through YPF pipelines.

ITALY

In August 2009, the Italian Ministry of Economic Development posted an invitation for bidding on three previously producing gas properties owned and operated by Eni, the Italian multinational oil and gas company. Zenith's wholly owned subsidiary, Canoel Italia Srl ("Canoel Italia"), participated in the bidding process for two properties and was later selected as one of the finalists for both.

On August 30, 2011, the Company announced that the Italian "Ministero per lo Sviluppo Economico" (the Ministry of Economic Development) confirmed in writing that Zenith's technical submission and proposal to re-establish production from the two properties was successful.

These two natural gas properties are in proximity to each other and are located in southern Italy, an area which is currently producing a large portion of Italian hydrocarbons. The first property, named "Torrente Vulgano", is located in the Puglia Region, while the second one, named "Canaldente", and is located in the Basilicata Region. Both properties are already connected to the Italian national gas distribution grid; therefore, there is no need to install new gas pipelines.

The Torrente Vulgano and Canaldente properties were previously produced by Eni. Before the agreement to return the field to the Ministry of Economic Development, in the last 4 years of production (1997-2000), the Torrente Vulgano property was producing an average of 7,900 standard cubic meters (m3) per day (278,949 standard cubic feet (mcf) per day, using a conversion rate of 1 m3 = 35.31 mcf).

Canoel Italia will have to comply with certain Italian regulatory obligations before field start-up. Production will commence after all the necessary approvals have been received, which the Company expects to occur by late 2016. However, there are no assurances that production of the Torrente Vulgano and Canaldente properties will be at the same levels that they were previously producing. It is worth noting that the Canaldente reservoir appears to be a good candidate for gas storage when the well will be eventually shut-in at the end of commercial production.

On August 27, 2011, Canoel Italia was approved in its role as operator by the Italian relevant authorities and is currently submitting environmental reports and conducting the final assessment of on-site equipment.

On June 6, 2013, the Company completed the acquisition of various working interests in 13 Italian producing and exploration properties from Medoilgas Italia S.P.A. and Medoilgas Civita Limited, each a subsidiary of Mediterranean Oil and Gas Plc after receiving the final approval from the Italian Ministry of Economic Development to the change of ownership.

On October 1, 2015, the Company acquired co-generation equipment and facilities which will enable the company to produce electricity from the gas produced by the Masseria Vincelli 1 well and sell it directly into the national energy grid.

The Company's share of estimated total proved plus probable natural gas net reserves were assessed at 16,622 Mmscf and condensate net reserves were assessed at 261 Mbbls as of March 31, 2016.

AZERBAIJAN

On June 8, 2015, the Company and SOCAR (State Oil Company of Azerbaijan Republic) executed a confidential memorandum of understanding ("MOU") regarding the Muradhanli Block. Formal approval of the MOU and permission to disclose was subsequently granted by the President of Azerbaijan through Decree No. 1439 dated October 7, 2015 ("Presidential Decree") which authorised SOCAR to prepare and execute a Rehabilitation, Exploration, Development and Production Sharing Agreement ("REDPSA") for the Muradhanli Block between the Company and SOCAR on behalf of the Republic of Azerbaijan.

The REDPSA was executed on March 16, 2016 between SOCAR, Zenith Aran and SOCAR Oil Affiliate ("SOA"), a 100% owned subsidiary of SOCAR. The REDPSA became effective on June 20, 2016, upon ratification by the Parliament of the Republic of Azerbaijan whereby the REDPSA and the Company's rights and obligations under the REDPSA became binding in law in Azerbaijan.

The REDPSA covers approximately 642 square kilometres (or 248 square miles) and include the active Muradkhanli, Jafarli and Zardab oil fields located in the Lower Kura Region, about 300 kilometres inland from the city of Baku, Azerbaijan. Pursuant to the REDPSA, the Company holds an 80% participating interest both the Contract Rehabilitation Area and the Contract Exploration Area; SOA holds the remaining 20% participating interest. Together, the Company and SOA will form the contractor group.

The term of the Contract Rehabilitation Area portion of the REDPSA is 25 years from the date of SOCAR's approval of the contractor's rehabilitation and production program which occurred in August 2016. The term of the Contract Exploration Area portion of the REDPSA is 25 years from the date of SOCAR's approval of the contractor's development program. The term of each Area may be extended by an additional five years at the option of SOCAR

On June 14, 2016 the Agreement on the Rehabilitation, Exploration, Development and Production Sharing ("REDPSA") for the Block Including the Muradkhanly, Yafarli and Zardob Oil Fields in the Republic of Azerbaijan has been ratified by the Azerbaijan Parliament.

In June 2016, the Company started the operation to establish Aran Oil Operating Company Ltd., an 80% owned subsidiary of Zenith Aran, to serve as operator of the REDPSA.

On June 24, 2016 the President of the Republic of Azerbaijan signed the REDPSA into law, after the approval by Parliament on the 14th of June 2016.

On August 11, 2016 the handover of the Azerbaijan assets, physically completed in June 2016, formally completed with the necessary signatures on related documents.

On August 11, 2016 the Company commenced crude oil production of approximately 275 barrels of oil per day in Azerbaijan under Zenith's ownership.

OTHER ACTIVITIES

In addition to its activities discussed above, the Company is evaluating the acquisition of other production opportunities in established oil production environments.

Financial Perfomance

The following table summarizes key financial indicators for the three and nine months ended December 31:

Three months ended December 31			Nine months ended December 31
	2016	2015	2016	2015
Oil and gas revenue, net of royalties ($)	1,676,663	263,741	2,496,750	1,687,764
Oil and gas revenue, net of royalties - per boe ($)	62.99	48.20 48.20	55.61	51.45
Total daily oil and gas sales volumes per boe	295.87	59	164	119
Electricity revenue($)	240,582	n.a.	479,995	n.a.
Electricity gas sales volumes per mcf ($)	4.83	n.a.	3.90	n.a.
Net income (loss) ($)	(1,555,692)	(889,470)	614,713,380	(2,106,182)
Net income (loss) per share - basic ($)	(0.03)	(0.03)	10.59	(0.07)
Net income (loss) per share - diluted ($)	(0.02)	(0.02)	5.90	(0.04)
Capital expenditures ($)	72,646	258,476	103,850	517,993
Weighted average number of shares - basic	63,284,344	33,623,814	58,619,309	30,859,060
Weighted average number of shares - diluted	108,912,461	57,774,291	104,247,426	55,009,357

Production

Three months ended December 31			Nine months ended December 31
	2016	2015	2016	2015
Total volumes
Oil (bbls) (1)	25,733	1,232	40,192	17,279
Condensate (bbls) (3)	139	141	599	671
Gas (mcf) (2)	4,470	12,838	20,337	77,379
Total oil and gas sales volumes (boe)	26,618	3,513	44,901	30,847
Electricity (gas) sales volumes (mcf)	18,160	11,752	54,434	11,752
Total sales volumes (boe)	29,565	5,472	53,973	32,806
Daily volumes
Oil (bbls/day) (1)	283	13	150	63
Condensate (bbls/day)	2	2	2	2
Gas (mcf/day)	50	143	75	286
Total daily oil and gas sales volumes (boe/day)	296	39	164	113

Daily gas sales volumes for electricity (mcf)(mcf/day)	202	21	202	44
Total daily sales volumes (boe/day)	318	60	198	120

(1) During the three and nine months ended December 31, 2016, the Company sold 11,807 and 25,775 bbls of oil from its properties in Azerbaijan. This data is not comparable to the past year.

It is important to note that the data regarding the nine months includes the oil production from August 11 to December 31, 2016.

At the end of December 2016, there were 2,462 bbls of unsold oil production in Argentina held in inventory. The oil held in inventory at the end of the period correspond to the same existing quantity as of 30 September 2016, due to the lack of production of this quarter. The average daily production rate for the three and nine months ended December 31, 2015 was 13 bbls and 63 bbls of oil per day, respectively.

At the end of December 2016, there were 189 bbls of unsold oil production in Azerbaijan held in inventory which were sold in subsequent months. Total oil sales, transfers of produced volumes to Termap Oil Storage and oil held in inventory at the end of the period correspond to an average daily production rate for the three months ended December 31, 2016 of 283 bbls of oil per day. The average daily production rate is not comparable with past year.

(2) During the three and nine months ended December 31, 2016, the Company sold 4,470 and 20,337 mcf of natural gas from its Italian properties as compared 24,590 and 89,131 mcf of natural gas in the 2015 comparative period, with a decrese of 72% and 74%. The predominant reason for the decrease is a change in classification from gas to electricity from the Torrente Cigno concession. Prior to October 1, 2015, the Company sold its 45% share of this gas to the previous electricity producer and included such sales in oil and gas revenues. Following the Company's acquisition of co-generation equipment and facilities on October 1, 2015, the Company became the new electricity producer and now classifies its 45% share of Torrente Cigno gas production as gas sales volumes for electricity.

(3) During the three and nine months ended December 31, 2016, the Company sold 140 and 599 bbls of condensate from its Italian properties as compared to 141 and 671 bbls of condensate in the 2015 comparative period, with a decrease of nil% and 11% respectively.

During the three and nine months ended December 31, 2016, the Company sold 2,774 and 8,112 MWh of electricity from its Italian properties as compared to 1,757 MWh of electricity in the three months ended December 31, 2015 with an increase of 57%. The electricity production in Italy started on October 1, 2015 so no data relating the 9 months are comparable.

Argentina Oil Production

The decrease in oil production and sales in the three and nine months ended December 31, 2016 is a result of lost production due to the collapse of the storage tank (state owned) occurred in late 2015, used by the company, and the subsequent temporary interruption of production in Argentina.

On February 20, 2017 the Company announced the sale of its operations in Argentina to a group of local energy investors.

Azerbaijan Oil Production

On March 16, 2016, the Company's wholly-owned subsidiary, Zenith Aran, entered into the REDPSA with SOCAR and SOA. The REDPSA covers 642 square kilometres which include the active Muradkhanli, Jafarli and Zardab oil fields located in the Lower Kura Region, about 300 kilometres inland from the city of Baku, in Azerbaijan (the "Azerbaijani Operations").

The delivery of the capital assets previously used in respect of the petroleum operations at the Azerbaijani Operations, from the previous operating company to Aran Oil, officially completed on August 11, 2016, and the production started under Zenit's ownership. The Company now has operational control of the Azerbaijani Operations. The transfer of operational control did not involve any interruption of petroleum production operations at the Azerbaijani Operations.

Following successful handover on August 11, 2016 production under Zenith ownership commenced at the Azeri operations. Production has been relatively consistent at an average of about 275 barrels per day resulting in 14,010 bbls for the period and gross revenue of CAD $659,000.

During the period from August 11 to September 30, 2016 the Company achieved a production of about 275 barrels of oil per day, although they have produced much larger quantities previously (Source: SOCAR). Gas is also produced, but in low quantities and is used onsite.

In the subsequent months the Company has achieved an increase of production. The current production from the assets in Azerbaijan is approximately 295 barrels of oil per day.

During the three and nine months ended December 31, 2016, the Company sold 11,807 and 25,775 bbls of oil from its properties in Azerbaijan. This data is not comparable to the past year.

It is important to note that the data regarding the nine months includes the oil production from August 11 to December 31, 2016.

Italy Gas Production

During the three and nine months ended December 31, 2016, the Company sold 4,470 and 20,337 mcf of natural gas from its Italian properties as compared 24,590 and 89,131 mcf of natural gas in the 2015 comparative period, with a decrese of 72% and 74%. The predominant reason for the decrease is a change in classification from gas to electricity from the Torrente Cigno concession. Prior to October 1, 2015, the Company sold its 45% share of this gas to the previous electricity producer and included such sales in oil and gas revenues. Following the Company's acquisition of co-generation equipment and facilities on October 1, 2015, the Company became the new electricity producer and now classifies its 45%
share of Torrente Cigno gas production as gas sales volumes for electricity.

Daily gas sales volumes for electricity from Torrente Cigno per day for three months and nine months enede December 31, 2016 were 202 mcf/d.

Italy Condensate Production

During the three and nine months ended December 31, 2016, the Company sold 140 and 599 bbls of condensate from its Italian properties as compared to 141 and 671 bbls of condensate in the 2015 comparative period, with a decrease of nil% and 11% respectively.

Italy Electricity Production

During the three and nine months ended December 31, 2016 the Company sold 2,774 and 8,112 MWh of electricity from its Italian properties as compared to 1,757 MWh of electricity in the three months ended December 31, 2015 with an increase of 57%. The electricity production in Italy started on October 1, 2015 so no data relating the 9 months are comparable.

Prior to October 1, 2015, the Company sold its gas volumes from the Torrente Cigno area in Italy for approximately $1.44/mcf to the previous owner of the co-generation plant who then converted the gas to electricity and as a result earned a much higher rate. The Company acquired this plant on October 1, 2015 to improve revenue generation and margins. Although the Company continues to supply its Torrente Cigno gas volumes to the co-generation plant, as plant owner, the Company now earns higher revenues on those gas volumes.

The Electricity production remained steady for all the quarters since the acquisition of the cogeneration plant, as detailed in the following table.

Italy Electricity Production	Production MWh
I quarter 2017	2,718
II quarter 2017	2,620
III quarter 2017	2,774

Revenues

Three months ended December 31			Nine months ended December 31
	2016	2015	2016	2015
Commodity Prices
Oil and gas prices
Oil (Argentina $/bbl)	nil	68.10	63.08	74.31
Oil (Azerbainan $/bbl)	63.67	n.a.	57.29	n.a.
Condensate ($/bbl)	73.69	69.97	65.48	74.07
Gas ($/mcf)	6.23	5.98	5.40	4.77
Total oil and gas ($/boe)	64.35		55.61
Electricity ($/mcf)	8.82	8.57	13.24	8.57
Revenues (CAD$)
Oil and gas revenue
Oil (Argentina)	nil	83,904	77,636	1,283,940
Oil (Azerbainan)	1,638,547	n.a.	2,277,341	n.a.
Condensate (Italy)	10,276	9,880	39,209	49,731
Gas (Italy)	27,840	76,711	109,775	368,734
Total oil and gas (CAD$)	1,676,663		2,503,961
Electricity (CAD$)	240,582	100,767	479,995	100,767
Total (CAD$)	1,917,245	271,262	2,983,956	1,803,172

Oil Revenue

Gross oil revenue earned in Argentina was $nil for the three months ended December 31, 2016 versus $83,904 in the comparative three-month 2015 period and $77,636 for the nine months ended December 31, 2016 versus $1,283,940 for the comparative nine-month 2015 period. The decrease in oil production and sales in the three and nine months ended December 31, 2016 is a result of lost production due to the collapse of the storage tank (state owned) occurred in late 2015, used by the Company, and the subsequent temporary interruption of production in Argentina. On February 20, 2017 the Company announced the sale of its operations in Argentina to a group of local energy investors.

Gross oil revenue earned in Azerbaijan was $1,638,547 for the three months ended December 31, 2016. This period is not comparable with past year comparative three and nine months with production in Azerbaijan commencing on 11 August 2016.

Condensate Revenue

The price per bbl received for condensate during the three and nine months ended December 31, 2016 was $73.69 per bbl and $65.48 per bbl, respectively, as compared to $69.97 per bbl and $74.47 per bbl earned on condensate sales during
the three and nine months ended December 31, 2015, respectively. The condensate price per bbl in the last three months is higher in the 2016 periods due to an increase in the base price of Brent crude which is used in the formulas to establish the
price of condensate.

Gas Revenue

The price per mcf received for natural gas is higher in the three and nine months ended December 31, 2016 as compared to the three and nine months ended December 31, 2015 due primarily to the effect of gas sales volumes from the Torrente Cigno
area being reclassified to the electricity market .

In general, gas prices are also impacted by fluctuations in the base price of Europens gas rates which is used in the formulas to establish the price of natural gas.

Electricity Revenue

The difference in the gross revenues achieved is only for the electricity selling price that is determed by the market.

Italy Electricity Production	Production MWh	Gross Revenues	Average Price Euro/MWH
I quarter 2017	2,718	$ 140,813	$ 51.80
II quarter 2017	2,620	$ 141,848	$ 54.14
III quarter 2017	2,774	$ 194,767	$ 70.21

In the fourth quarter 2017 the selling price is higher than the previous quarters, but due to the weater conditions in the South of Italy, and the related problems, the production was stopped from 10 of January to 15 February 2017 when it recommenced.

Royalties and Operating Expenses

Three months ended December 31			Nine months ended December 31
	2016	2015	2016	2015
Royalties ($)	n.a.	7,521	7,211	115,408
% of Argentine revenues (1)	n.a.	9%	9%	9%
$/bbl of oil	n.a.	6.10	0.50	6.68
$/boe (total Company)	n.a.	1.37	0.30	3.52

Operating and transportation ($)
Argentina	278,325	441,855	547,054	1,111,690
Azerbaijan	650,635	n.a.	1,021,702	n.a.
Italy	88,527	20,798	234,988	217,782
Total	1,017,487	462,653	1,803,744	1,329,472
Argentina $/bbl	n.a.	358.64	n.a.	64.34
Azerbaijan $/bbl	25.28	n.a.	25.70	n.a.
Italy $/boe	23.10	4.91	17.99	14.03
Total $/boe	34.41	84.56	33.42	40.53

(1) Royalties are charged on Argentine oil revenues only.

Royalties

Royalties in the three and nine months ended December 31, 2016 are not comparable to the three and nine months ended December 31, 2015 due to the lack of sales during the quarter in Argentina.

No royalties are charged on the Azerbaijan oil production and on the Italian productions.

Operating and transportation costs

Argentina operating costs per bbl are lower in the three nine months ended December 31, 2016 due primarily to the decrease in sales volumes resulting from a temporary shut-down of production.

Operating costs per boe for the nine months ended December 31, 2016 are lower than the nine months ended December 31, 2015 due a decrease in joint venture concession expense as a result of operational efficiencies and continued monitoring of operations.

Netbacks

Three months ended December 31				Nine months ended December 31
	2016	2015	2016		2015
Argentina ($/bbl)
Revenue	n.a.	68.10	66.85		74.31
Royalties	n.a.	(6.10)	(0.50)		(6.68)
Operating expenses	n.a.	(358.64)	(231.40)		(64.34)
Field netback	n.a.	(296.64)	(165.20)		3.29
Azerbaijan ($/bbl)
Revenue	63.67	n.a.	57.29		n.a.
Operating expenses	(25.28)	n.a.	(25.70)		n.a.
Field netback	38.39	n.a.	31.59		n.a.
Italy ($/boe)
Revenue	72.73	44.19	48.15		33.44
Operating expenses	(23.10)	(4.91)	(17.99)		(14.03)
Field netback	49.63	39.28	30.16		19.41
Total Company ($/boe)
Revenue	64.85	49.58	55.29		54.97
Royalties	n.a.	(1.37)	(0.30)		(3.52)
Operating expenses	(34.41)	(84.56)	(33.42)		(40.53)
Field netback	30.44	(36.35)	21.57		10.92

General and Administrative Expenses ("G&A")

General and administrative expenses for the three and nine months ended December 31 are composed of the following:

Three months ended December 31			Nine months ended December 31
	2016	2015	2016	2015
Professional fees	558,537	120,908	1,378,631	430,662
Office	308,088	28,009	588,363	385,771
Administrative	111,726	175,292	300,702	379,880
Salaries and benefits	692,004	93,424	990,541	338,331
Travel	230,793	223,479	438,434	447,231
	1,901,148	641,112	3,696,671	1,981,875

G&A expenses increased by 196% in the three months ended December 31, 2016 versus the 2015 comparative period and increased by 86% in the nine months ended December 31, 2016 versus the 2015 comparative period. Included in the General and Administrative expenses for three and nine months ended December 31, 2016 are approximately CAD$600,000 and CAD$1,600,000 non-recurrent expenses related to the January 11th 2017 admission to the London Stock Exchange as well as a non-cash charge of C$290,000 in relation to the award of the 6,000,000 options.

Professional fees were higher in the three and nine months ended December 31, 2016 due to business development and fundraising activities. Office expenses are higher in the three and nine months ended December 31, 2016 than the 2015 comparative periods due to an increase in Canadian, Azerbaijan, Italian and Argentine office costs. Administrative expenses were higher in the three and nine months ended December 31, 2015 due to director fees charged in Italy for which there are no charges in the 2016 periods. Salaries and benefits are higher in the three months ended December 31, 2016 than the comparative 2015 period due to the addition of a senior executive salaries in Azerbaijan. Salaries and benefits are lower in the nine months ended December 31, 2016 as the increase in salaries was offset by the lack of bonuses in the 2016 period. Travel costs are higher in the three and nine months ended December 31, 2016 due to an increase in travel activities, particularly in relation to negotiations in Azerbaijan and the establishment of an Azerbaijan office.

No general and administrative expenses were capitalized in the nine months ended December 31, 2016 and 2015.

Depletion and depreciation

Three months ended December 31			Nine months ended December 31
	2016	2015	2016	2015
Argentina	-	1,325	11,317	58,204
Azerbaijan	209,172	n.a.	319,715	n.a.
Italy	110,025	54,273	191,980	190,998
Total	319,197	55,598	523,012	249,202
Argentina $/bbl	n.a.	1.08	9.75	3.37
Azerbaijan $/bbl	8.13	n.a.	8.04	n.a.
Italy $/boe	28.71	12.80	14.70	12.30
Total $/boe	10.80	10.16	9.69	7.60

The depletion rate for Argentine properties in the nine months ended December 31, 2016 is lower than the comparative 2015 period due to the decrease in oil production in the 2016 period.

The depletion rate for the Italian properties in the nine months ended December 31, 2016 is lower than comparative 2015 period due to the impairment of the Italian assets calculated in the year 2016.

Oil production commenced in Azerbaijan during the period. There is no 2015 comparative period.

The Company did not identify any indicators of impairment with respect to its Italian or Argentine CGUs as at December 31, 2016.

Net income (loss)

The Company reported net loss of ($1,555,692) and net income of $614,713,380 for the three and nine months ended December 31, 2016 versus net losses of ($889,470) and ($2,106,182) for the three and nine months ended December 31, 2015.

SUMMARY OF QUARTERLY INFORMATION

The following is a summary of selected financial information for the Company for the past eight quarters.

			Net revenue	Net income (loss)	Per share ^*
		$		$	$
2017
Third quarter ended December 31, 2016		1,917,245		(1,555,692)	(0.03)
Second quarter ended September 30, 2016		817,996		($1,150,014)	(0.02)
First quarter ended June 30, 2016		241,504		617,418,886	0.11
2016
Fourth quarter ended March 31, 2016	251,319			(5,568,266)	(0.14)
Third quarter ended December 31, 2015	284,408			(889,470)	(0.03)
Second quarter ended September 30, 2015	524,996			(868,697)	(0.03)
First quarter ended June 30, 2015	899,027			(348,015)	(0.01)
2015
Fourth quarter ended March 31, 2014	987,353			(984,864)	(0.04)

1 The sum of quarterly amounts per share may not add to the year-to-date figure due to rounding.

§ In the third quarter 2017 the Company recorded the first full quarter of the oil production in Azerbaijan, that has been consistent; in fact the revenues of the Company are more than double of almost last 10 quarters.

§ In the second quarter 2017, following successful handover on August 11, 2016 production under Zenith ownership commenced at the Azeri operations. Production has been relatively consistent at circa 275 barrels per day resulting in bbls for the period 14,010 and gross revenue of CAD $659,000

§ Net revenues decreased in the first quarter 2017 due to a lack of oil sales. Net loss excluding Gain on business combination increased due to the decrease in net revenues combined with an increase in general and administrative expenses.

§ Net revenue decreased in the fourth quarter 2016 due to a lack of oil sales offset by an increase in electricity revenue. Net loss increased due primarily to an increase in G&A expenses and inventory impairment and $5,025,000 of
impairment related to the Company's Italian properties.

§ Net revenue decreased in the third quarter ended December 31, 2015 due to a decrease in sales volumes, primarily oil sales volumes, combined with a decrease in the price earned for oil. Net loss increased due to the decrease in net revenues combined with an increase general and administrative expenses.

§ Net revenue decreased in the second quarter ended December 31, 2015 due to a decrease in sales volumes and in commodity prices for natural gas and NGLs. Net loss increased due to the decrease in net revenues combined with an increase in operating costs.

§ Net revenue decreased in the first quarter ended June 30, 2015 due to a decrease in both sales volumes and commodity prices. Net loss decreased as compared to the previous quarter due a decrease in general and administrative expenses and a net foreign exchange gain in the quarter.

§ Net revenue decreased in the fourth quarter ended March 31, 2015 due to a decrease in oil sales volumes. Net loss increased due to the decrease in net revenue combined with increases in general and administrative expenses, unrealized loss on foreign exchange and finance expenses.

Liquidity Risk and Capital Resources

As at December 31, 2016 the Company has a working capital deficit of $6,025,592 (March 31, 2016 - $6,709,115), negative cash flows from operating activities of $1,909,076 (March 31, 2016 - $2,473,767) and an accumulated surplus of $601,067,453 (March 31, 2016 - deficit - $13,645,926). During the three and nine months ended December 31, 2016, the Company incurred $59,505 and $517,993 on capital expenditures.

As of December 31, 2016, the contractual cash flows, including estimated future interest, of current and non-current financial liabilities mature as follows:

		Carrying amount	Contractual cash flows	Due on or before December 31 ,2017	Due on or before December 31, 2018	Due between January 2018 and November 2020
Trade and other payables	$	4,892,846	4,892,846	4,892,846	-	-
Oil share agreement		1,063,629	1,063,629	1,063,629	-	-
Loans payable		4,322,726	5,264,699	1,973,367	3,123,648	167,684
Convertible notes		525,992	940,058	6,313	7,035	926,710
Notes payable		213,608	213,608	213,608	-	-
Bonds payable		383,090	443,511	55,995	387,516	-
	$	11,401,891	12,818,351	8,205,758	3,518,199	1,094,394

Note: the deferred consideration payable related to opportunities of development in Azerbaijan for the Company, but they are not commitments.

Subsequent Events

· On January 5, 2017, the Company announced that the Prospectus dated January 5, 2017, has been approved by the UK Listing Authority (the "Prospectus"). The Prospectus relates to admission of the Company's Common Shares to the standard listing segment of the Official List and to trading on the London Stock Exchange's Main Market ("Admission"). Admission and commencement of dealings in the Company's Common Shares began on January 11, 2017.

· On January 11, 2017 - The Company announced that its entire Common Share capital, consisting of 98,564,867 Common Shares, were admitted to the standard listing segment of the Official List of the FCA and to trading on the London Stock Exchange's Main Market under the ticker symbol "ZEN".

Admission became effective and dealings commenced at 8.00 a.m. on January 11, 2017.

The net proceeds of the UK Placing will be used by the Company to provide additional funding for debt repayment, to provide additional funding for the Company's development and appraisal activities in Italy and Azerbaijan, and to provide additional working capital.

· On January 24, 2017, the Company announced the signing of a well workover contract and engagement of highly experienced local drilling company to initiate and execute the workover of first two wells in the programme (M-195 and M-45).

· In January 2017, the Company paid the USD$ 700,000 (CAD$943,467) of the USD loan, utilising part of the proceeds from the fundraising aligned with the listing on the London Stock Exchange of January 11, 2017.

· In January 2017, the Company issued 668,571 shares, at a deemed price of £0.07 per share, for the settlement of a debt for services of a senior manager of the Companty, for an amount of £46,800.

· In January 2017, the Company incurred in expenses for a total amount of £306,628 (CAD$505,476), related to the admission to the London Stock Exchange listing, as follow:

Role	Cost (£)	Cost (CAD$)
UK Legal Counsel to the Company	£ 100,000	$ 164,850
TSX - V share issue costs	£ 18,000	$ 29,673
Auditors & Reporting Accountants	£ 70,000	$ 115,395
Registrar	£ 1,300	$ 2,143
Legal opinion Crest	£ 5,000	$ 8,243
Prospectus Printers	£ 8,000	$ 13,188
placings payable	£ 96,128	$ 158,467
LSE Admission Fees	£ 8,200	$ 13,518
Total	£ 306,628	$ 505,476

· In January 2017 the Company entered into an agreement to proceed with a brokered private placement (the "Private Placement") to raise gross proceeds of GBP 855,000 (approximately CAD$ 1,408,000) through the issue of nine million (9,000,000) new common shares of the Company ("New Common Shares") at a price of GBP 0.095 (approximately CAD$ 0.1565) per share.

In addition to the New Common Shares, under the Private Placement each subscriber received one warrant (the "Warrant") for every New Common Share purchased. Each Warrant shall entitle the Warrant holder to subscribe for new Common Shares in the Company at a price of GBP 0.15 per common share (approximately CAD$ 0.247), exercisable at any time until February 1, 2019. The proceeds of the Private Placement will be used to accelerate the Company's field rehabilitation activities in Azerbaijan and increase the number of well workovers scheduled for completion by March 31, 2018.

· On January 25, 2017, the Company issued 3,700,000 shares on the conversion of 311,067 Swiss Francs (CAD$407,000) principal amount of convertible notes.

Outstanding debt As of January 25, 2017	CHF	CAD$
Principal	CHF 314,953	$ 412,084
Accrued Interest	CHF 249,758	$ 327,730
Total to be paid	CHF 564,711	$ 739,814

Conversion of notes	Shares	CHF	CAD$
Outstanding principal As of January 25, 2017		CHF 314,953	$ 412,084
Issued January 2017	3,700,000	-CHF 311,067	$ -407,000
Remaining		CHF 3,886	$ 5,084

Changes calculated using the following current change rate conversion (January 25, 2017)
Change Rate
CAD$/CHF	1.3084
CHF/CAD$	0.7643

The outstanding amount of convertible note, at the date of this document, is CHF3,886 Swiss Francs ($5,084) of principal, and CHF249,758 (CAD$327,730) of accrued interest.

· On February 20, 2017, the Company announced the sale of its operations in Argentina to a group of local energy investors.

· The Stock Options Plan (note 12 of the Financial Statement) has been approved by shareholders of the Company at the Annual General Meeting held on January 20, 2017.

· On February 22, 2017, the Company announced that a Director of the Company has exercised his stock options to purchase 1,000,000 common shares in the capital of the Company at a price of CAD$0.10 per Common Share and a total cost of CAD$100,000.

· On February 22, 2017, the terms of the repayment of the First Credit Agreement were amended and the amount of USD $160,000 (plus accrued interest)(CAD $215,650) will be paid on March 27, 2017.

· On February 21, 2017, the terms of the repayment of the Third Credit Agreement were amended and the amount of USD $55,000 (plus accrued interest)(CAD $74,130) will be paid on March 27, 2017.

· On February 22, 2017, the terms of the repayment of the Fourth Credit Agreement were amended and the amount of USD $55,000 (plus accrued interest)(CAD $74,130) will be paid on March 27, 2017.

Going Concern

As at December 31, 2016, the Company has a working capital deficit and an accumulated deficit, and may incur future losses in the development of its business. Current cash resources will not be sufficient to continue development activities. These matters raise significant doubt about the ability of the Company to continue to meet its obligations as they become due. It is expected that further debt and equity financings will be required in order to settle existing current liabilities, continue development of the Company's assets and meet future obligations. Additional financing is subject to the global financial markets and economic conditions, and volatility in the debt and equity markets. These factors have made, and will likely continue to make it challenging to obtain cost effective funding. There is no assurance this capital will be available and if it is not, the Company may be forced to curtail or suspend planned activity.

The Company's unaudited condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to realize its assets and meet its obligations and continue its operations for the foreseeable future. Realization values may be substantially different from carrying values as shown and the consolidated financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the going concern basis were not appropriate for the consolidated financial statements, then the adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used.

Shares and Convertible, Exercisable and Exchangeable Securities

The Company is authorized to issue an unlimited number of common shares and an unlimited number of preferred shares issuable in series.

As at December 31, 2016 and the date of this MD&A, the Company's issued share capital and the outstanding securities that are convertible or exercisable for any voting or equity securities of the Company are as follows:

	Number of common shares	Number of warrants	Number of stock options
Balance - March 31, 2016	43,594,406	29,638,898	-
Issued	20,979,747	17,242,724	6,000,000
Expired	-	-	-
Balance - December 31, 2016	64,574,153	46,881,622	6,000,000
Issued	46,690,714	1,114,286	-
Expired	-	-	-
Balance - Date of MD&A	111,264,867	47,995,908	6,000,000

(a) On January 5, 2017 - The Company announced that the Prospectus dated January 5, 2017 has been approved by the UK Listing Authority (the "Prospectus"). The Prospectus relates to admission of the Company's Common Shares to the standard listing segment of the Official List and to trading on the London Stock Exchange's Main Market ("Admission"). Admission and commencement of dealings in the Company's Common Shares did occur on 11 January 2017.

(b) In January 2017 the Company issued 668,571 shares, at a deemed price of £0.07 per share, for the settlement of a debt for services of a senior manager of the Companty, for an amount of £46,800.

(c) On January 11, 2017 - The Company announced that its entire Common Share capital, consisting of 98,564,867 Common Shares, was admitted to the standard listing segment of the Official List of the FCA and to trading on the London Stock Exchange's Main Market under the ticker symbol "ZEN".

Admission became effective and dealings commenced at 8.00 a.m. on January 11, 2017.

(d) On January 25, 2017 the Company issued 3,700,000 shares on the conversion of 311,067 Swiss Francs (CAD$407,000) principal amount of convertible notes.

(e) In January 2017 the Company has entered into an agreement to proceed with a brokered private placement (the "Private Placement") to raise gross proceeds of GBP 855,000 (approximately CAD$ 1,408,000) through the issue of nine million (9,000,000) new common shares of the Company ("New Common Shares") at a price of GBP 0.095 (approximately CAD$ 0.1565) per share.

In addition to the New Common Shares, under the Private Placement each subscriber will receive one warrant (the "Warrant") for every New Common Share purchased. Each Warrant shall entitle the Warrant holder to subscribe for new Common Shares in the Company at a price of GBP 0.15 per common share (approximately CAD$ 0.247), exercisable at any time until 1 February 2019. The proceeds of the Private Placement will be used to accelerate the Company's field rehabilitation activities in Azerbaijan and increase the number of well workovers scheduled for completion by 31 March 2018.

Related Party Transactions

Related party transactions during the three and nine months ended December 31, 2016 and 2015 not disclosed elsewhere in this MD&A are as follows:

Off-Balance Sheet Arrangements

The Company has not entered into any off-balance sheet financing arrangements.

Outlook

As noted earlier, the Company's cash and cash equivalent balance is not sufficient to meet the Company's obligations and additional funds will have to be raised through the issuance of debt and equity financing. There is no assurance that such additional funds can be raised on reasonable terms, or at all.

The Company plans to continue to focus on both international oil and natural gas exploration opportunities as well as continuing its search for smaller producing assets in North America, Italy, Argentina and Azerbaijan. Management intends to focus its efforts toward acquiring large exploration permits, which offer high exploration potential and the opportunity to act as operator.

The Company's plans for fiscal 2017 include:

(a) Italy: After the acquisition of 9 producing licenses and 4 exploration applications from Mediterranean Oil & Gas Plc., Zenith has evaluated drilling opportunities on these permits and will formalize plans to either participate directly in such potential operations or farm-out its interest to third parties. The company's technical team has conducted in depth geological, geophysical and engineering evaluations on all these properties. Natural gas from two properties which is not suitable for transportation in the national pipeline grid will now be produced to generate electricity with the use of gas turbines. New seismic data has defined a very interesting structure on the Macchia Nuova property and plans are being made to drill this prospect in the future. Drilling plans for side-track drilling operations at the Masseria Petrilli property and drilling of a new well at the San Teodoro field are also being evaluated. These activities are expected to increase Zenith's gas production in Italy.

Submission of extensive environmental reports relating to the commencement of production of the Torrente Vulgano and Canaldente gas properties has been completed and preliminary approval has been received. The Company is now looking forward to finally place on production these wells after the final approval is received. Production of natural gas from the Torrente Vulgano and Canaldente properties is now expected to commence in late 2017.

Improvements of facilities at San Teodoro will be completed by the tie-in of new dehydration equipment. While the field has been capable of production, a lack of regional infrastructure had limited additional expansion in the past. In December 2014, Zenith reached an agreement with Basengas S.r.l., a successful retail marketer of natural gas within Italy, to handle forthcoming production from this 100% owned field, which is anticipated to restart production in September 2017. Production from the existing wellbore is expected to commence at 3,000 cubic meters/day (106 mcf/d or 18 boed), increasing Zenith's current daily production in Italy by 25%, to over 100 boepd. Costs of the refurbishment and commencing production are anticipated at €300,000 and will be paid through an equipment leasing facility.

Zenith is also evaluating the possibility of drilling a deviated well into the crestal area of the Torrente Salsola structure, where the Company has a 100% working interest, in order to unlock residual reserves. The Company has an ambitious plan to enhance the Italian daily gas production rate in the Puglia Region by 100% through a technical program employing additional workovers.

Zenith is drawing together an innovative plan for the exploitation of the Traetta 1 well in the Masseria Grottavecchia concession (20% working interest) through the sweetening of the produced gas so that it can be sold through the national pipeline grid. This development plan will be submitted to the relevant authorities in Italy for their analysis and required prior approval. Approval is expected to be received in September 2017.

(b) Azerbaijan: On June 20, 2016, the REDPSA ("Rehabilitation, Exploration, Development and Production Sharing Agreement") for the Block in the Republic of Azerbaijan was ratified by the Parliament of the Republic of Azerbaijan and converted into an official law of the country signed by the President of the Republic of Azerbijan. The Block covers an area of 642.4 square kilometres, and at the time of the formal finalitazion of the transaction the production in Azerbaijan was about 275 barrels per day of oil, having however produced significantly larger quantities in previous years. Minor quantities of natural gas are also produced and used on-site. In the subsequent months the Company has achieved an increase in production. The current production from the assets in Azerbaijan is approximately 295 barrels of oil per day.

The terms of the Contract Rehabilitation Area section of the REDPSA is 25 years from the date of SOCAR's approval of the contractor's rehabilitation and production programme which is anticipated to occur in late 2016. The terms of the Contract Exploration Area section of the REDPSA is 25 years from the date of SOCAR's approval of the contractor's development programme. The terms of each Area may be extended by an additional five years by SOCAR.

Zenith's corporate office in Baku, the capital of Azerbaijan, is a two and a half hour drive from the operational office presently used to manage the producing fields, which are in the southern region of Azerbaijan. Azeri management familiar with the properties will initially be supplemented by new technical and operational personnel from Zenit. The Company will, however, also begin to actively identify international management and specialists willing to relocate to Azerbaijan as part of its strategy to increase production at the Block. Zenith Aran, the Company's wholly-owned subsidiary, will act as the operating entity for the management of the Azerbaijan oil operations..

On August 11, 2016, the handover of the Azerbaijan assets, physicallycompleted in June 2016, was formally completed with the necessary signatures on related documents and the Company commenced crude oil production of approximately 275 barrels of oil per day in Azerbaijan under Zenith's ownership. The Company plans to evaluate the
performance of key wells and will then implement a program of work-overs and facilities improvements.

The Company, which is free to sell/export oil without restrictions, sells its oil through the Marketing and Operations Department of SOCAR ("SOCARMO"). A related commission of 1% of total sales is payable to SOCARMO.

On January 24, 2017 the Company announced the signing of a well workover contract and engagement of highly experienced local drilling company to initiate and execute the workover of first two wells in the programme (M-195 and M-45).

In all, 145 wells are expected to be drilled over 16 years, of which 58 of these are anticipated to be horizontal wells

Contractual Obligations and Commitments

In the ordinary course of business, the Company and its subsidiaries may enter into contracts which contain indemnification provisions, such as service agreements, leasing agreements, asset purchase and sale agreements, joint venture agreements, operating agreements, and land use agreements. In such contracts, the Company may indemnify counterparties to the contracts if certain events occur. These indemnification provisions vary on an agreement by agreement basis. In some cases, there are no pre-determined amounts or limits included in the indemnification provisions and the occurrence of contingent events that will trigger payment under them is difficult to predict. Therefore, the maximum potential future amount that the Company could be required to pay cannot be estimated.

The Company subleases premises in London, UK, under an operating lease on a month to month basis which requires payments of approximately $50,000 per annum.

Business Risks and Uncertainties

The Company has production operations in Azerbaijan and Italy and its primary focus is the success of its production
activities in these countries. Some of the Company's operations and related assets are located in countries which carry a higher degree of political and economic risk.

The prices of Oil and natural gas have fluctuated considerably in recent years and are determined based on world demand,
supply and other factors, all of which are beyond the Company's control.

The Company operates in the petroleum, natural gas and electricity industry which is subject to numerous risks that can affect the amount of cash flow from operating activities and the ability to grow. These risks include but are not limited to:

· Global economic uncertainty;

· Risks associated with operating in foreign jurisdictions;

· Competition with more established companies and the availability of services;

· Volatility in commodity pricing, exchange and interest rates;

· Government and regulatory risk with respect to royalty and income tax regimes;

· Operation risks that may affect the quality and recoverability of reserves;

· Geological risks associated with accessing and recovering new quantities of reserves;

· Ability to capitalize on farm-in and farm-out opportunities as they arise;

· Production risks associated with the ability to extract commercial quantities of petroleum and natural gas;

· Transportation risk with respect to the ability to transport petroleum and natural gas to market;

· Third party credit risk and the resulting ability to collect amounts owed;

· Capital markets risk and the ability to finance future growth;

· Uncertainty as to the nature of evolving environmental legislation that is likely to result in stricter standards and enforcement ;

· Environmental risk with respect to the ability to remedy spills, releases or emissions of various substances produced in association with petroleum and natural gas operations.

The Company will seek to minimize these business risks by:

· Employing management, technical staff and consultants with extensive industry experience;

· Maintaining a low cost structure;

· Maintaining prudent financial practices;

· Controlling timing and magnitude of operating and capital costs;

· Working with established industry partners;

· Maintaining insurance in accordance with industry standards to address the risk of liability for pollution, blow-outs, property damage, personal injury and other hazards.

Other

Additional information related to the Company's business and activities can be found on SEDAR at www.sedar.com.

This information is provided by RNS

The company news service from the London Stock Exchange

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