**Exhibit 99.3**

**MANAGEMENT’S REPORT**

Theconsolidated financial statements of Penn West Energy Trust were prepared bymanagement in accordance with accounting principles generally accepted inCanada. In preparing the consolidated financial statements, management has madeestimates because a precise determination of certain assets and liabilities isdependent on future events. The financial and operating information presentedin this report is consistent with that shown in the consolidated financialstatements.

Managementmaintains a system of internal controls to provide reasonable assurance thatall assets are safeguarded and to facilitate the preparation of relevant,reliable and timely financial records for the preparation of statements.

Theconsolidated financial statements have been examined by the external auditorsand approved by the Board of Directors. The Board of Directors’ financialstatement related responsibilities are fulfilled through the Audit Committee.The Audit Committee is composed entirely of independent directors. The AuditCommittee recommends appointment of the external auditors to the Board ofDirectors, ensures their independence, and approves their fees. The AuditCommittee meets regularly with management and the external auditors to discussreporting and control issues and to ensure each party is properly dischargingits responsibilities. The auditors have full and unrestricted access to theAudit Committee to discuss their audit and their related findings as to theintegrity of the financial reporting process.

 
|                    |                               |                 |
|--------------------|-------------------------------|-----------------|
|               |                          |            |
| William E. Andrew  | Todd H. Takeyasu              | Derek W. Loomer |
| President and  CEO | Senior Vice President and CFO | Controller      |
|               |                          |            |
| February 28,  2007 |                          |            |

 

1

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**AUDITORS’ REPORT TO THE UNITHOLDERS**

Wehave audited the consolidated balance sheets of Penn West Energy Trust as atDecember 31, 2006 and 2005 and the consolidated statements of income andretained earnings and cash flows for the years then ended. These consolidatedfinancial statements are the responsibility of the trust’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

Weconducted our audits in accordance with Canadian generally accepted auditingstandards. Those standards require that we plan and perform an audit to obtainreasonable assurance whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.

Inour opinion, these consolidated financial statements present fairly, in allmaterial respects, the financial position of the trust as at December 31, 2006and 2005 and the results of its operations and its cash flows for the yearsthen ended in accordance with Canadian generally accepted accountingprinciples.

Chartered Accountants

Calgary, Canada

February 28, 2007

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**CONSOLIDATED BALANCE SHEETS**
| ** **                                       | ** ** | **As at December 31** | ** **  |
|--------------------------------------------------|------------|--------------------------------------|-------------|
| **($ millions)**                            | ** ** | **2006**                             | ** **  | **2005** | ** ** |
| ASSETS                                           |       |                                 |        |   |   |
| Current                                          |       |                                 |        |   |   |
| Accounts receivable                              | ** ** | **$**                                | **268.7**   |   | $ | 214.4 |   |
| Risk management (note 12)                        | ** ** | **54.0**                             |        | 8.5 |   |
| Other                                            | ** ** | **56.0**                             |        | 29.0 |   |
|                                             | ** ** | **378.7**                            |        | 251.9 |   |
| Property, plant  and equipment (note 4)          | ** ** | **7,039.0**                          |        | 3,715.2 |   |
| Goodwill (note  5)                               | ** ** | **652.0**                            |        | — |   |
| ** **                                       |       | **7,691.0**                          |        | 3,715.2 |   |
| ** **                                       |       | **$**                                | **8,069.7** |   | $ | 3,967.1 |   |
| LIABILITIES AND  UNITHOLDERS’ EQUITY        |       |                                 |        |   |   |
| Current                                          |       |                                 |        |   |   |
| Accounts payable and accrued liabilities         | ** ** | **$**                                | **382.9**   |   | $ | 304.1 |   |
| Taxes payable                                    | ** ** | **1.2**                              |        | 11.8 |   |
| Distributions payable                            | ** ** | **80.6**                             |        | 50.6 |   |
| Deferred gain on financial instruments (note 12) | ** ** | **—**                           |        | 11.9 |   |
|                                             | ** ** | **464.7**                            |        | 378.4 |   |
| Bank loan (note  6)                              | ** ** | **1,285.0**                          |        | 542.0 |   |
| Asset retirement  obligations (note 7)           | ** ** | **339.1**                            |        | 192.4 |   |
| Future income  taxes (note 8)                    | ** ** | **792.6**                            |        | 682.1 |   |
|                                             | ** ** | **2,416.7**                          |        | 1,416.5 |   |
| **Unitholders’  equity**                    |       |                                 |        |   |   |
| Unitholders’  capital (note 9)              | ** ** | **3,712.4**                          |        | 561.0 |   |
| Contributed  surplus (note 9)                    | ** ** | **16.4**                             |        | 5.5 |   |
| Retained  earnings                               | ** ** | **1,459.5**                          |        | 1,605.7 |   |
| ** **                                       |       | **5,188.3**                          |        | 2,172.2 |   |
| ** **                                       |       | **$**                                | **8,069.7** |   | $ | 3,967.1 |   |

 

Subsequent event (note 18)

See accompanying notes to theaudited consolidated financial statements.

Approved on behalf of theBoard:
|                |                |
|----------------|----------------|
| John A. Brussa | James C. Smith |
| Chairman       | Director       |

 

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**CONSOLIDATED STATEMENTS OF INCOME AND RETAINEDEARNINGS**
| ** **                                                         | ** ** | **Year ended December 31** | ** **  |
|--------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| **($ millions, except per unit amounts)** | ** ** | **2006**                                  | ** **  | **2005** | ** ** |
| **Revenues**                                                       | ** ** | ** **                                | ** **  | ** ** | ** ** |
| Oil and natural gas                                                |       | **$**                                     | **2,100.9** | ** ** | $ | 1,919.0 |   |
| Royalties                                                          |       | **(373.3**                                | **)**       | (355.0 | ) |
| Risk management (note 12)                                          |       | **42.8**                                  | ** **  | (14.8 | ) |
|                                                               |       | **1,770.4**                               | ** **  | 1,549.2 |   |
| **Expenses**                                                       |       | ** **                                | ** **  |   |   |
| Operating                                                          |       | **426.3**                                 | ** **  | 327.4 |   |
| Transportation                                                     |       | **24.5**                                  | ** **  | 22.7 |   |
| General and administrative                                         |       | **36.0**                                  | ** **  | 23.1 |   |
| Financing                                                          |       | **49.3**                                  | ** **  | 23.2 |   |
| Depletion, depreciation and accretion (note 4)                     |       | **654.7**                                 | ** **  | 437.6 |   |
| Equity-based compensation (note 10)                                |       | **11.3**                                  | ** **  | 77.2 |   |
| Foreign exchange loss                                              |       | **—**                                | ** **  | 4.5 |   |
| Risk management activities (note 12)                               |       | **(5.8**                                  | **)**       | (11.4 | ) |
|                                                               |       | **1,196.3**                               | ** **  | 904.3 |   |
| **Income  before taxes**                                           |       | **574.1**                                 | ** **  | 644.9 |   |
| **Taxes**                                                          |       | ** **                                | ** **  |   |   |
| Capital                                                            |       | **14.7**                                  | ** **  | 14.7 |   |
| Current income taxes                                               |       | **—**                                | ** **  | 54.1 |   |
| Future income tax recovery (note 8)                                |       | **(106.2**                                | **)**       | (1.1 | ) |
|                                                               |       | **(91.5**                                 | **)**       | 67.7 |   |
| **Net  income**                                                    |       | **$**                                     | **665.6**   | ** ** | $ | 577.2 |   |
| ** **                                                         |       | ** **                                | ** **  |   |   |
| **Retained  earnings, beginning of period**                        |       | **$**                                     | **1,605.7** | ** ** | $ | 1,393.7 |   |
| Net income                                                         |       | **665.6**                                 | ** **  | 577.2 |   |
| Trust conversion costs                                             |       | **—**                                | ** **  | (32.9 | ) |
| Distributions declared                                             |       | **(811.8**                                | **)**       | (321.5 | ) |
| Dividends declared                                                 |       | **—**                                | ** **  | (10.8 | ) |
| **Retained  earnings, end of period**                              |       | **$**                                     | **1,459.5** | ** ** | $ | 1,605.7 |   |
| ** **                                                         |       | ** **                                | ** **  |   |   |
| **Net  income per unit**                                           |       | ** **                                | ** **  |   |   |
| Basic                                                              |       | **$**                                     | **3.32**    | ** ** | $ | 3.55 |   |
| Diluted                                                            |       | **$**                                     | **3.27**    | ** ** | $ | 3.48 |   |

 

See accompanying notes to theaudited consolidated financial statements.

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                       | ** ** | **Year ended December 31** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **($ millions)**                                            | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| **Operating  activities**                                        |       |                                      |       |   |   |
| Net income                                                       |       | **$**                                     | **665.6**  | ** ** | $ | 577.2 |   |
| Depletion, depreciation and accretion (note 4)                   |       | **654.7**                                 | ** ** | 437.6 |   |
| Future income tax recovery                                       |       | **(106.2**                                | **)**      | (1.1 | ) |
| Unrealized foreign exchange loss                                 |       | **—**                                | ** ** | 4.5 |   |
| Equity-based compensation (note 10)                              |       | **11.3**                                  | ** ** | 77.2 |   |
| Risk management (note 12)                                        |       | **(48.6**                                 | **)**      | 3.4 |   |
| Payments for surrendered options                                 |       | **—**                                | ** ** | (141.6 | ) |
| Asset retirement expenditures                                    |       | **(26.9**                                 | **)**      | (22.6 | ) |
| Change in non-cash working capital (note 15)                     |       | **(43.6**                                 | **)**      | (1.8 | ) |
|                                                             |       | **1,106.3**                               | ** ** | 932.8 |   |
| **Investing  activities**                                        |       | ** **                                | ** ** |   |   |
| Additions to property, plant and equipment, net                  |       | **(577.9**                                | **)**      | (456.7 | ) |
| Petrofund merger costs                                           |       | **(25.0**                                 | **)**      | — |   |
| Change in non-cash working capital (note 15)                     |       | **11.7**                                  | ** ** | (63.2 | ) |
|                                                             |       | **(591.2**                                | **)**      | (519.9 | ) |
| **Financing  activities**                                        |       | ** **                                | ** ** |   |   |
| Increase (decrease) in bank loan                                 |       | **132.6**                                 | ** ** | (51.4 | ) |
| Issue of equity                                                  |       | **118.6**                                 | ** ** | 23.7 |   |
| Distributions/dividends paid                                     |       | **(781.8**                                | **)**      | (288.4 | ) |
| Trust conversion costs                                           |       | **—**                                | ** ** | (36.3 | ) |
| Realized foreign exchange gain                                   |       | **—**                                | ** ** | 85.8 |   |
| Settlement of future income tax liabilities on trust  conversion |       | **15.5**                                  | ** ** | (146.3 | ) |
|                                                             |       | **(515.1**                                | **)**      | (412.9 | ) |
| **Change  in cash**                                              |       | **—**                                | ** ** | — |   |
| **Cash,  beginning of period**                                   |       | **—**                                | ** ** | — |   |
| **Cash,  end of period**                                         |       | **$**                                     | **—** | ** ** | $ | — |   |
| ** **                                                       |       | ** **                                | ** ** |   |   |
| Interest paid                                                    |       | **$**                                     | **44.4**   | ** ** | $ | 22.9 |   |
| Income and capital  taxes paid                                   |       | **$**                                     | **8.6**    | ** ** | $ | 241.2 |   |

 

See accompanying notes to theaudited consolidated financial statements.

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**NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

(All tabular amounts are in $millions except numbers of units, per unit amounts, percentages and variousfigures in Note 12.)

**1.****    ****Structure of the Trust**

On May 31, 2005, Penn West Petroleum Ltd. (the “Company”) wasreorganized into Penn West Energy Trust (“PennWest” or the “Trust”) under a plan ofarrangement entered into by Penn West and the Company and its shareholders. Shareholders received three trust unitsfor each common share held. On June 2, 2005, the trust units commenced trading on the TSX under the symbol “PWT.UN”.On June 30, 2006, the trust units commenced trading on the NYSE under the symbol “PWE”. The Trust was createdpursuant to a trust indenture dated April 22, 2005 with CIBC Mellon Trust Company appointed trustee.

Penn West is an open-ended, unincorporated investment trust governed bythe laws of the Province of Alberta. Thepurpose of Penn West is to indirectly explore for, develop and holdinterests in petroleum and natural gas properties through investments in securities ofsubsidiaries and royalty interests in oil and natural gas properties. Penn West owns 100 percent of the common shares,directly or indirectly, of the entities that carry on the oil and natural gas business of Penn West. The activities ofthese entities are financed through interest-bearing notes from Penn West and third-party debt as described innote 6 to the audited consolidated financial statements.

Pursuant to the terms of net profit interest agreements (the “NPIs”), PennWest is entitled to payments from certainsubsidiary entities equal to essentially all of the proceeds of the saleof oil and natural gas production less certain specified deductions. Under the terms of the NPIs, the deductions are inpart discretionary, include the requirement to fund capital expenditures and asset acquisitions, and are subject tocertain adjustments for asset dispositions.

Under the terms of its trust indenture, Penn West is required to makedistributions to unitholders in amounts atleast equal to its taxable income consistingof interest on notes, the NPIs, and any inter-corporate distributions and dividends received, less certainexpenses.

**2.****    ****Summary of significant accounting policies**

The consolidated financial statements have been prepared in accordancewith Canadian generally accepted accounting principles.

**a) Principles of consolidation**

The consolidated financial statements, prior to the plan of arrangement,included the Company and its subsidiaries. Upon completion of the trust conversion,the consolidated financial statements have been prepared on a continuity ofinterests basis with Penn West as the successor to the Company.

The 2005 consolidated financial statements reflect the results ofoperations and cash flows of the Company andits subsidiaries for the period from January1, 2005 to May 31, 2005 and the results of operations of Penn West and its subsidiaries and partnerships for theperiod from June 1, 2005 to December 31, 2005. As a result of the conversion into a trust, certain informationincluded in the consolidated financial statements for prior periods may not be comparable. The consolidated financialstatements include the accounts of Penn West and all its wholly owned subsidiaries and partnerships.

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**b) Other current assets**

Other current assets include deposits, prepayments and inventory.Inventories are valued at the lower of cost and net realizable value.

**c) Property, plant and equipment**

i) Capitalized costs

The full cost method of accounting for oil and natural gas operations isfollowed, whereby all costs of acquiring,exploring and developing oil and natural gas reserves are capitalized.These costs include lease acquisition, geological and geophysical, exploration and development and relatedequipment costs. Proceeds from the dispositionof oil and natural gas properties are accounted for as a reduction ofcapitalized costs, with no gain or lossrecognized unless such disposition results in a significant change in thedepletion and depreciation rate.

ii) Depletion and depreciation

Depletion and depreciation of resource properties is calculated usingthe unit-of-production method based onproduction volumes before royalties in relation to total proved reservesas estimated by independent petroleum engineers. Natural gas volumes are converted to equivalent oil volumesbased upon the relative energy content of six thousand cubic feet of natural gas to one barrel of oil. Indetermining its depletion base, the Trust includes estimated future costs to be incurred in developingproved reserves and excludes estimated facility and equipment salvage values and the lower of cost andmarket of unevaluated properties. Significant natural gas processing facilities, net of estimated salvage values,are depreciated using the declining balance method over the estimated useful lives of the facilities.

iii) Ceiling test

The recoverability of accumulated costs in a cost centre is assessedbased on undiscounted future cash flows fromproved reserves, using forecast prices, andthe cost of unproved properties. If accumulated costs are assessed to be not fully recoverable, the cost centre iswritten down to its fair value estimated as the present value of expected future cash flows, using forecastprices, from proved and probable reserves and the value of unproved properties. Expected future cash flows arediscounted at the Trust’s estimated risk free rate.

iv) Asset retirement obligations

The fair value of legal obligations for property abandonment and siterestoration is recognized as a liability on thebalance sheet as incurred with a correspondingincrease to the carrying amount of the related asset. The recorded liability increases over time to its futureamount through accretion charges included in depletion, depreciation and accretion. Revisions to the estimatedamount or timing of the obligations are reflected as increases or decreases to the recorded liability. Assetretirement expenditures, up to the recorded liability at the time, are chargedto the liability. Amountscapitalized to the related assets are amortized to income consistent with thedepletion or depreciation of the underlying asset.

The estimates in ii) and iii) and iv) are based on volumes and reservescalculated based on forecast sales prices, costs and regulations expected atthe end of the fiscal year.

**d) Joint operations**

Some of the Trust’s exploration and development activities are conductedjointly with others. The accounts reflect only the Trust’s proportionateinterest in such activities.

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**e) Financial instruments**

The Trust has policies and procedures in place with respect to therequired documentation and approvals for the useof derivative financial instruments and theiruse is limited to mitigating market price risk associated with expected cash flows.

The Trust elected to discontinue hedge accounting in 2005. EffectiveJuly 1, 2005 all financial instruments areaccounted for using the fair value method. Thefair value of these financial instruments is recognized on the balance sheet at inception and changes in the fairvalue of these instruments are recognized in income.

Prior to July 1, 2005, financial instruments that were determined to behedges were accounted for as a componentof the hedged item such as oil prices, natural gas prices, electricitycosts or interest. The changes in market values of financial instruments accounted for as hedgeswere not recognized in the financial statements until the underlying oil or natural gas production, power purchasesor interest cost was realized. Changes in market value of financial instruments determined not to be hedges, notqualifying as a hedge, or no longer effective as a hedge were fully recognized in the financial statements.

**f) Enhanced oil recovery**

The value of proprietary injectants is not recognized as revenue untilreproduced and sold to third parties. The costof injectants purchased from third parties formiscible flood projects is included in property, plant and equipment. These injectant costs are amortized asdepletion and depreciation over the period of expected future economic benefit on a straight-line basis. Costsassociated with the production of proprietary injectants are expensed.

**g) Foreign currency translation**

Monetary items, such as receivables and borrowings, are translated toCanadian dollars at the rate of exchangein effect at the balance sheet date. Non-monetary items, such asproperty, plant and equipment, are translated to Canadian dollars at the rate of exchange in effect when thetransaction occurred. Revenues and expenses denominated in foreign currencies are translated at the average exchangerate in effect during the period. Foreign exchange gains or losses on translation are included in income.

**h) Equity-based compensation**

The Trust has a trust unit rights incentive plan that was implementedduring the second quarter of 2005. Compensationexpense for the plan is based on the fairvalue of rights issued, amortized over the remaining vesting periods on a straight-line basis. A Binomial Latticeoption-pricing model is used to determine the fair value of rights granted.

Costs in respect of the employee trust unit savings plan are expensed asincurred.

The Company had a stock option plan in effect until May 31, 2005. Asthis stock option plan included a cash settlementalternative, stock-based compensation cost wasmeasured for stock options outstanding at intrinsic value and recognized as an expense over the vestingperiod. Provision was made for all vested options at the period-end plus the portion of future option vestingsattributable to the current period. Changes in intrinsic value of outstanding options between the grant date and themeasurement date were reflected as stock-based compensation expense. Cash payments made on option exercises werecharged against the stock-based compensation liability to the extent that prior provision was made for thepayment. Payments in excess of the recorded liability were charged to stock-based compensation cost.

Compensation costs in excess of the recorded liability that wererealized due to the cancellation of outstanding stock options as a result ofthe trust conversion were charged to income.

8

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**i) Revenue recognition**

Revenues from the sale of crude oil, natural gas liquids and natural gasare recognized when title passes from theCompany to the purchaser. Sales below or in excess of the Company’sworking interest share of production are recorded as inventory or deferred revenue respectively.

**j) Income taxes**

The corporate subsidiaries of Penn West use the asset and liabilitymethod of accounting for future income taxes.Temporary differences are calculated assumingthat the financial assets and liabilities will be settled at their carrying amount. Future income taxes are computedon temporary differences using income tax rates that are expected to apply when future income tax assets andliabilities are realized or settled.

Penn West is taxable on income in excess of distributions tounitholders. No provision for future income taxes has been made for temporarydifferences in the trust, as it is required to distribute all of its taxableincome to unitholders.

**k) Goodwill**

Goodwill is recorded on a business combination when the total purchaseconsideration exceeds the fair value ofthe net identifiable assets and liabilities of the acquired entity.Goodwill is not amortized and the balance is assessed for impairment on anannual basis or more frequently if circumstances arise that indicatesimpairment may have occurred.

The impairment test consists of two steps. First, the fair value of theTrust is compared to the carrying amount,including goodwill, to identify a potential impairment. If the fairvalue is greater than the carrying amount, goodwill is considered not to be impaired and thesecond step is not necessary. When the carrying amount exceeds the fair value, the second step requires the impliedfair value of the goodwill to be compared to its carrying amount. The implied fair value of goodwill is computed byassigning fair values to the identifiable assets and liabilities of the Trust as if it had been acquired in a businesscombination. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss equal to the excessis recognized in the period.

**l) Measurement uncertainty**

The preparation of financial statements in conformity with generallyaccepted accounting principles requiresmanagement to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of any contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses for the period. Actual results may differmaterially from those estimates.

Significant estimates are included in the determination of theprovisions for depletion and depreciation of petroleumand natural gas assets and the assetretirement obligations liability and the accretion thereof. Depletion and the ceiling test is based on estimates ofreserves, which by their nature include estimates of future production rates, oil and gas prices and costs, as well asother assumptions. These and other estimates are subject to measurement uncertainty and the effect on the financialstatements of changes in such estimates could be material.

**3.****    ****Merger with Petrofund Energy Trust (“Petrofund”)**

Penn West and Petrofundmerged effective June 30, 2006 pursuant to a plan of arrangement (the “Arrangement”).Under the terms of theArrangement, Petrofund unitholders received 0.6 of a Penn West unit for eachPetrofund unit exchanged and aspecial distribution of $1.00 per unit plus $0.10 per unit to align thedistribution dates of the trusts. PennWest accounted for the merger as an acquisition of Petrofund by Penn West usingthe purchase method of accounting.The consolidated financial statements of Penn West include the results ofoperations and cash flows of Petrofundfrom July 1, 2006 forward. The allocation of the consideration paid to the fairvalue of the identifiable assets andliabilities follows:

9

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| Purchase Price                            | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------|------------|
| 70.7 million  Penn West trust units issued (1) |       | $          | 3,032.4    |   |
| Transaction  costs                             |       | 25.0       |       |
|                                           |       | $          | 3,057.4    |   |

 

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(1)   Units issued at $42.91 per unit based on volume-weighted average for thefive-day period, including two days before and two days after the announcementof the transaction.
| Allocation of the Purchase Price | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|
| Property, plant  and equipment                       |       | $          | 3,323.3    |   |
| Working capital  (deficiency)                        |       | (10.0      | )          |
| Bank loan                                            |       | (610.4     | )          |
| Future income  taxes                                 |       | (199.5     | )          |
| Asset retirement  obligations                        |       | (98.0      | )          |
| Goodwill                                             |       | 652.0      |       |
|                                                 |       | $          | 3,057.4    |   |

 

**4.****    ****Property,plant and equipment**
|                                                                                | ** ** | **As at December 31** | ** **  |
|--------------------------------------------------------------------------------|------------|--------------------------------------|-------------|
| ** **                                                                     | ** ** | **2006**                             | ** **  | **2005** | ** ** |
| Oil and natural  gas properties, including production and processing equipment | ** ** | **$**                                | **9,666.0** |   | $ | 5,710.4 |   |
| Other                                                                          | ** ** | **17.2**                             |        | 14.0 |   |
|                                                                           | ** ** | **9,683.2**                          |        | 5,724.4 |   |
|                                                                           | ** ** | ** **                           |        |   |   |
| Accumulated  depletion and depreciation                                        | ** ** | **(2,549.1**                         | **)**       | (1,925.4 | ) |
| Accumulated gas  plant depreciation                                            | ** ** | **(95.1**                            | **)**       | (83.8 | ) |
|                                                                           | ** ** | **(2,644.2**                         | **)**       | (2,009.2 | ) |
| Net book value                                                                 | ** ** | **$**                                | **7,039.0** |   | $ | 3,715.2 |   |

 

Other than Penn West’s net share of capital overhead recoveries, nogeneral and administrative expenses arecapitalized. In 2006, additions to property, plant and equipmentincluded a $55.9 million increase related to additions to asset retirement obligations and changes inestimates, and a $1.7 million addition for future income taxes recorded on minor acquisitions. The lower of cost andmarket of unevaluated property excluded from the depletion base as at December 31, 2006 was $303 million (December31, 2005 – $259 million). The depletion and depreciation calculation includes future capital costs to developproved reserves of $718 million (2005 – $413 million).

An impairment test was performed on the oil and natural gas propertyinterests at December 31, 2006, whichdetermined that the estimated undiscounted future net cash flows associatedwith proved reserves, based on forecastprices and escalated costs, exceeded the carrying amount of the oil and naturalgas property interests. Averageprices of $8.59 per mcf (2005 – $8.46 per mcf) for natural gas and $66.04 perbarrel (2005 – $54.95 per barrel) forliquids were used to calculate the future net revenues.

**5.****    ****Goodwill**

In 2006, Penn West recorded $652 million in goodwill in conjunction withthe Petrofund merger. At December 31, 2006 an impairment test was performed andit was determined that there was no impairment to the goodwill balance.

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**6.****    ****Bank loan**
|                                                 | ** ** | **As at December 31** | ** **  |
|-------------------------------------------------|------------|--------------------------------------|-------------|
| ** **                                      | ** ** | **2006**                             | ** **  | **2005** | ** ** |
| Bankers’  acceptances and prime rate loans | ** ** | **$**                                | **1,285.0** |   | $ | 542.0 |   |
|                                                 |            |                                      |             |  |  |  |  |

 

As at December 31, 2006, the Company had an unsecured, extendible,three-year revolving syndicated credit facilitywith an aggregate borrowing limit of $1.8billion plus a $100 million swing line facility, both of which expire on August 25, 2009. The credit facility containsprovisions for stamping fees on bankers’ acceptances and LIBOR loans and standby fees on unutilized credit linesthat vary depending on certain consolidated financial ratios.

Letters of credit totaling $0.4 million (December 31, 2005 – $9 million)were outstanding on December 31, 2006 thatreduced the amount otherwise available to bedrawn on the swing line facility.

**7.****    ****Asset retirement obligations**

Total asset retirement obligations are based upon the present value ofPenn West’s net share of estimated future coststo abandon and reclaim all wells andfacilities. The estimates were made by management and external consultants assuming current technology and enactedlegislation.

The total uninflated and undiscounted amount to settle Penn West’s assetretirement obligations at December 31,2006 was $1.3 billion (December 31, 2005 – $0.8 billion). The assetretirement obligation was determined by applying an inflation factor of 2.0 percent (2005 – 1.7 percent) and the inflatedamount was discounted using a credit-adjusted rate of 7.0 percent (2005 – 7.5 percent) over the expected useful lifeof the underlying assets, currently extending up to 50 years into the future with an average life of 23 years. Futurecash flows from operating activities are expected to fund the obligations.

Changes to asset retirement obligations were as follows:
|                                                   | ** ** | **2006**  | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|-----------|------------|----------|------------|
| Balance,  beginning of period                     | ** ** | **$**     | **192.4**  |     | $          | 180.7 |   |
| Liabilities  incurred during the period           | ** ** | **30.2**  |       | 9.8      |       |
| Petrofund  liabilities assumed on acquisition     | ** ** | **98.0**  |       | —   |       |
| Increase in  liability due to change in estimates | ** ** | **25.7**  |       | 3.4      |       |
| Liabilities  settled during the period            | ** ** | **(26.9** | **)**      | (22.6    | )          |
| Accretion  charges                                | ** ** | **19.7**  |       | 21.1     |       |
| Balance, end of period                            | ** ** | **$**     | **339.1**  |     | $          | 192.4 |   |

 

**8.****    ****Income taxes**

On October 31, 2006, the Government of Canada announced a proposed newdistribution tax on publicly tradedincome trusts. Under the proposed rules, effective for the 2011 taxyear, distributions representing return on capital would no longer be deductible for income taxpurposes by certain publicly traded trusts including Penn West. Any resultant taxable income in Penn West would betaxed at an estimated corporate tax rate. To date, the tax proposals have not been enacted and the impact on PennWest’s organizational structure, current and future income taxes is not currently determinable.

11

----

 
|  | As at December  31, future income tax assets (liabilities) arose from temporary differences  as follows: |
|--|----------------------------------------------------------------------------------------------------------|

 
|                                | ** ** | **2006**  | ** ** | **2005** | ** ** |
|--------------------------------|------------|-----------|------------|----------|------------|
| Property, plant  and equipment | ** ** | **$**     | **(883.1** | **)**    | $          | (753.7 | ) |
| Commodity contracts            | ** ** | **(17.6** | **)**      | —   |       |
| Asset retirement  obligations  | ** ** | **101.4** |       | 67.0     |       |
| Other                          | ** ** | **6.7**   |       | 4.6      |       |
|                           | ** ** | **$**     | **(792.6** | **)**    | $          | (682.1 | ) |
| Future income tax  liability   | ** ** | **$**     | **(792.6** | **)**    | $          | (682.1 | ) |

 
|        | The trust currently maintains an income tax status  that permits it to deduct distributions to unitholders in addition to other  items. As a result, no future income tax provision or recovery was made for  temporary differences in the trust. As at December 31, 2006, the book amount  of the trust’s assets and liabilities exceed their tax basis by $1.7 billion.  If the tax proposals are enacted, the recording of future income taxes to  reflect the temporary timing differences in the trust could be required. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | The provision for (recovery  of) income taxes reflects an effective tax rate that differs from the  combined federal and provincial statutory tax rate as follows:                                                                                                                                                                                                                                                                                                                                                                  |

 
|                                      | ** ** | **Year ended December 31** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| Income before  taxes                 |       | **$**                                     | **574.1**  | ** ** | $ | 644.9 |   |
| Corporate income  tax rate           |       | **35.2**                                  | **%**      | 38.4 | % |
| Computed income  tax provision       |       | **$**                                     | **202.1**  | ** ** | $ | 247.6 |   |
| Increase  (decrease) resulting from: |       | ** **                                | ** ** |   |   |
| Net income attributable to the trust |       | **(197.4**                                | **)**      | (154.3 | ) |
| Non-deductible Crown payments, net   |       | **36.1**                                  | ** ** | 71.0 |   |
| Resource allowance                   |       | **(38.4**                                 | **)**      | (75.9 | ) |
| Tax rate reductions                  |       | **(108.6**                                | **)**      | (31.1 | ) |
| Non-taxable foreign exchange         |       | **—**                                | ** ** | 0.8 |   |
| Other                                |       | **—**                                | ** ** | (5.1 | ) |
| Total income  taxes                  |       | **$**                                     | **(106.2** | **)** | $ | 53.0 |   |
| Current                              |       | **—**                                | ** ** | 54.1 |   |
| Future recovery                      |       | **(106.2**                                | **)**      | (1.1 | ) |
|                                 |       | **$**                                     | **(106.2** | **)** | $ | 53.0 |   |

 
| **9.**     | **Unitholders’ equity**                                                                                                                                                                                                                                                                        |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                          |
| ** ** | **a) Authorized**                                                                                                                                                                                                                                                                                   |
| ** ** | ** **                                                                                                                                                                                                                                                                                          |
| ** ** | i) An unlimited number of  Voting Trust Units, which are redeemable at the option of the unitholder.                                                                                                                                                                                                |
| ** ** |                                                                                                                                                                                                                                                                                                |
| ** ** | ii) An unlimited number of Special Voting Units,  which enable the Trust to provide voting rights to holders of any  exchangeable shares that may be issued by any direct or indirect subsidiaries  of the Trust. Except for the right to vote, the Special Voting Units do not  confer any rights. |

 

12

----

 
|            | Trust units are redeemable at any time at the option  of the unitholder. The redemption price is equal to the least of 95 percent  of the closing market price on the date the units were tendered for  redemption, 95 percent of the volume-weighted average market price for the 10  days immediately after the date the units were tendered for redemption, or 95  percent of the closing market price on the date of redemption. Total  redemptions are limited to $250,000 in any calendar month, subject to waiver  at the discretion of the administrator. If the limitation is not waived, the amount  payable in excess of the $250,000 will be settled by the distribution of  redemption notes to the redeeming unitholders by the Trust. |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | Penn West has a Distribution Reinvestment and  Optional Trust Unit Purchase Plan (the “DRIP”) that provides eligible  unitholders the opportunity to reinvest monthly cash distributions into  additional units at a potential discount. Units are issued from treasury at  95 percent of the 10-day volume-weighted average market price when available.  When units are not available from treasury they are acquired in the open  market at prevailing market prices.                                                                                                                                                                                                                                                                   |
| ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | Unitholders who participate in the DRIP may also  purchase additional units, subject to a monthly maximum of $5,000 and a  minimum of $500. Optional cash purchase units are acquired, without a  discount, in the open market at prevailing market prices or issued from  treasury at the 10-day volume-weighted average market price.                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | **b) Issued**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | Penn West shareholders received three trust units  for each common share held resulting in the issuance of 163,137,018 trust  units in exchange for the common shares of Penn West pursuant to the plan of  arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | No special voting units  were issued or outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 
| Common shares of Penn West               | ** ** | **Shares**  | ** ** | **Amount** | ** ** |
|--------------------------------------------------------------|------------|-------------|------------|------------|------------|
| Balance,  December 31, 2003                                  |       | 53,692,290  |       | $          | 505.6      |   |
| Issued on  exercise of stock options                         |       | 176,455     |       | 5.2        |       |
| Liability  settlement on stock options exercised for shares  |       | —      |       | 4.5        |       |
| Balance,  December 31, 2004                                  |       | 53,868,745  |       | $          | 515.3      |   |
| Issued on  exercise of stock options                         |       | 488,399     |       | 17.0       |       |
| Issued to employee  stock savings plan                       |       | 21,905      |       | 1.8        |       |
| Cancellation of  certificates                                |       | (43         | )          | —     |       |
| Liability  settlements on stock options exercised for shares |       | —      |       | 22.0       |       |
| Balance, May 31,  2005 prior to plan of arrangement          |       | 54,379,006  |       | $          | 556.1      |   |
| Exchanged for  Trust units                                   |       | (54,379,006 | )          | (556.1     | )          |
| Balance as at May 31,  2005                                  |       | —      |       | $          | —     |   |

 
| Voting Trust Units                  | ** ** | **Units**   | ** ** | **Amount** | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------|------------|
| Issued to  settlor for cash, April 22, 2005   |       | 1,250       |       | $          | —     |   |
| Exchanged for  Penn West shares, May 31, 2005 |       | 163,137,018 |       | 556.1      |       |
| Issued to employee  trust unit savings plan   |       | 151,745     |       | 4.9        |       |
| Balance,  December 31, 2005                   |       | 163,290,013 |       | 561.0      |       |
| Issued on  exercise of trust unit rights      |       | 407,750     |       | 10.6       |       |
| Issued to  employee trust unit savings plan   |       | 295,449     |       | 12.3       |       |
| Issued to DRIP                                |       | 2,459,870   |       | 96.1       |       |
| Issued on  Petrofund merger                   |       | 70,673,137  |       | 3,032.4    |       |
| Balance, December 31,  2006                   |       | 237,126,219 |       | $          | 3,712.4    |   |

 

13

----

 
|            | Special Voting Units                 |
|------------|--------------------------------------|
| ** ** |                                 |
| ** ** | No Special Voting Units were issued. |
| ** ** |                                 |
| ** ** | **c) Contributed Surplus**           |

 
|                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Balance,  beginning of period       | ** ** | **$**    | **5.5**    |     | $          | — |   |
| Equity-based  compensation expense  | ** ** | **11.3** |       | 5.5      |       |
| Net benefit on  rights exercised(1) | ** ** | **(0.4** | **)**      | —   |       |
| Balance, end of period              | ** ** | **$**    | **16.4**   |     | $          | 5.5 |   |

 

----

|            | (1)   Upon exercise of trust unit rights, the net  benefit is reflected as a reduction of contributed surplus and an increase to  unitholders’ capital.

** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **10.**    | **Equity-based compensation**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** ** | **a) Stock option plan**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** ** | Until May 31, 2005, the Company had a stock option  plan for the benefit of its employees and directors. Stock options vested  over a five-year period and, if unexercised, expired six years from the date  of grant. The stock option plan included a cash payment alternative and  stock-based compensation costs were recorded based on changes to the share price  at the end of each quarter and any changes to the number of outstanding  options. Pursuant to the plan of arrangement, all stock options outstanding  on the date of conversion were settled for cash of $84.77 per share or by issuing  shares. The continuity of the compensation liability and the outstanding  options to the date of cancellation were as follows: |

 
|                                                              | ** ** | **2005** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|
| Balance,  beginning of period                                |       | $        | 91.9       |   |
| Compensation  expense provision                              |       | 71.7     |       |
| Cash payments on  exercise of stock options                  |       | (141.6   | )          |
| Liability  settlements on stock options exercised for shares |       | (22.0    | )          |
| Balance, end of period                                       |       | $        | —     |   |

 
|                                                                     | ** ** | **Number of**     | ** ** | **Weighted Average** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| **Penn West Petroleum Ltd. Stock Options** | ** ** | **Stock Options** | ** ** | **Exercise Price**   | ** ** |
| Outstanding,  January 1, 2005                                       |       | 3,728,980              |       | $                         | 39.00      |   |
| Granted                                                             |       | 82,600                 |       | 79.51                     |       |
| Exercised for  common shares                                        |       | (488,399               | )          | 34.72                     |       |
| Settled for cash                                                    |       | (3,212,931             | )          | 40.51                     |       |
| Forfeited                                                           |       | (110,250               | )          | 44.26                     |       |
| Outstanding, May 31,  2005                                          |       | —                 |       | $                         | —     |   |

 

14

----

**b) Trust unit rights incentive plan**

On the close of the trust conversion in May 2005, Penn West implementeda unit rights incentive plan that allowsPenn West to issue rights to acquire trust units to directors, officers,employees and other service providers. Under the terms of the plan, the number of trust units reserved for issuanceshall not exceed 10 percent of the aggregate number of issued and outstanding trust units of Penn West. Unit rightexercise prices are administrated to be equal to the volume-weighted average trading price of the trust units on theToronto Stock Exchange for the five trading days immediately prior to the date upon which the unit rights aregranted. If certain conditions are met, the exercise price per unit may be reduced by deductingfrom the grant price the aggregate of all monthly distributions, on a per unit basis, paid by Penn West after thegrant date. In 2006, a Binomial Lattice model was adopted to compute the fair value of rights granted. Penn West usedthe Black-Scholes option pricing model to compute the fair value of rights granted in 2005. This transition had nomaterial effect on the fair value of the rights granted. Rights granted underthe plan prior to November 13,2006 vest over a five-year period and expire six years after the date of thegrant. Rights granted subsequentto this date vest over a three-year period and expire four years after the dateof the grant.
|                                                     | ** ** | **2006**             | ** ** | **2005**                | ** ** |
|-----------------------------------------------------|------------|----------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | ** **           | ** ** | **Weighted**            | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                          | ** ** | **Number of**   | ** ** | **Average**             | ** ** | **Number of** | ** ** | **Average** | ** ** |
| **Trust Unit Rights**                     | ** ** | **Unit Rights** | ** ** | **Exercise Price** | ** ** | **Unit Rights** | ** ** | **Exercise Price** | ** ** |
| Outstanding,  beginning of period                   |       | **9,447,625**        | ** ** | **$**                   | **28.45**  | ** ** | — |   | $ | — |   |
| Granted                                             |       | **3,257,622**        | ** ** | **39.77**               | ** ** | 10,045,325 |   | 29.73 |   |
| Exercised                                           |       | **(407,750**         | **)**      | **24.65**               | ** ** | — |   | — |   |
| Forfeited                                           |       | **(1,012,625**       | **)**      | **33.38**               | ** ** | (597,700 | ) | 28.46 |   |
| Balance before  reduction of exercise price         |       | **11,284,872**       | ** ** | **30.89**               | ** ** | 9,447,625 |   | 29.81 |   |
| Reduction of  exercise price for distributions paid |       | **—**           | ** ** | **(3.13**               | **)**      | — |   | (1.36 | ) |
| Outstanding, end  of period                         |       | **11,284,872**       | ** ** | **$**                   | **27.76**  | ** ** | 9,447,625 |   | $ | 28.45 |   |
| Exercisable, end of  period                         |       | **1,125,300**        | ** ** | **$**                   | **23.16**  | ** ** | — |   | $ | — |   |

 
|                                          | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                               | ** ** | ** **                   | ** ** | ** **                   | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | **Remaining** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                               | ** ** | **Number**                   | ** ** | **Average**                  | ** ** | **Contractual** | ** ** | **Number** | ** ** | **Average** | ** ** |
| **Range of Grant Prices** | ** ** | **Outstanding**              | ** ** | **Exercise Price**(1)   | ** ** | **Life (years)** | ** ** | **Exercisable** | ** ** | **Exercise Price**(1) | ** ** |
| $28.00 — $32.99                     |       | 6,570,300                    |       | $                            | 22.85      |   | 4.4 |   | 1,073,700 |   | $ | 22.87 |   |
| $33.00 — $37.99                     |       | 2,569,572                    |       | 31.13                        |       | 4.7 |   | 51,600 |   | 29.06 |   |
| $38.00 — $42.99                     |       | 2,027,500                    |       | 38.50                        |       | 5.4 |   | — |   | — |   |
| $43.00 — $47.99                     |       | 117,500                      |       | 42.96                        |       | 5.7 |   | — |   | — |   |
| ** **                               | ** ** | **11,284,872**               | ** ** | **$**                        | **27.76**  | ** ** | **4.7** | ** ** | **1,125,300** | ** ** | **$** | **23.16** | ** ** |

 

----

(1)   Exercise prices are adjusted for distributionsif certain conditions are met as described above.

15

----

 
| Penn West recorded compensation expense of  $11.3 million for the year ended December 31, 2006 (2005 – $5.5 million). Compensation expense subsequent to  the trust conversion is based on the fair value of rights issued and is amortized over the remaining vesting  periods on a straight-line basis.                                                                                                                                                                 |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
| During the year, Penn West  adopted the recommendations in Emerging Issues Committee Abstract 162,*“Stock-based  compensation for employees eligible to retire before the vesting date”.*The recommendation requires early recognition of compensation expense  for employees eligible to retire or for employees who will become eligible to retire during the vesting  period. The adoption of these recommendations did not affect reported compensation expense. |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
| The Binomial Lattice  option-pricing model was used to determine the fair value of trust unit  rights granted with the following weighted average assumptions:                                                                                                                                                                                                                                                                                                                 |   |

 
|                                                             | ** ** | **Year ended December 31, 2006 **(1) | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Five-year**                                                 | ** ** | **Three-year** | ** ** |
| ** **                                                  | ** ** | **Vesting Period**                                       | ** ** | **Vesting Period** | ** ** |
| Average fair  value of trust unit rights granted (per unit) |       | $                                                             | 8.05       |   | $ | 7.18 |   |
| Expected life of  trust unit rights (years)                 |       | 4.5                                                           |       | 3.0 |   |
| Expected  volatility (average)                              |       | 23.8                                                          | %          | 25.5 | % |
| Risk-free rate  of return (average)                         |       | 4.1                                                           | %          | 3.9 | % |
| Distribution yield                                          |       | 9.9                                                           | %          | 11.5 | % |
|                                                             |            |                                                               |            |  |  |  |  |

 

----

| (1)   Rights granted prior to November 13, 2006 vest  over a five-year period. Rights granted subsequent to November 13, 2006 vest  over a three-year period.  |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                     |   |
| In 2005, the Black-Scholes  option pricing model was used to determine the fair value of the Trust unit  rights granted with the following weighted average assumptions: |   |

 
|                                                             | ** ** | **Seven months ended December 31** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2005**                                               | ** ** |
| Average fair  value of trust unit rights granted (per unit) |       |                                                   |       |
| Directors and officers                                      |       | $                                                      | 6.50       |   |
| Other employees                                             |       | $                                                      | 6.13       |   |
| Expected life of  trust unit rights (years)                 |       |                                                   |       |
| Directors and officers                                      |       | 5.0                                                    |       |
| Other employees                                             |       | 4.5                                                    |       |
| Expected  volatility (average)                              |       | 16                                                     | %          |
| Risk-free rate  of return (average)                         |       | 3.4                                                    | %          |
| Expected distribution  rate                                 |       | Nil                                                    |       |

 
| **c) Employee trust unit savings plan**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |   |
| Penn West has an employee trust unit savings plan  for the benefit of all employees. Under this savings plan, employees may  elect to contribute up to 10 percent of their salary. Penn West matches  employee contributions at a rate of $1.50 for each $1.00. Both the employee’s  and Penn West’s contribution are used to acquire Penn West trust units. These  trust units may be issued from treasury at the five-day volume  weighted-average month-end trading price on the Toronto Stock Exchange or  purchased in the open market. During 2006, 295,449 treasury units were  contributed to the plan at an average price of $41.71 per unit and a total  cost of $12.3 million. No trust units have been purchased in the open market  since the trust conversion. |   |

** **

16

----

Prior to the trust conversion, the Company had a stock savings plan withessentially the same terms as the trust unitsavings plan. During 2005, 20,355 employercontribution shares (equivalent to 61,065 trust units) were purchased in the open market at an average price of$81.48 per share ($27.16 per equivalent trust unit) and a total cost of $1.7million and 21,905 shares(equivalent to 65,715 trust units) were issued from treasury.

**11.**** ****Distributions payable tounitholders**

Under the terms of its trust indenture, Penn West is required to makedistributions to unitholders in amounts atleast equal to its taxable income consistingof interest on notes, the NPIs, and any inter-corporate distributions and dividends received, less certain expenses.Distributions may be monthly or special and in cash or in trust units at the discretion of the board of directors.Distributions payable to unitholders is the amount declared and payable by the Trust.
| Accumulated Cash Distributions                      | ** ** | **2006**   | ** **  | **2005** | ** ** |
|---------------------------------------------------------------|------------|------------|-------------|----------|------------|
| Balance,  beginning of period                                 | ** ** | **$**      | **321.5**   |     | $          | — |   |
| Distributions  declared                                       | ** ** | **811.8**  |        | 321.5    |       |
| Balance, end of  period                                       | ** ** | **$**      | **1,133.3** |     | $          | 321.5 |   |
|                                                          | ** ** | ** ** |        |     |       |
| Distributions  per unit(1)                                    | ** ** | **$**      | **4.05**    |     | $          | 1.97 |   |
| Accumulated cash  distributions per unit, beginning of period | ** ** | **1.97**   |        | —   |       |
| Accumulated cash distribution  per unit, end of period        | ** ** | **$**      | **6.02**    |     | $          | 1.97 |   |

 

----

(1)   Distributions per unit are the sum of the perunit amounts declared monthly to unitholders.

**12.**** ****Financial instruments**

Financial instruments included in the balance sheets consist of accountsand taxes receivable, fair values of derivativefinancial instruments, current liabilities andthe bank loan. The fair values of these financial instruments approximate their carrying amounts due to theshort-term maturity of the instruments, the mark to market values recorded forthe financial instruments and themarket rate of interest applied to the bank loan.

All of the accounts receivable are with customers in the oil and naturalgas industry and are subject to normalindustry credit risk. Penn West, from time to time, uses various typesof financial instruments to reduce its exposure to fluctuating oil and natural gas prices,electricity costs, exchange rates and interest rates. The use of theseinstruments exposes Penn West tocredit risks associated with the possible non-performance of counterparties toderivative instruments. Penn Westlimits this risk by transacting only with financial institutions with highcredit ratings and by obtainingsecurity in certain circumstances.

Penn West’s revenue from the sale of crude oil, natural gas liquids andnatural gas is directly impacted by changesto the underlying commodity prices. To ensurethat cash flows are sufficient to fund planned capital programs and distributions, costless collars or otherfinancial instruments may be utilized. Collars ensure that commodity prices realized will fall into a contractedrange for a contracted sales volume. Forward power contracts fix a portion offuture electricity costs atlevels determined to be economic by management.

Variations in interest rates directly impact interest costs. From timeto time, Penn West may increase the certainty offuture interest rates using financialinstruments to swap floating interest rates for fixed rates.

Crude oil sales are referenced to or denominated in US dollars. Crudeoil prices realized in Canadian dollars areaccordingly impacted directly by Canadian toUS exchange rates. From time to time, Penn West may use financial instruments to fix future exchange rates.

17

----

As at December31, 2006, Penn West had the following financial instruments outstanding:
|                           | ** ** | **Notional Volume** | ** ** | **Remaining Term** | ** ** | **Pricing**            | ** ** | **Market Value** | ** ** |
|---------------------------|------------|--------------------------|------------|-------------------------|------------|------------------------|------------|-----------------------|------------|
| **Crude  Oil**            |       |                     |       |                    |       |                   |       |                  |       |
| WTI Costless  Collars     |       | 3,000 bbls/day           |       | Jan/07 – Mar/07    |       | US$56.67 to $84.28/bbl |       | $                     | 0.2        |   |
| WTI Costless  Collars     |       | 1,000 bbls/day           |       | Jan/07 – Jun/07    |       | US$60.00 to $73.10/bbl |       | 0.2                   |       |
| WTI Costless  Collars     |       | 1,000 bbls/day           |       | Apr/07 – Jun/07    |       | US$60.00 to $80.00/bbl |       | 0.2                   |       |
| WTI Costless  Collars     |       | 25,000 bbls/day          |       | Jan/07 – Dec/07    |       | US$56.00 to $83.80/bbl |       | 7.9                   |       |
| WTI Costless  Collars     |       | 10,000 bbls/day          |       | Jan/08 – Jun/08    |       | US$60.00 to $94.55/bbl |       | 6.2                   |       |
| **Natural  Gas**          |       |                     |       |                    |       |                   |       |                  |       |
| AECO Costless  Collars    |       | 9,200 mcf/day            |       | Jan/07 – Mar/07    |       | $9.18 to $12.97/mcf    |       | 1.0                   |       |
| AECO Costless  Collars    |       | 73,400 mcf/day           |       | Jan/07 – Oct/07    |       | $7.63 to $9.68/mcf     |       | 20.8                  |       |
| **Electricity**           |       |                     |       |                    |       |                   |       |                  |       |
| Alberta Power  Pool Swaps |       | 67 MW                    |       | 2007                    |       | $49.55/MWh             |       | 17.3                  |       |
| Alberta Power  Pool Swaps |       | 2 MW                     |       | 2008                    |       | $57.00/MWh             |       | 0.4                   |       |
| **Interest  Rate Swaps**  |       | $100.0                   |       | Jan/07 – Mar/08    |       | 4.356                  | %          | (0.2                  | )          |
| Total                     |       |                     |       |                    |       |                   |       | $                     | 54.0       |   |

 

EffectiveJuly 1, 2005, Penn West elected to discontinue the designation of financialinstruments as hedges, choosing to account for these instruments using the fairvalue method. In accordance with the transitional accounting recommendations,the fair value of power contracts at July 1, 2005 in the amount of $16.7million was recorded as a deferred gain and was taken into income over theremaining life of the contracts. Changes in the fair value of all outstanding financialcommodity, power and interest rate contracts are reflected on the balance sheetwith a corresponding unrealized gain or loss in income.

Thefollowing table reconciles the changes in the fair value of financialinstruments no longer designated as hedges:
| Risk Management                       | ** ** | **2006**   | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|
| Balance,  beginning of period              | ** ** | **$**      | **8.5**    |     | $          | — |   |
| Deferred gain                              | ** ** | **—** |       | 16.7     |       |
| Unrealized gain  on financial instruments: |       |       |       |     |       |
| Commodities                                | ** ** | **51.3**   |       | (14.8    | )          |
| Electricity contracts                      | ** ** | **(5.6**   | **)**      | 6.6      |       |
| Interest rate swaps                        | ** ** | **(0.2**   | **)**      | —   |       |
| Balance, end of  period                    | ** ** | **$**      | **54.0**   |     | $          | 8.5 |   |

 
| Deferred gain on financial instruments | ** ** | **2006**   | ** ** | **2005** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------|------------|
| Balance,  beginning of period                              | ** ** | **$**      | **(11.9**  | **)**    | $          | — |   |
| Deferred gain                                              | ** ** | **—** |       | (16.7    | )          |
| Amortization                                               | ** ** | **11.9**   |       | 4.8      |       |
| Balance, end of period                                     | ** ** | **$**      | **—** |     | $          | (11.9 | ) |

 

18

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**13.  Per unit amounts**

PennWest follows the treasury stock method to compute the dilutive impact of unitrights. The treasury stock method assumes that the proceeds received from thepro-forma exercise of in-the-money trust unit rights are used to purchase trustunits at average market prices.

Thenumber of incremental shares included in diluted earnings per share (“EPS”) iscomputed using the average volume-weighted market price of common shares foreach interim period. In addition, contracts that could be settled in cash orcommon shares are assumed settled in common shares if share settlement is moredilutive. Shares to be issued upon conversion of convertible instruments with amandatory conversion feature would be included in the basic weighted averageEPS calculation from the date when conversion becomes mandatory.

Theweighted average number of trust units used to calculate per unit amounts was:
|            | ** ** | **Year ended December 31** | ** ** |
|------------|------------|-------------------------------------------|------------|
| ** ** | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| Basic      | ** ** | **200,758,870**                           |       | 162,632,127 |   |
| Diluted    | ** ** | **203,509,494**                           |       | 165,878,364 |   |

 

In2006, 1.7 million rights (2005 – nil) were excluded in calculating the weightedaverage number of diluted trust units as they were considered anti-dilutive.

**14.  Contractualobligations and commitments**

Thefollowing is a summary the contractual obligations due in the next five yearsand thereafter:
|                           | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Transportation            | ** ** | **$**    | **20.0**   |     | $          | 9.2      |       | $        | 4.7        |     | $          | 1.9            |       | $ | — |   | $ | — |   |
| Transportation  ($US)     | ** ** | **2.5**  |       | 2.3      |       | 2.3      |       | 2.3      |       | 2.3      |       | 8.6            |       |
| Power  infrastructure     | ** ** | **4.6**  |       | 3.7      |       | 3.7      |       | 3.7      |       | 3.7      |       | 7.6            |       |
| Drilling rigs             | ** ** | **6.9**  |       | 7.7      |       | 2.4      |       | 1.2      |       | —   |       | —         |       |
| Purchase  obligations (1) | ** ** | **13.2** |       | 13.3     |       | 13.3     |       | 13.3     |       | 13.3     |       | 54.3           |       |
| Office lease              | ** ** | **$**    | **12.0**   |     | $          | 17.9     |       | $        | 17.5       |     | $          | 15.1           |       | $ | 14.3 |   | $ | 117.5 |   |

 

----

(1)          Theseamounts represent estimated commitments of $95.5 million for CO2 purchases and $25.2 million for processingfees related to interests in the Weyburn Unit.

Ourcredit facility expires in three years, which if not renewed would require therepayment of all amounts outstanding. We believe the facility will be renewedprior to that time.

19

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**15.  Change in non-cashworking capital**

Changes in non-cashworking capital items increased (decreased) cash and cash equivalents asfollows:
|                                           | ** ** | **Year ended December 31** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| Accounts receivable                       | ** ** | **$**                                     | **(54.3**  | **)** | $ | (53.9 | ) |
| Other current  assets                     | ** ** | **(27.0**                                 | **)**      | (9.2 | ) |
| Accounts payable  and accrued liabilities | ** ** | **78.8**                                  | ** ** | (2.5 | ) |
| Taxes payable                             | ** ** | **(10.6**                                 | **)**      | 0.6 |   |
| Petrofund                                 | ** ** | **(18.8**                                 | **)**      | — |   |
|                                      | ** ** | **$**                                     | **(31.9**  | **)** | $ | (65.0 | ) |
|                                      | ** ** | ** **                                | ** ** |   |   |
| Operating  activities                     | ** ** | **$**                                     | **(43.6**  | **)** | $ | (1.8 | ) |
| Investing  activities                     | ** ** | **11.7**                                  |       | (63.2 | ) |
| Financing  activities                     | ** ** | **—**                                |       | — |   |
|                                      | ** ** | **$**                                     | **(31.9**  | **)** | $ | (65.0 | ) |

 

**16.  Plan of arrangementcosts**

Effective May 31, 2005,the Penn West commenced operations as an oil and gas income trust pursuant to aplan of arrangement approved by the shareholders on May 27, 2005. Certainamounts, related to the plan of arrangement, were charged to accumulatedearnings: 
| Rate differences on income  taxes paid                   |   | $    | 13.3   |   |
|----------------------------------------------------------|--------|------|--------|--------|
| Incremental  capital taxes                               |   | 13.4 |   |
| Financial  advisor fees                                  |   | 5.6  |   |
| Filing fees,  communication, professional fees and other |   | 4.0  |   |
| Tax benefit on  fees                                     |   | (3.4 | )      |
|                                                     |   | $    | 32.9   |   |

 

Inaddition, the trust conversion resulted in a short income tax year thataccelerated $146.3 million of cash income taxes as a significant amount of PennWest’s taxable income was earned in a partnership.

**17.  Related-partytransactions**

During2006, Penn West paid $4.1 million (2005 – $ 2.1 million) of legal fees to a lawfirm of which a partner is also a director of Penn West.

**18.  Subsequent event**

OnFebruary 9, 2007, Penn West announced it had recently entered into an agreementto acquire conventional oil and natural gas assets. The transaction is expectedto close in March 2007 subject to the satisfaction of certain conditions,including the rights of first refusal held on certain assets by workinginterest parties and the receipt of regulatory approvals. The purchase price ofthe asset package, prior to any reductions due to rights of first refusal,totals approximately $339 million before closing adjustments of an estimated$12 million, which will reduce the cash outlays on closing.

20

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**Investor Information**

**Officers**

WilliamAndrewPresident and CEO

DavidMiddletonExecutive Vice President and COO

ThaneJensenSenior Vice President, Exploration and Development

WilliamTang KongSenior Vice President, Corporate Development

ToddTakeyasuSenior Vice President and CFO

GreggGegundeVice President, Development

EricObreiterVice President, Production

KristianTangeVice President, Business Development

AnneThomsonVice President, Exploration

LucasLawVice President, Asset Management

KeithLuftVice President, Land and Legal

**Directors**

JohnA. BrussaChairmanCalgary, Alberta

WilliamE. AndrewCalgary, Alberta

ThomasE. Phillips(1)(2)(3)(4)(5)Calgary, Alberta

JamesC. Smith (1)(3)(4)(5)Calgary, Alberta

MurrayR. Nunns(1)(2)(3)(5)Calgary, Alberta

GeorgeH. Brookman (1)(4)(5)Calgary, Alberta

James E. Allard (1)Calgary,Alberta

JefferyE. Errico (3)(5)Calgary, Alberta

FrankPotter (2)(4)Toronto, Ontario

----

Notes:

(1)     Member of the Audit Committee

(2)     Member of the Human Resourcesand Compensation Committee

(3)     Member of the ReservesCommittee

(4)     Member of the GovernanceCommittee

(5)     Member of the Health, Safetyand Environment Committee

21

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**Legal Counsel**

Burnet,Duckworth & PalmerCalgary, Alberta

ThackrayBurgessCalgary, Alberta

Dorsey& Whitney LLPVancouver, B.C.

**Bankers**

CanadianImperial Bank of Commerce

RoyalBank of Canada

TheBank of Nova Scotia

Bankof Montreal

Bankof Tokyo-Mitsubishi (Canada)

AlbertaTreasury Branches

SumitomoMitsui Banking Corporation of Canada

BNPParibas (Canada)

SocieteGenerale

HSBCBank Canada

TorontoDominion Bank 

Citibank,N.A.

NationalBank of Canada

FortisCapital (Canada) Ltd.

UnionBank of California, N.A.

**Transfer Agent**

CIBCMellon Trust CompanyCalgary, Alberta

Investorsare encouraged to contact The CIBC Mellon Trust Company for informationregarding their security holdings. They can be reached at:

CIBCMellon Trust Company(416) 643-5000 or toll-free throughoutNorth America at 1-800-387-0825Email: inquiries@cibcmellon.caWebsite: www.cibcmellon.ca

**Independent Reserve Evaluator**

GLJ Petroleum Consultants Ltd.Calgary, Alberta

**Auditors**

KPMGLLPCalgary, Alberta

**Stock Exchange Listing**

TorontoStock ExchangeTrading Symbol: PWT.UN

NewYork Stock ExchangeTrading Symbol: PWE

**Head Office**

Suite2200, 425 - First Street S.W.

Calgary,Alberta T2P 3L8
| Telephone: | (403) 777-2500   |
|------------|------------------|
| Toll-free: | 1-866-693-2707   |
| Fax:       | (403) 777-2699   |
| Website:   | www.pennwest.com |

Forfurther information contact:

InvestorRelations

Toll-free:1-888-770-2633

Email:investor_relations@pennwest.com

**William Andrew**

Presidentand CEO

Phone:(403) 777-2502

Email:bill.andrew@pennwest.com

**Notes to Reader**

Thisdocument contains forward-looking statements (forecasts) under applicablesecurities laws. Forward-looking statements are necessarily based uponassumptions and judgements with respect to the future including, but notlimited to, the outlook for commodity markets and capital markets, theperformance of producing wells and reservoirs, and the regulatory and legalenvironment. Many of these factors can be difficult to predict.  As a result, the forward-looking statementsare subject to known or unknown risks and uncertainties that could cause actualresults to differ materially from those anticipated or implied in theforward-looking statements.

Refer to our MD&A fora more detailed discussion of forward-looking statements.

22

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| **Abbreviations**                  | ** **                                                                          |
|------------------------------------|-------------------------------------------------------------------------------------|
|                               |                                                                                |
| bbl                                | barrel (oil or natural gas liquids)                                                 |
| mmbbl                              | million barrels                                                                     |
| bbls per day or bbls/day or bbls/d | barrels per day                                                                     |
| boe                                | barrels of oil equivalent (based on 6 mcf of natural  gas equals one barrel of oil) |
| mmboe                              | million barrels of oil equivalent                                                   |
| mcf                                | thousand cubic feet (natural gas)                                                   |
| mmcf                               | million cubic feet                                                                  |
| mmcf per day                       | million cubic feet per day                                                          |
| NGL                                | natural gas liquids                                                                 |
| GJ                                 | gigajoule                                                                           |
| bcf                                | billion cubic feet                                                                  |
| API                                | American Petroleum Institute                                                        |
| TSX                                | Toronto Stock Exchange                                                              |
| NYSE                               | New York Stock Exchange                                                             |
| WTI                                | West Texas Intermediate                                                             |
| MW                                 | megawatt                                                                            |
| MWh                                | megawatt-hour                                                                       |
|                               |                                                                                |
| **Conversions of Units**           | ** **                                                                          |
|                               |                                                                                |
| Imperial                           | Metric                                                                              |
| 1 ton                              | 0.907 tonnes                                                                        |
| 1.102 tons                         | 1 tonne                                                                             |
| 1 acre                             | 0.40 hectares                                                                       |
| 2.5 acres                          | 1 hectare                                                                           |
| 1 bbl                              | 0.159 cubic metres                                                                  |
| 6.29 bbls                          | 1 cubic metre                                                                       |
| 1 mcf                              | 28.2 cubic metres                                                                   |
| .035 mcf                           | 1 cubic metre                                                                       |
| 1 mile                             | 1.61 kilometres                                                                     |
| 0.62 miles                         | 1 kilometre                                                                         |

 

Unlessotherwise stated, all financial sums are stated in Canadian dollars.

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Suite 2200, 425 – FirstStreet S.W.Calgary, Alberta T2P 3L8Telephone (403) 777-2500Fax (403) 777-2699www.pennwest.com

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