Table of Contents





UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D. C. 20549





FORM
10-Q





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





For the
quarterly period ended December 31, 2008





OR





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




For the
transition period from _____________ to ___________________.






Commission
file number: 000-51425




Rancher
Energy Corp.


(Exact
name of registrant as specified in its charter)


Nevada
            98-0422451(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)999
      - 18th
      Street, Suite 3400
              Denver,
      CO 80202
              (Address
      of principal executive offices)
              
              (303)
      629-1125
              (Registrant’s
      telephone number, including area
code)




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






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




Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o(Do
      not check if a smaller reporting company)
            Small
      reporting company o




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




As of
January 19, 2009,  119,016,723 shares of Rancher Energy Corp. common
stock, $.00001 par value, were outstanding.









Table of Contents
 Rancher
Energy Corp.


Table of Contents




PART I - FINANCIAL INFORMATIONItem 1.
            Financial StatementsConsolidated Balance Sheets as of December 31, 2008 and March
      31, 2008
            03Consolidated Statements of Operations for the Three Months and
      Nine Months ended December 31, 2008 and 2007
            05Consolidated Statement of Changes in Stockholders’ Equity as
      of December 31, 2008
            06Consolidated Statements of Cash Flows for the Nine Months ended
      December 31, 2008 and 2007
            07Notes to Consolidated Financial
    Statements
            08Item 2.
            Management's Discussion and Analysis of Financial Condition
      and Results of Operations
            18Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            25Item 4.
            Controls and Procedures
            26PART II - OTHER INFORMATIONItem 1A.
            Risk Factors
            26Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            26Item 6.
            Exhibits
            27SIGNATURES
            29








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PART I.  FINANCIAL INFORMATION.








Item 1.  Financial Statements




Rancher
Energy Corp.


Consolidated Balance Sheets




ASSETS




December 31,
              2008
            
            
            March 31,
              2008Current
      assets:Cash
      and cash equivalents
            
            $
            1,431,589
            
            
            $
            6,842,365Accounts
      receivable and prepaid expenses
            
            
            621,072
            
            
            
            1,170,641Derivative
      receivable
            
            
            731,183
            
            
            
            —Total
      current assets
            
            
            2,783,844
            
            
            
            8,013,006Oil
      and gas properties at cost (successful efforts method):Unproved
            
            
            53,319,816
            
            
            
            54,058,073Proved
            
            
            20,642,182
            
            
            
            20,734,143Less:  Accumulated
      depletion, depreciation, amortization and impairment
            
            
            (41,615,882
            )
            
            
            (1,531,619
            )Net
      oil and gas properties
            
            
            32,346,116
            
            
            
            73,260,597Other
      assets:Furniture
      and equipment net of accumulated depreciation of $333,743
      and     $277,420, respectively
            
            
            818,007
            
            
            
            997,196Other
      assets
            
            
            1,015,637
            
            
            
            1,300,382Total
      other assets
            
            
            1,833,644
            
            
            
            2,297,578Total
      assets
            
            $
            36,963,604
            
            
            $
            83,571,181


The
accompanying notes are an integral part of these financial
statements.





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Rancher
Energy Corp.


Consolidated
Balance Sheets




LIABILITIES AND
STOCKHOLDERS’ EQUITY





December 31,
              2008
            
            
            March 31,
              2008Current
      liabilities:Accounts
      payable and accrued liabilities
            
            $
            703,765
            
            
            $
            2,114,204Accrued
      oil and gas property costs
            
            
            250,000
            
            
            
            250,000Asset
      retirement obligation
            
            
            320,768
            
            
            
            337,685Note
      payable, net of unamortized discount of $663,158 and $2,527,550,
      respectively
            
            
            9,336,842
            
            
            
            9,712,450Derivative
      liability
            
            
            —
            
            
            
            590,480Total
      current liabilities
            
            
            10,611,375
            
            
            
            13,004,819Long-term
      liabilities:Derivative
      liability
            
            
            —
            
            
            
            246,553Asset
      retirement obligation
            
            
            952,686
            
            
            
            922,166Total
      long-term liabilities
            
            
            952,686
            
            
            
            1,168,719Commitments
      and contingencies
            
            
            —
            
            
            
            —Stockholders’
      equity:Common
      stock, $0.00001 par value, 275,000,000 shares authorized; 119,016,700
      and 114,878,341 shares issued and outstanding at December 31 and
      March 31, 2008, respectively
            
            
            1,191
            
            
            
            1,150Additional
      paid-in capital
            
            
            92,438,678
            
            
            
            91,790,181Accumulated
      deficit
            
            
            (67,040,326
            )
            
            
            (22,393,688
            )Total
      stockholders’ equity
            
            
            25,399,543
            
            
            
            69,397,643Total
      liabilities and stockholders’ equity
            
            $
            36,963,604
            
            
            $
            83,571,181


The
accompanying notes are an integral part of these financial
statements.







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Rancher
Energy Corp.


Consolidated Statements of Operations




Three
      Months Ended
              December
      31,
            
            
            Nine
      Months Ended
              December
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenues:Oil
      & gas sales
            
            $
            746,967
            
            
            $
            1,704,267
            
            
            $
            4,641,836
            
            
            $
            4,685,373Derivative
      gains (losses)
            
            
            1,586,911
            
            
            
            (636,109
            )
            
            
            997,169
            
            
            
            (636,109
            )2,333,878
            
            
            
            1,068,158
            
            
            
            5,639,005
            
            
            
            4,049,264Operating
      expenses:
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —Production
      taxes
            
            
            90,940
            
            
            
            207,588
            
            
            
            564,590
            
            
            
            570,239Lease
      operating expenses
            
            
            831,559
            
            
            
            808,091
            
            
            
            2,004,422
            
            
            
            2,087,753Depreciation,
      depletion and amortization
            
            
            350,847
            
            
            
            330,612
            
            
            
            928,395
            
            
            
            1,030,868Impairment
            
            
            32,500,000
            
            
            
            —
            
            
            
            39,300,000
            
            
            
            —Accretion
      expense
            
            
            40,661
            
            
            
            (11,221
            )
            
            
            117,771
            
            
            
            66,387Exploration
      expense
            
            
            4,293
            
            
            
            55,945
            
            
            
            13,896
            
            
            
            186,772General
      and administrative
            
            
            780,261
            
            
            
            1,735,482
            
            
            
            2,788,415
            
            
            
            5,788,574Total
      operating expenses
            
            
            34,598,561
            
            
            
            3,126,497
            
            
            
            45,717,489
            
            
            
            9,730,593Loss
      from operations
            
            
            (32,264,683
            )
            
            
            (2,058,339
            )
            
            
            (40,078,484
            )
            
            
            (5,681,329
            )Other
      income (expense):Liquidated
      damages pursuant to registration rights arrangement
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,645,393
            )Amortization
      of deferred finance costs and discount on note payable
            
            
            (848,696
            )
            
            
            (901,456
            )
            
            
            (3,524,399
            )
            
            
            (1,000,709
            )Interest
      and other income
            
            
            6,811
            
            
            
            95,982
            
            
            
            26,129
            
            
            
            169,846Interest
      expense
            
            
            (323,190
            )
            
            
            (441,528
            )
            
            
            (1,069,884
            )
            
            
            (554,708
            )Total
      other income (expense)
            
            
            (1,165,075
            )
            
            
            (1,247,002
            )
            
            
            (4,568,154
            )
            
            
            (4,030,964
            )Net
      loss
            
            $
            (33,429,758
            )
            
            $
            (3,305,341
            )
            
            $
            (44,646,638
            )
            
            $
            ($9,712,293
            )Basic
      and diluted net loss per share
            
            $
            (0.29
            )
            
            $
            (0.03
            )
            
            $
            (0.39
            )
            
            $
            (0.09
            )Basic
      and diluted weighted average shares outstanding
            
            
            116,196,049
            
            
            
            113,471,032
            
            
            
            115,541,973
            
            
            
            108,425,299


The
accompanying notes are an integral part of these financial
statements




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Rancher
Energy Corp.


Consolidated Statement of Changes in Stockholders’
Equity


(Unaudited)




Shares
            
            
            Amount
            
            
            Additional
              Paid-In
      Capital
            
            
            Accumulated Deficit
            
            
            Total
      Stockholders’ EquityBalance,
      March 31, 2008
            
            
            114,878,341
            
            
            $
            1,150
            
            
            $
            91,790,181
            
            
            $
            (22,393,688
            )
            
            $
            69,397,643Stock
      issued upon exercise of stock options
            
            
            750,000
            
            
            
            7
            
            
            
            —
            
            
            
            —
            
            
            
            7Common
      stock exchanged for services – non-employee directors
            
            
            3,388,359
            
            
            
            34
            
            
            
            217,466
            
            
            
            —
            
            
            
            217,500Stock-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            353,481
            
            
            
            —
            
            
            
            353,481Amortization
      of deferred compensation
            
            
            —
            
            
            
            —
            
            
            
            77,550
            
            
            
            —
            
            
            
            77,550Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (44,646,638
            )
            
            
            (44,646,638
            )Balance,
      December 31, 2008
            
            
            119,016,700
            
            
            $
            1,191
            
            
            $
            92,438,678
            
            
            $
            (67,040,326
            )
            
            $
            25,399,543






The
accompanying notes are an integral part of these financial
statements.





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Rancher
Energy Corp.


Consolidated Statements of Cash Flows





NineMonths
      Ended
              December 31,2008
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (44,646,638
            )
            
            $
            (9,712,293
            )Adjustments
      to reconcile net loss to cash used for operating
    activities:Loss
      on sale of assets
            
            
            35,797
            
            
            
            —Depreciation,
      depletion, and amortization
            
            
            928,395
            
            
            
            1,030,868Impairment
      of unproved properties
            
            
            39,300,000
            
            
            
            —Accretion
      Expense
            
            
            117,771
            
            
            
            66,387Settlement
      of asset retirement obligation
            
            
            (146,401
            )
            
            
            (18,318
            )Liquidated
      damages pursuant to registration rights arrangement
            
            
            —
            
            
            
            2,645,393Imputed
      interest on registration rights arrangement payments
            
            
            —
            
            
            
            112,489Amortization
      of deferred financing costs and discount on note payable
            
            
            3,524,398
            
            
            
            1,132,050Unrealized
      (gains) losses on crude oil hedges
            
            
            (836,907
            )
            
            
            578,435Stock-based
      compensation expense
            
            
            353,481
            
            
            
            864,143Restricted
      stock compensation expense
            
            
            77,550
            
            
            
            180,950Services
      exchanged for common stock – non-employee directors
            
            
            217,500
            
            
            
            222,750Services
      exchanged for common stock – non-employee
            
            
            —
            
            
            
            112,500Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (420,232
            )
            
            
            (260,853
            )Prepaid
      expenses
            
            
            238,616
            
            
            
            (560,321
            )Other
      assets
            
            
            —Accounts
      payable and accrued liabilities
            
            
            (1,142,448
            )
            
            
            45,758Net
      cash used for operating activities
            
            
            (2,399,118
            )
            
            
            (3,560,062
            )Cash
      flows from investing activities:Capital
      expenditures for oil and gas properties
            
            
            (230,087
            )
            
            
            (2,087,871
            )Proceeds
      from conveyance of unproved oil and gas properties
            
            
            —
            
            
            
            491,500Increase
      in other assets
            
            
            (440,101
            )
            
            
            (797,432
            )Net
      cash used for investing activities
            
            
            (670,188
            )
            
            
            (2,393,803
            )Cash
      flows from financing activities:Payment
      of deferred financing costs
            
            
            (101,478
            )
            
            
            (862,577
            )Proceeds
      from borrowings
            
            
            —
            
            
            
            12,240,000Proceeds
      from issuance of common stock upon exercise of stock
    options
            
            
            8
            
            
            
            15Repayment
      of debt
            
            
            (2,240,000
            )
            
            
            —Payment
      of offering costs
            
            
            —
            
            
            
            (300,365
            )Net
      cash provided by (used for) financing activities
            
            
            (2,341,470
            )
            
            
            11,077,073Increase
      (decrease) in cash and cash equivalents
            
            
            (5,410,776
            )
            
            
            5,123,208Cash
      and cash equivalents, beginning of period
            
            
            6,842,365
            
            
            
            5,129,883Cash
      and cash equivalents, end of period
            
            $
            1,431,589
            
            
            $
            10,253,091Supplemental
      schedule of additional cash flow information and non-cash
      investing and financing activities:Cash
      paid for interest
            
            $
            1,069,733
            
            
            $
            442,108Payables
      settled for oil and gas properties
            
            $
            53,799
            
            
            $
            118,023Asset
      retirement asset and obligation
            
            $
            43,493
            
            
            $
            18,743Common
      stock issued on payment of liquidated damages pursuant to registration
      rights arrangement
            
            
            —
            
            
            $
            5,463,412Discount
      on note payable, conveyance of overriding royalty interest
            
            $
            1,050,000
            
            
            $
            4,500,000





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Rancher
Energy Corp.


Notes to Consolidated Financial Statements




Note
1 – Organization and Summary of Significant Accounting Policies




Organization




Rancher
Energy Corp. (“Rancher Energy” or the “Company”) was incorporated in Nevada on
February 4, 2004. The Company acquires, explores for, develops and produces oil
and natural gas, concentrating on applying secondary and tertiary recovery
technology to older, historically productive fields in North
America.




Basis of
Presentation




The
accompanying unaudited consolidated financial statements include the accounts of
the Company’s wholly owned subsidiary, Rancher Energy Wyoming, LLC, a Wyoming
limited liability company that was formed on April 24, 2007.  In
management’s opinion, the Company has made all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of financial
position, results of operations, and cash flows.  The consolidated
financial statements should be read in conjunction with financial statements
included in the Company’s Annual Report on Form 10-K for the year ended March
31, 2008. The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information.  They do not include all
information and notes required by generally accepted accounting principles for
complete financial statements.  However, except as disclosed herein,
there has been no material change in the information disclosed in the notes to
financial statements included in the Company’s Annual Report on Form 10-K for
the year ended March 31, 2008. Operating results for the periods presented are
not necessarily indicative of the results that may be expected for the full
year.




The accompanying financial statements
have been prepared on the basis of accounting principles applicable to a going
concern, which contemplates the realization of assets and extinguishment of
liabilities in the normal course of business. As shown in the accompanying
financial statements, the Company has incurred a cumulative net loss of $67.0
million for the period from inception (February 4, 2004) to December 31, 2008,
and it has a working capital deficit of approximately $7.8 million as of
December 31, 2008.  On October 22, 2008, the Company made a principal
payment on its short term debt, scheduled to mature on October 31, 2008, and
extended the maturity of the remaining $10,000,000 balance until April 30,
2009.  The Company will require significant additional funding to
repay this debt on the new maturity date, and for its planned oil and gas
development operations.  The Company’s ability to continue the Company
as a going concern is dependent upon its ability to obtain additional funding in
order to finance its planned operations. The accompanying financial statements
do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.




Use of Estimates in the
Preparation of Financial Statements




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of oil and gas reserves, assets
and liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Significant estimates include oil and gas reserve quantities that provide the
basis for calculations of depletion, depreciation, and amortization (DD&A),
and impairment, timing and costs associated with asset retirement obligations,
and estimates of the fair value of derivative instruments, each of which
represents a significant component of the financial statements.




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Oil and Gas Producing
Activities




The
Company uses the successful efforts method of accounting for its oil and gas
properties.  Under this method of accounting, all property acquisition
costs and costs of exploratory and development wells are capitalized when
incurred, pending determination of whether the well has found proved reserves.
 If an exploratory well does not find proved reserves, the costs of
drilling the well are charged to expense.  Exploratory dry hole costs are
included in cash flows from investing activities as part of capital expenditures
within the consolidated statements of cash flows.  The costs of development
wells are capitalized whether or not proved reserves are found.  Costs of
unproved leases, which may become productive, are reclassified to proved
properties when proved reserves are discovered on the property.  Unproved
oil and gas interests are carried at the lower of cost or estimated fair value
and are not subject to amortization.




Geological
and geophysical costs and the costs of carrying and retaining unproved
properties are expensed as incurred.  DD&A of capitalized costs related
to proved oil and gas properties is calculated on a property-by-property basis
using the units-of-production method based upon proved reserves.  The
computation of DD&A takes into consideration restoration, dismantlement, and
abandonment costs and the anticipated proceeds from salvaging
equipment.




The
Company complies with Statement of Financial Accounting Standards Staff Position
No. FAS 19-1, “Accounting for Suspended Well Costs” (FSP FAS 19-1).
The Company currently does not have any existing capitalized exploratory well
costs, and has therefore determined that no suspended well costs should be
impaired.




The
Company reviews its long-lived assets for impairments when events or changes in
circumstances indicate that impairment may have occurred. The impairment test
for proved properties compares the expected undiscounted future net cash flows
on a property-by-property basis with the related net capitalized costs,
including costs associated with asset retirement obligations, at the end of each
reporting period. Expected future cash flows are calculated on all proved
reserves using a discount rate and price forecasts selected by the Company’s
management. The discount rate is a rate that management believes is
representative of current market conditions. The price forecast is based on
NYMEX strip pricing, adjusted for basis and quality differentials, for the first
three to five years and is held constant thereafter. Operating costs are also
adjusted as deemed appropriate for these estimates. When the net capitalized
costs exceed the undiscounted future net revenues of a field, the cost of the
field is reduced to fair value, which is determined using discounted future net
revenues. The Company has recorded no impairment on its proved
properties.  An impairment allowance is provided on unproved property
when the Company determines the property will not be developed or the carrying
value is not realizable. Recent global market conditions and declining commodity
prices have negatively impacted the valuation of the Company’s unproved oil and
gas properties. During  the nine months ended December 31, 2008 the
Company recognized impairment of unproved properties of $39,300,000,
representing the excess of the carrying value over the estimated realizable
value of such property.




Capitalized
Interest




The
Company’s policy is to capitalize interest costs to oil and gas properties on
expenditures made in connection with exploration, development and construction
projects that are not subject to current DD&A and that require greater than
six months to be readied for their intended use (“qualifying projects”).
Interest is capitalized only for the period that such activities are in
progress. To date, the Company has had no such qualifying projects during
periods when interest expense has been incurred. Accordingly, the Company
has recorded no capitalized interest.




Commodity
Derivatives




The
Company accounts for derivative instruments or hedging activities under the
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 133,
“Accounting for Derivative Instruments and Hedging Activities.”
SFAS No. 133 requires the Company to record derivative instruments at
their fair value. The Company’s risk management strategy is to enter into
commodity derivatives that set “price floors” and “price ceilings” for its crude
oil production.  The objective is to reduce the Company’s exposure to
commodity price risk associated with expected crude oil
production.




The
Company has elected not to designate the commodity derivatives to which they are
a party as cash flow hedges, and accordingly, such contracts are recorded at
fair value on its balance sheets and changes in such fair value are recognized
in current earnings as income or expense as they occur.




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The
Company does not hold or issue commodity derivatives for speculative or trading
purposes. The Company is exposed to credit losses in the event of nonperformance
by the counterparty to its commodity derivatives. It is anticipated, however,
that its counterparty will be able to fully satisfy its obligations under the
commodity derivatives contracts. The Company does not obtain collateral or other
security to support its commodity derivatives contracts subject to credit risk
but does monitor the credit standing of the counterparty. The price the Company
receives for production in its three fields is indexed to Wyoming Sweet
crude oil posted price. The Company has not hedged the basis differential
between the NYMEX price and the Wyoming Sweet price. Under the terms of the
Company’s Term Credit Agreement entered into during October 2007 it was required
to hedge a portion of its expected future production, and it entered into a
costless collar agreement for a portion of its anticipated future crude oil
production.  The costless collar contains a fixed floor price
(put) and ceiling price (call). If the index price exceeds the call strike
price or falls below the put strike price, the Company receives the fixed
price and pays the market price. If the market price is between the call and the
put strike price, no payments are due from either party.




The table
below summarizes the realized and unrealized losses related to
the  Company’s derivative instruments for the three and nine months
ended December 31, 2008 and 2007.




Three
      Months Ended
              December
      31,
            
            
            Nine
      Months Ended
              December
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Realized
      gains (losses) on derivative instruments
            
            $
            144,285
            
            
            $
            (57,674
            )
            
            $
            (505,623
            )
            
            $
            (57,674
            )Unrealized
      gains (losses) on derivative instruments
            
            
            1,442,626
            
            
            
            (578,435
            )
            
            
            1,502,792
            
            
            $
            (578,435
            )Total
      realized and unrealized gains (losses) recorded
            
            $
            1,586,911
            
            
            $
            (636,109
            )
            
            $
            997,169
            
            
            $
            (636,109
            )




The table
below summarizes the terms of the Company’s costless collar:




Contract
      Feature
            
            Contract Term
            
            Total
      Volume Hedged (Bbls)
            
            
            Remaining
      Volume Hedged (Bbls)
            
            Index
            
            Fixed
      Price ($/Bbl)
            
            
            Position
      at
              December
      31, 2008
              Due
      To (From) CompanyPut
            
            Nov
      07—Oct 09
            
            
            113,220
            
            
            
            45,611
            
            WTI
      NYMEX
            
            $
            65.00
            
            
            $
            739,183Call
            
            Nov
      07—Oct 09
            
            
            67,935
            
            
            
            27,368
            
            WTI
      NYMEX
            
            $
            83.50
            
            
            
            —




The
Company established the fair value of its derivative instruments using a
published index price, the Black-Scholes option-pricing model and other factors
including volatility, time value and the counterparty’s credit adjusted risk
free interest rate. The actual contribution to the Company’s future results of
operations will be based on the market prices at the time of settlement and may
be more or less than the value estimates used at December 31, 2008.




Other Significant Accounting
Policies




Other
accounting policies followed by the Company are set forth in Note 1 to the
Consolidated Financial Statements included in its Annual Report on Form 10-K for
the year ended March 31, 2008, and are supplemented in the Notes to Consolidated
Financial Statements in this Quarterly Report on Form 10-Q for the nine months
ended December 31, 2008. These unaudited consolidated financial statements and
notes should be read in conjunction with the consolidated financial statements
and notes included in the Annual Report on Form 10-K for the year ended March
31, 2008.




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Net Loss Per
Share




Basic net
(loss) per common share of stock is calculated by dividing net loss available to
common stockholders by the weighted-average of common shares outstanding during
each period.




Diluted
net income per common share is calculated by dividing adjusted net loss by the
weighted-average of common shares outstanding, including the effect of other
dilutive securities. The Company’s potentially dilutive securities consist of
in-the-money outstanding options and warrants to purchase the Company’s common
stock. Diluted net loss per common share does not give effect to dilutive
securities as their effect would be anti-dilutive.




The
treasury stock method is used to measure the dilutive impact of stock options
and warrants. For the nine months ended December 31, 2008 and 2007,
anti-dilutive stock options and warrants of   70,314,465 and
80,473,550, respectively have been omitted from the earnings per share
computation.





Reclassification




Certain
amounts in the 2007 financial statements have been reclassified to conform to
the 2008 financial statement presentation.  Such reclassification had
no effect on net loss.




Recent Accounting
Pronouncements




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, “Fair Value Measurements.”  This Statement defines
fair value as used in numerous accounting pronouncements, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosure related to the use of fair value measures in financial
statements. In February 2008, the FASB issued FASB Staff Position (FSP) FAS
157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13
and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13,” which
removes certain leasing transactions from the scope of SFAS No. 157, and
FSP FAS 157-2, “Effective Date of FASB Statement No. 157,” which defers the
effective date of SFAS No. 157 for one year for certain nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis.   In
October 2008, the FASB issued FSPFAS 157-3, “Determining the Fair Value of
a Financial Asset When the Market for that Asset is Not Active”, which clarified
the application of SFAS No. 157 as it relates to the valuation of financial
assets in a market that is not active for those financial assets. On April 1, 2008, the Company adopted without
material impact on the Company’s consolidated financial statements the
provisions of SFAS No. 157 related to financial assets and liabilities and
to nonfinancial assets and liabilities measured at fair value on a recurring
basis. Beginning April
1, 2009, the Company plans
toadopt the provisions for nonfinancial assets and nonfinancial
liabilities that are not required or permitted to be measured at fair value on a
recurring basis, which will include, among others, those nonfinancial long-lived
assets measured at fair value for impairment assessment and asset retirement
obligations initially measured at fair value. The Company does not expect the
provisions of SFAS No. 157 related to these items to have a material impact
on its financial
statements.




On
February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities.” This Statement
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 was effective for the
Company’s financial statements on April 1, 2008 and the adoption had no material
effect on its financial position or results of operations.




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141R”), which replaces FASB Statement No. 141.
SFAS No. 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non controlling interest in the acquiree
and the goodwill acquired, and establishes that acquisition costs will be
generally expensed as incurred. This statement also establishes disclosure
requirements which will enable users to evaluate the nature and financial
effects of the business combination. SFAS No. 141R is effective as of the
beginning of an entity’s fiscal year that begins after December 15, 2008,
which will be the Company’s year beginning April 1, 2009. The Company is
currently evaluating the potential impact, if any, of the adoption of SFAS
No. 141R on its future financial reporting.




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In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements—Amendments of ARB No. 51.” SFAS
No. 160 states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS No. 160 also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. This
statement is effective as of the beginning of an entity’s first fiscal year
beginning after December 15, 2008, which corresponds to the Company’s year
beginning January 1, 2009. The Company is currently evaluating the
potential impact, if any, of the adoption of SFAS No. 160 on its future
financial reporting.




On March 19, 2008, the FASB issued
SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities” which amends SFAS No. 133 by requiring expanded disclosures
about an entity’s derivative instruments and hedging activities, but does not
change SFAS No. 133’s scope or accounting. This statement is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early adoption permitted.The Company iscurrently evaluating the potential
impact, if any, of the adoption of SFAS No. 161 onitsfuture financial
reporting.




In May
2008, the FASB issued FSP 14-1 "Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) ".  FSP 14-1 requires the issuer of certain
convertible debt instruments that may be settled in cash (or other assets) on
conversion to separately account for the liability (debt) and equity (conversion
option) components of the instrument in a manner that reflects the issuer's
non-convertible debt borrowing rate.  FSP 14-1 is effective for fiscal
years beginning after December 15, 2008, on a retroactive
basis.  The Company has not yet determined the impact that the
implementation of FSP 14-1 will have on its consolidated financial
position, results of operations or cash flows.




Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to have a material impact on the Company’s present or future
consolidated financial statements.




Note
2 – Oil and Gas Properties




Acquisitions




In December 2006 and January 2007 the
Company purchased oil and gas properties in Wyoming’s Powder River Basin area,
consisting of the Cole Creek South Field, the South Glenrock B Field and the Big
Muddy Field.  The total purchase price for the three fields was $71.8
million plus acquisition and closing costs of $1.6 million. The Company’s
business plan includes the injection of CO2 into its
three oil fields and the Company has entered into two separate CO2agreements
as more fully described in the Company’s Annual Report on Form 10-K for the year
ended March 31, 2008.




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The
Company’s oil and gas properties are summarized in the following
table:




December
      31,
            
            
            March
      31,2008
            
            
            2008Proved
      properties
            
            $
            20,642,182
            
            
            $
            20,734,143Unproved
      properties excluded from DD&A
            
            
            52,948,655
            
            
            
            53,655,471Equipment
      and other
            
            
            371,161
            
            
            
            402,602Subtotal
      Unevaluated Properties
            
            
            53,319,816
            
            
            
            54,058,073Total
      oil and gas properties
            
            
            73,961,998
            
            
            
            74,792,216Less
      accumulated depletion, depreciation, amortization and
      impairment
            
            
            (41,615,882
            )
            
            
            (1,531,619
            )$
            32,346,116
            
            
            $
            73,260,597




Impairment of Unproved
Properties




In
conjunction with the periodic assessment of impairment of unproved properties,
the Company re-evaluated the carrying value of its unproved properties giving
consideration to lower  commodity prices and the difficulties
encountered in raising capital to develop the
properties.  Accordingly, during the nine months ended December 31,
2008 the Company recorded $39,300,000 of impairment expense on unproved
properties, reflecting the excess of the carrying value over estimated
realizable value of the assets.  The Company recognized no impairment
in the corresponding periods of 2007.




Exploration ofStrategic
Alternatives




In August
2008, the Company retained Growth Capital Partners, L.P. as its financial
advisor to assist in exploring financing and other strategic alternatives,
including the possible sale of the Company.    We have been
unsuccessful in completing a strategic transaction.  Our ability to
survive will be dependent upon completing a strategic transaction; however,
there is no assurance any such transaction will be completed.




Note
3 – Asset Retirement Obligations




The
Company recognizes an estimated liability for future costs associated with the
abandonment of its oil and gas properties. A liability for the fair value of an
asset retirement obligation and a corresponding increase to the carrying value
of the related long-lived asset are recorded at the time a well is completed or
acquired. The increase in carrying value is included in proved oil and gas
properties in the balance sheets. The Company depletes the amount added to
proved oil and gas property costs and recognizes accretion expense in connection
with the discounted liability over the remaining estimated economic lives of the
respective oil and gas properties. Cash paid to settle asset retirement
obligations are included in the operating section of the Company’s statements of
cash flows.




The
Company’s estimated asset retirement obligation liability is based on historical
experience in abandoning wells, estimated economic lives, estimates as to the
cost to abandon the wells in the future, and federal and state regulatory
requirements. The liability is discounted using a credit-adjusted risk-free rate
estimated at the time the liability is incurred or revised, as appropriate.
Revisions to the liability result from changes in estimated abandonment costs,
changes in well economic lives, or if federal or state regulators enact new
requirements regarding the abandonment of wells.




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A
reconciliation of the Company’s asset retirement obligation liability during the
nine months ended December31 is as
follows:




2008
            
            
            2007Balance,
      April 1
            
            $
            1,259,851
            
            
            $
            1,221,567Liabilities
      incurred
            
            
            —Liabilities
      settled
            
            
            (147,661
            )
            
            
            (18,318
            )Changes
      in estimates
            
            
            43,493
            
            
            
            —Accretion
      expense
            
            
            117,771
            
            
            
            66,387Balance,
      December 30
            
            $
            1,273,454
            
            
            $
            1,269,636Current
            
            $
            320,768
            
            
            $
            564,308Long-term
            
            
            952,686
            
            
            
            705,328$
            1,273,454
            
            
            $
            1,269,636




Note 4
– Fair Value Measurements




On April
1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” which
defines fair value, establishes a framework for using fair value to measure
assets and liabilities, and expands disclosures about fair value measurements.
The Statement establishes a hierarchy for inputs used in measuring fair value
that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when
available. Observable inputs are inputs that market participants would use in
pricing the asset or liability developed based on market data obtained from
sources independent of the Company. Unobservable inputs are inputs that reflect
the Company’s assumptions of what market participants would use in pricing the
asset or liability developed based on the best information available in the
circumstances. The hierarchy is broken down into three levels based on the
reliability of the inputs as follows:




·  Level 1:
Quoted prices are available in active markets for identical assets or
liabilities;




·
            Level
      2: Quoted prices in active markets for similar assets and liabilities that
      are observable for the asset or liability;
or




·
            Level
      3: Unobservable pricing inputs that are generally less observable from
      objective sources, such as discounted cash flow models or
      valuations.




SFAS
No. 157 requires financial assets and liabilities to be classified based on
the lowest level of input that is significant to the fair value measurement. The
Company’s assessment of the significance of a particular input to the fair value
measurement requires judgment, and may affect the valuation of the fair value of
assets and liabilities and their placement within the fair value hierarchy
levels. The following table presents the company’s financial assets and
liabilities that were accounted for at fair value on a recurring basis as of
December 31, 2008 by level within the fair value hierarchy:




Fair Value Measurements
    UsingLevel 1
            
            
            Level 2
            
            
            Level 3Assets:Derivative
      instrument
            
            $
            —
            
            
            $
            —
            
            
            $
            731,183Liabilities:




The Company’ssolederivative financial
instrumentisaparticipating capcostless collar agreement.The fair valueof the costless collar
agreementisdetermined based on both observable and
unobservable pricing inputs and therefore, the data sources utilized in these
valuation models are considered level 3 inputs in the fair value
hierarchy.In the
Company's adoption of SFAS No. 157, it considered the impact of counterparty
credit risk in the valuation of its assets and its own credit risk in the
valuation of its liabilities that are presented at fair
value.




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The
following table sets forth a reconciliation of changes in the fair value of
financial assets and liabilities classified as level 3 in the fair value
hierarchy:




Derivatives
            
            TotalBalance
      as of April 1, 2008, asset, (liability)
            
            $
            (836,907
            )
            
            $
            (836,907
            )Total
      gains (losses) (realized or unrealized):Included
      in earnings
            
            
            997,169
            
            
            
            997,169Included
      in other comprehensive incomePurchases,
      issuances and settlements
            
            
            680,223
            
            
            
            680,223Transfers
      in and out of Level 3Balance
      as of December 31, 2008
            
            $
            840,485
            
            
            $
            840,485Change
      in unrealized gains (losses) included in earnings relating to derivatives
      still held as of December 31, 2008
            
            $
            1,677,392
            
            
            $
            1,677,392




Note
5 – Short-term Note Payable





On
October 16, 2007, the Company borrowed $12,240,000 pursuant to a Term Credit
Agreement (the “Credit Agreement”) with a financial institution (the Lender),
which was amended on October 22, 2008 (the “First Amendment”) .  The
First Amendment extended for six months the maturity date under the Term Credit
Agreement of October 31, 2008 to April 30, 2009. In consideration of the six
month extension and other terms included in First Amendment, the Company
made a principal payment to the Lender in the amount of $2,240,000, resulting in
a new loan balance of $10,000,000, and granted an increase in the proportionate
overriding royalty interests (“ORRI”) assigned to the Lender from 2% to 3%.
Under the terms of the First Amendment, the Company has the right to buy back
one-third (1/3) of the ORRI at a repurchase price calculated to ensure that
total payments by the Company to the Lender of principal, interest, ORRI
revenues, and ORRI repurchase price will equal 140% of the original loan
amount.  The Company also has the right to apply the three months
interest held in escrow under the terms of the original Term Credit Agreement,
against the final three months interest payments due in February, March and
April, 2009.




All
amounts outstanding under the Credit Agreement, as amended, are due and
payable on




April 30,
2009  with interest at a rate equal to the greater of (a) 12% per
annum and (b) the one-month LIBOR rate plus 6% per annum. The Company is
required to make monthly interest payments on the amounts outstanding under the
Credit Agreement, but is not required to make any principal payments until the
maturity date. The Company may prepay the amounts outstanding under the Credit
Agreement at any time without penalty.




The
Company’s obligations under the Credit Agreement are collateralized by a first
priority security interest in its properties and assets, including all rights
under oil and gas leases in its three producing oil fields in the Powder River
Basin of Wyoming and all of its equipment on those properties. Under the terms
of the original Credit agreement, the Company granted the Lender a 2% Overriding
Royalty Interest (ORRI), proportionally reduced when the Company’s working
interest is less than 100%, in all crude oil and natural gas produced from its
three Powder River Basin fields. The Company estimated that the fair value of
the ORRI granted to the Lender was approximately $4,500,000 and has recorded
this amount as a discount to the Note Payable and as a decrease of oil and gas
properties. Under the terms of the First Amendment the Company granted an
additional 1% ORRI, proportionally reduced when the Company’s working
interest is less than 100%, in all crude oil and natural gas produced from its
three fields. The Company estimated that the fair value of the ORRI granted to
the Lender was approximately $1,050,000 and has recorded this amount as a
discount to the Note Payable and as a decrease of oil and gas
properties. Amortization of the discount based upon the effective interest
method in the amount of $752,965 and $2,914,392 is included in the Company’s
statements of operations as amortization of deferred financing costs and
discount on note payable for the three and nine months ended December 31, 2008,
respectively. As long as any of its obligations remain outstanding under the
Credit Agreement, the Company will be required to grant the same ORRI to the
Lender on any new working interests acquired after closing. Prior to the
maturity date, the Company may re-acquire 1/3 of the ORRI granted to the Lender
at a repurchase price calculated to ensure that total payments by the Company to
the Lender of principal, interest, ORRI revenues, and ORRI repurchase price will
equal 140% of the loan amount.




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The
Credit Agreement contains several events of default, including if, at any time
after closing, the Company’s most recent reserve report indicates that its
projected net revenue attributable to proved reserves is insufficient to fully
amortize the amounts outstanding under the Credit Agreement within a 48-month
period and it is unable to demonstrate to the Lender’s reasonable satisfaction
that it would be able to satisfy such outstanding amounts through a sale of its
assets or an sale of equity. Upon the occurrence of an event of default under
the Credit Agreement, the Lender may accelerate the Company’s obligations under
the Credit Agreement. Upon the occurrence of certain events of bankruptcy,
obligations under the Credit Agreement would automatically accelerate. In
addition, at any time that an event of default exists under the Credit
Agreement, the Company will be required to pay interest on all amounts
outstanding under the Credit Agreement at a default rate, which is equal to the
then-prevailing interest rate under the Credit Agreement plus four percent per
annum.




The
Company is subject to various restrictive covenants under the Credit Agreement,
including limitations on its ability to sell properties and assets, pay
dividends, extend credit, amend material contracts, incur indebtedness, provide
guarantees, effect mergers or acquisitions (other than to change its state of
incorporation), cancel claims, create liens, create subsidiaries, amend its
formation documents, make investments, enter into transactions with its
affiliates, and enter into swap agreements. The Company must maintain (a) a
current ratio of at least 1.0 (excluding from the calculation of current
liabilities any loans outstanding under the Credit Agreement) and (b) a
loan-to-value ratio greater than 1.0 to 1.0 for the term of the loan. As of
December 31, 2008 the Company is in compliance with all covenants under the
Credit Agreement.




Note
6 – Income Taxes




As of
December 31, 2008, because the Company believes that it is more likely than not
that its net deferred tax assets, consisting primarily of net operating losses,
will not be utilized in the future, the Company has fully provided for a
valuation of its net deferred tax assets.




The
Company is subject to United States federal income tax and income tax from
multiple state jurisdictions. Currently, the Internal Revenue Service is not
reviewing any of the Company’s federal income tax returns, and agencies in
states where the Company conducts business are not reviewing any of the
Company’s state income tax returns. All tax years remain subject to examination
by tax authorities, including for the period from February 4, 2004 through March
31, 2008.




Note
7 – Common Stock




The
Company’s capital stock as of December 31, 2008 and 2007 consists of 275,000,000
authorized shares of common stock, par value $0.00001 per share.




Issuance of Common
Stock




For theNine MonthsEndedDecember 31, 2008




During
the nine months ended December 31, 2008, the Company issued common stock as
follows:




750,000
      shares to an officer of the Company upon the exercise of stock
      options;3,388,359
      shares to directors of the Company in exchange for
    services;






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Note
8 – Share-Based Compensation




Chief Executive Officer
(CEO) Options




During
the nine months ended December 31, 2008, the Company’s CEO exercised options to
acquire 750,000 shares of common stock, for a cumulative exercise price of $7.50
($0.00001/share).




2006 Stock Incentive
Plan




There
were no options to purchase shares of common stock granted during the nine
months ended December 31, 2008. During the nine months ended December 31, 2008,
options to purchase 852,667 shares of common stock granted to employees expired.
The options had exercise prices of $1.18 to $1.75.




Total
estimated unrecognized compensation cost from unvested stock options as of
December 31, 2008 was approximately $103,000 which the Company expects to
recognize over 3.3 years. As of December 31, 2008 there were 577,000
options outstanding under the 2006 Stock Incentive Plan and 9,423,000 options
are available for issuance.




Restricted Stock
Award




On April
20, 2007, four new members were appointed to the Company’s Board of Directors.
Each newly appointed director received a stock grant of 100,000 shares of the
Company’s common stock that vests 20% (20,000 shares) on the date of grant with
vesting 20% per year thereafter. On May 31, 2007, the remaining independent
Board member not covered by the April 20, 2007 award received a stock grant of
100,000 shares of the Company’s common stock that vests 20% (20,000 shares) on
the date of grant with vesting 20% per year thereafter.




On May
22, 2007, the Company issued 400,000 shares of common stock to the four new
board members, and on June 26, 2007, the Company issued 100,000 shares of common
stock to the remaining independent Board member. Pursuant to the vesting
discussed above, for the nine months ended December 31, 2008, $77,550 has
been reflected as a charge to general and administrative expense in the
statement of operations, with a corresponding credit to additional paid-in
capital.




Board of Director
Fees




On April
20, 2007, the Board of Directors approved a resolution whereby members may
receive stock in lieu of cash for Board meeting fees, Committee meeting fees and
Committee Chairman fees.




For the
nine months ended December 31, 2008, board members elected to receive 3,388,359
shares of common stock, respectively, in lieu of cash, ranging in value from
$0.31 to $0.03 per share, representing the closing price of the Company’s
stock on the date of grant. Total compensation for the nine months ended
December 31, 2008 of $218,500 has been reflected as a charge to general and
administrative expense in the statement of operations, with a corresponding
credit to common stock and additional paid-in capital.






- 17
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Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations




Forward-Looking
Statements




The
statements contained in this Quarterly Report on Form 10-Q that are not
historical are “forward-looking statements”, as that term is defined in Section
21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), that
involve a number of risks and uncertainties. These forward-looking statements
include, among others, the following:





·
            business
      strategy;




·
            ability
      to complete a sale of the Company, all or a significant portion of its
      assets or financing or other strategic
  alternatives;




·
            ability
      to obtain the financial resources to repay secured debt and to conduct the
      EOR projects;




·
            water
      availability and waterflood production
targets;




·
            carbon
      dioxide (CO2)
      availability, deliverability, and tertiary production
    targets;




·
            construction
      of surface facilities for waterflood and  CO2operations
      and a CO2pipeline;




·
            inventories,
      projects, and programs;




·
            other
      anticipated capital expenditures and
budgets;




·
            future
      cash flows and borrowings;




·
            the
      availability and terms of
financing;




·
            oil
      reserves;




·
            reservoir
      response to water and CO2
      injection;




·
            ability
      to obtain permits and governmental
approvals;




·
            technology;




·
            financial
      strategy;




·
            realized
      oil prices;




·
            production;




·
            lease
      operating expenses, general and administrative costs, and finding and
      development costs;




·
            availability
      and costs of drilling rigs and field
services;




·
            future
      operating results;




·
            plans,
      objectives, expectations, and intentions;
and




These
statements may be found under “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”, and other sections of this Quarterly
Report on Form 10-Q. Forward-looking statements are typically identified by use
of terms such as “may”, “could”, “should”, “expect”, “plan”, “project”,
“intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “pursue”,
“target” or “continue”, the negative of such terms or other comparable
terminology, although some forward-looking statements may be expressed
differently.




The
forward-looking statements contained in this Quarterly Report are largely based
on our expectations, which reflect estimates and assumptions made by our
management. These estimates and assumptions reflect our best judgment based on
currently known market conditions and other factors. Although we believe such
estimates and assumptions to be reasonable, they are inherently uncertain and
involve a number of risks and uncertainties that are beyond our control. In
addition, management’s assumptions about future events may prove to be
inaccurate. Management cautions all readers that the forward-looking statements
contained in this Quarterly Report on Form 10-Q are not guarantees of future
performance, and we cannot assure any reader that such statements will be
realized or the forward-looking events and circumstances will occur. Actual
results may differ materially from those anticipated or implied in the
forward-looking statements due to the factors listed in the “Risk Factors”
section and elsewhere in our Annual Report on Form 10-K for the year ended March
31, 2008. All forward-looking statements speak only as of the date of this
Quarterly Report on Form 10-Q. We do not intend to publicly update or revise any
forward-looking statements as a result of new information, future events or
otherwise. These cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.




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Organization




Rancher
Energy is an independent energy company which explores for and develops,
produces, and markets oil and gas in North America. Prior to April 2006, Rancher
Energy, formerly known as Metalex Resources, Inc. (“Metalex”), was engaged in
the exploration of a gold prospect in British Columbia, Canada. Metalex found no
commercially exploitable deposits or reserves of gold. During April 2006,
stockholders voted to change the name to Rancher Energy Corp. We operate three
fields in the Powder River Basin, Wyoming, which is located in the Rocky
Mountain region of the United States. The fields were acquired in December 2006
and January 2007 and are known as the South Glenrock B Field, the Big Muddy
Field, and the Cole Creek South Field. Our business plan in acquiring the three
fields was to substantially increase production by using waterflood, CO2injection
and other enhanced oil recovery (EOR) techniques.  All three fields
currently produce some oil and we believe that, subject to financing, they are
good candidates for EOR techniques, waterflood or CO2tertiary
recovery.




To fund
the acquisition of the three fields and our operating expenses, from June 2006
through January 2007, we sold $89.3 million of our securities in two private
placements. In December 2006, we also entered into an agreement with Anadarko
Petroleum Corporation to supply us with CO2needed to
conduct CO2tertiary recovery operations in our three fields. In February 2008, we
entered into a Carbon Dioxide Sale and Purchase Agreement with ExxonMobil Gas
and Power Marketing (ExxonMobil), a division of ExxonMobil Corporation, to
supply additional CO2to the
three fields. We are seeking financing or strategic joint venture partners to
enable us to construct a pipeline to deliver CO2 to our
fields and to drill additional wells and construct necessary infrastructure
improvements in order to implement EOR techniques.




Company
Goals




The
following summarizes our goals for the next three months:




●
            Continue
      to explore the potential for a  strategic
      transaction  to repay the Company’s debt and to continue
      operations;●
            Minimize
      operating and administration costs.




We need
substantial additional funding or to enter into another type of strategic
transaction to be able to repay our short term debt and to continue
operations. Our other
goals are to enhance production from our existing wells, amend our two CO2 supply
agreements and initiate development activities in our fields.




In
October 2007 we raised approximately $12.2 million in short-term debt financing
to enhance production and provide cash reserves. While we had intended to raise
long-term debt  in 2007 to further our waterflood and CO2 EOR plans,
weakness in the capital market conditions contributed to our change in strategy
to raise short-term financing.  The raising of future funding is
dependent on many factors, some of which are outside our control and are not
assured. One major factor is the level of and projected trends in oil prices,
which we cannot protect against by using hedging at this time.Our short term debt
was scheduled to mature on October 31, 2008.  On October 22, 2008, we
and the Lender entered into an amendment to the credit agreement to extend the
maturity for six months until April 30, 2009.




On August
7, 2008, we retained Growth Capital Partners, L.P. as the Company’s financial
advisor to consider financing and other strategic alternatives, including the
possible sale of the Company.  We have been unsuccessful in completing
a strategic transaction.  Our ability to survive will be dependent
upon completing a strategic transaction; however, there is no assurance that any
transaction will be completed.




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Liquidity and Capital
Resources




Going
Concern




The
report of our independent registered public accounting firm on the financial
statements for the year ended March 31, 2008 includes an explanatory paragraph
relating to the uncertainty of our ability to continue as a going concern. We
have incurred a cumulative net loss of $ 67.0  million for the period
from inception (February 4, 2004) to December 31, 2008.  At December
31, 2008 we had cash on hand of $1.4 million, short term debt of $10 million and
a working capital deficit of approximately $7.8 million.  The debt is
currently scheduled to mature on April 30, 2009. We require significant
additional funding to repay the short term debt and to sustain our operations.
Our ability to continue the Company as a going concern is dependent upon our
ability to obtain additional funding in order to pay our short term debt and
finance our planned operations.




Our
primary source of liquidity to meet operating expenses and fund capital
expenditures is our access to debt and equity markets. The debt and equity
markets, public, private, and institutional, have been our principal source of
capital used to finance a significant amount of growth, including property
acquisitions. We will need substantial additional funding to survive and to
pursue our business plan. The recent unprecedented events in global
financial markets have had a profound impact on the global economy. Many
industries, including the oil and natural gas industry, are impacted by these
market conditions. Some of the key impacts of the current financial market
turmoil include contraction in credit markets resulting in a widening of credit
risk, devaluations and high volatility in global equity, commodity, natural
resources and foreign exchange markets, and a lack of market liquidity. A
continued or worsened slowdown in the financial markets or other economic
conditions, including but not limited to, employment rates, business conditions,
lack of available credit, the state of the financial markets
and  interest rates may adversely affect our
opportunities.




In
October 2007, we issued $12,240,000 of short term debt the proceeds of which
were intended to enhance our existing production and to provide cash reserves
for operations. The debt was scheduled to mature on October 31, 2008. We had
planned to secure longer term fixed rate financing to repay the short term debt
and to commence our EOR development activities in the three fields of the Powder
River Basin; however, due to difficulties in the capital debt markets, we have
been unable to secure such financing.  On October 22, 2008 we and the
lender entered into an amendment to the credit agreement to, among other terms,
extend the maturity date by six months, until April 30, 2009.  In
consideration for the extension and other terms, we made a principal payment of
$2,240,000 reducing the outstanding balance to $10,000,000. We do not have cash
available to repay this loan. If we are not successful in repaying this debt
within the term of the loan, or default under the terms of the loan, the lender
will be able to foreclose one or more of our three properties and other assets
and we could lose the properties. A foreclosure could significantly reduce or
eliminate our property interests or force us to alter our business strategy,
which could involve the sale of properties or working interests in the
properties. A foreclosure would adversely affect our results of operations and
financial condition including a possible termination of business
activities.




Beginning
in March 2008, we reduced our level of staffing by laying off several employees
whose positions were considered to be redundant based upon the anticipated
closing of a farmout transaction with experienced industry operators. Neither
the original nor a subsequently identified farmout transaction was completed;
however we continued field and corporate operations utilizing the remaining
staff and, on a very limited contract basis, the utilization of contract
consultants.  At that time our monthly oil and gas production revenue
was adequate to cover monthly field operating costs, production taxes and
general and administrative expenses; however, interest payments on short term
debt and payments relating to our crude oil hedging position resulted in
negative cash flow each month.   The collapse of crude oil prices
commencing in August 2008 and continuing to date has exacerbated the situation,
such that at current NYMEX strip prices our expected future cash flows from
crude oil sale are inadequate to cover monthly field operating costs, production
taxes and general and administrative expenses.  This negative cash
flow is offset to some extent by proceeds realized from our crude oil hedging
position.  This hedge expires in October 2009.






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We have
executed two agreements to purchase CO2 for use in
EOR operations in our fields.  These supply agreements are discussed
in more detail in our Form 10-K for the year ended March 31, 2008, filed with
the Securities and Exchange Commission on June 30, 2008.  Both supply
contracts are problematic in the current low commodity price environment and we
have commenced discussions with both suppliers regarding amendments to the
contracts to make them economically viable for us.  There is no
assurance we will successfully complete any such amendments and in the event we
do not, we will likely be unable to sustain operations or meet our obligations
under the supply agreements.




On August
7, 2008, we retained Growth Capital Partners, L.P. as the Company’s financial
advisor to consider financing and other strategic alternatives, including the
possible sale of the Company. We have been unsuccessful in completing a
strategic transaction.  Our ability to survive will be dependent upon
completing a strategic transaction; however, there is no assurance that any
transaction will be completed.




Results of
Operations




Three
Months Ended December 31, 2008 Compared to Three Months December 31,
2007.




The
following is a comparative summary of our results of operations:





Three Months Ended
              December 31,2008
            
            
            2007Revenues:Oil
      production (in barrels)
            
            
            16,997
            
            
            
            22,020Net
      oil price (per barrel)
            
            $
            44.00
            
            
            $
            77.40Oil
      sales
            
            $
            746,967
            
            
            $
            1,704,267Gains
      (Losses) on derivative activities, net
            
            
            1,586,911
            
            
            
            (636,109
            )Total
      revenues
            
            
            2,333,878
            
            
            
            1,068,158Operating
      expenses:Production
      taxes
            
            
            90,940
            
            
            
            207,588Lease
      operating expenses
            
            
            831,559
            
            
            
            808,091Depreciation,
      depletion, amortization  and accretion
            
            
            391,508
            
            
            
            319,391Impairment
      of proved properties
            
            
            32,500,000
            
            
            
            —Exploration
      expense
            
            
            4,293
            
            
            
            55,945General
      and administrative expense
            
            
            780,261
            
            
            
            1,735,482Total
      operating expenses
            
            
            34,598,561
            
            
            
            3,126,497Loss
      from operations
            
            
            (32,264,683
            )
            
            
            (2,058,339
            )Other
      income (expense):Interest
      expense and financing costs
            
            
            (1,171,886
            )
            
            
            (1,342,984
            )Interest
      and other income
            
            
            6,811
            
            
            
            95,982Total
      other  expense
            
            
            (1,165,075
            )
            
            
            (1,247,002
            )Net
      loss
            
            $
            (33,429,758
            )
            
            $
            (3,305,341
            )




Overview.  For the three
months ended December 31, 2008, we reported a net loss of $33,429,758, or $0.29
per basic and fully-diluted share, compared to a net loss of $3,305,341, or $
0.03 per basic and fully-diluted share, for the corresponding three months of
2007.  Discussions of individually significant period to period
variances follow.




Revenue, production taxes, and lease
operating expenses.  For the three months ended December 31, 2008,
we recorded crude oil sales of $746,967 on 16,977 barrels of oil at an average
price of $44.00, as compared to revenues of $1,704,267 on 22,020 barrels of oil
at an average price of $77.40 per barrel in 2007. The period-to period variance
reflects a volume variance of $(390,310)and a price variance of $(566,991) The
decreased volume in 2008 reflects mechanical production problems resulting in a
reduction in the number of  producing wells and curtailed production
from other wells while flowline and other well repairs were carried out, coupled
with overall production decline from year to year. Production taxes (including
ad valorem taxes) of $90,940 in 2008 as compared to $ 207,588 in 2007 remained
constant at 12% of crude oil sales revenues. Lease operating expenses in 2008 of
$831,559 or $48.98/bbl showed an   increase from the prior year,
$808,091 or $36.70/bbl, reflecting the significant amounts of downhole repair
and other well work carried on in 2008 versus very little such work conducted in
2007.




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Gains (losses)on risk management
activities. In connection with
short term debt financing entered into in October 2007 we entered into a crude
oil derivative contract with an unrelated counterparty to set a price floor of
$65 per barrel for 75% of our estimated crude oil production for the next two
years, and a price ceiling of $83.50 for 45% of the same level of
production.  During the three months ended December 31, 2008 we
recorded total gains on the derivative activities of $1,586,911, comprised of
$144,285 of realized gains and $1,442,627 of unrealized gains
of  reflecting the reversal of previously recorded unrealized
losses.    For the comparable 2007 periods we recorded
derivative losses of $636,196  comprised of recognized losses
of  $57,674 and unrealized losses of $578,435




Depreciation, depletionandamortization.  For
the three months ended December 31, 2008, we reflected depreciation, depletion,
and amortization and accretion of  $391,508, made up of
$305,210, ($17.98/bbl), related to oil and gas properties, $45,637 related
to other assets, and accretion of the asset retirement obligation of $40,661 as
compared to $319,391 made up of $282,928, $12.84/bbl, related to oil and gas
properties, $47,684 related to other assets and accretion of the asset
retirement obligation of $(11,221) for the corresponding three months ended
December 31, 2007. The period-to period increase in dollars per barrel primarily
reflects the increased base of proved property costs being amortized over a
lower reserve base in 2008 as compared to 2007.




Impairment of unproved
properties.  As of December 31, 2008 and in conjunction with
the periodic assessment of impairment of unproved properties, we re-evaluated
the carrying value of our unproved properties giving consideration to lower
crude oil prices and the difficulties encountered in securing capital to develop
the properties.  Accordingly, during the three months ended December
31, 2008 we recorded $32,500,000 of impairment expense of unproved properties,
reflecting the excess of the carrying value over estimated realizable value of
the assets.  No such impairment was recognized during the three months
ended December 31, 2007.




General and administrative
expense.  For the three months ended December 31, 2008, we
reflected general and administrative expenses of $780,261 as compared to
$1,735,482 for the corresponding three months ended December 31,
2007.  The decrease reflects a general lower level of activity in 2008
compared to 2007 and staff reductions carried out in March and April of
2008.  As of December 31, 2008 we had six employees in the corporate
office and three in the field office in Wyoming as compared to seventeen and
six, respectively, as of December 31, 2007. Salaries and benefit costs for the
three months ended December 31, 2008 were $305,338 as compared to $805,073 for
the same period in 2007.  Stock-based compensation expense was reduced
to $143,553 in 2008 as compared to $394,209 in 2007 reflecting the expiration of
stock options previously held by terminated employees.  In addition to
personnel related cost reductions we implemented cost saving measures in several
other cost categories including: 1) lower accounting and financial reporting
contractor fees of $18,671 in 2008 compared to $116,657 in 2007 ; 2) lower
travel and entertainment costs of $5,362 in 2008 compared to $27,611 in 2007; 3)
lower investor relations fees of $15,784 in 2008 compared to $27,220 in 2007; 4)
lower recruiting fees of zero in 2008 compared to $22,050 in 2007; and 5) lower
audit and tax compliance fees of $26,886 in 2008 as compared to $76,289 in
2007.  We continue to initiate efforts to minimize general and
administrative expenses including the recent engagement a commercial real estate
broker to sublease or otherwise market the excess office space we have following
our staff reductions earlier this year.




Interest expense and financing
costs.For the three months ended December 31, 2008, we
reflected interest expense and financing costs of $1,171,886 as compared to
$1,342,984 for the corresponding three months ended December 31,
2007.  The 2008 amount is comprised of interest paid on the Note
Payable issued in October 2007 of $323,093 and amortization of deferred
financing costs and discount on notes payable of  $848,793.The 2007
amount is comprised of $441,422 of interest paid on the Note Payable and
$901,562 of amortization of deferred financing costs and discount on Note
Payable.




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Nine
Months Ended December 31, 2008 Compared to Nine Months December 31,
2007.




The
following is a comparative summary of our results of operations:




NineMonths
      Ended
              December 31,2008
            
            
            2007Revenues:Oil
      production (in barrels)
            
            
            51,239
            
            
            
            68,076Net
      oil price (per barrel)
            
            $
            90.59
            
            
            $
            68.83Oil
      sales
            
            $
            4,641,836
            
            
            $
            4,685,373Gains
      (losses) on derivative activities, net
            
            
            997,169
            
            
            
            (636,109
            )Total
      revenues
            
            
            5,639,005
            
            
            
            4,049,264Operating
      expenses:Production
      taxes
            
            
            564,590
            
            
            
            570,239Lease
      operating expenses
            
            
            2,004,422
            
            
            
            2,087,753Depreciation,
      depletion, amortization and accretion
            
            
            1,046,166
            
            
            
            1,097,255Impairment
      of unproved properties
            
            
            39,300,000
            
            
            
            —Exploration
      expense
            
            
            13,896
            
            
            
            186,772General
      and administrative expense
            
            
            2,788,415
            
            
            
            5,788,574Total
      operating expenses
            
            
            45,717,489
            
            
            
            9,730,593Loss
      from operations
            
            
            (40,078,484
            )
            
            
            (5,681,329
            )Other
      income (expense):Liquidated
      damages pursuant to registration rights arrangement
            
            
            
            
            
            
            (2,645,393
            )Interest
      expense and financing costs
            
            
            (4,594,283
            )
            
            
            (1,555,417
            )Interest
      and other income
            
            
            26,129
            
            
            
            169,846Total
      other expense
            
            
            (4,568,154
            )
            
            
            (4,030,964
            )Net
      loss
            
            $
            (44,646,638
            )
            
            $
            (9,712,293
            )




Overview.  For the nine
months ended December 31, 2008, we reported a net loss of $44,646,638, or $0.39
per basic and fully-diluted share, compared to a net loss of $9,712,293 or
$(0.09) per basic and fully-diluted share, for the corresponding nine months of
2007.  Discussions of individually significant period to period
variances follow.




Revenue, production taxes, and lease
operating expenses.  For the nine months ended December 31, 2008, we
recorded crude oil sales of $4,641,836 on 51,239 barrels of oil at an average
price of $90.59 as compared to revenues of $4,685,373 on 68,076 barrels of oil
at an average price of $68.83 per barrel in 2007. The period-to period variance
reflects a volume variance of $(1,158,817) and a price variance of $1,115,279.
The decreased volume in 2008 reflects mechanical production problems resulting
in a reduction in the number of  producing wells and curtailed
production from other wells while flowline and other well repairs were carried
out, coupled with overall production decline from period-to-period. Production
taxes (including ad valorem taxes) of $564,590 in 2008 as compared to $570,239
in 2007 remained constant at % of crude oil sales revenues. Lease operating
expenses decreased to $2,004,422 ($39.12/bbl) in 2008 compared to $2,087,753
($30.67/bbl) in 2007.   The period to period lease operating
expense variance is comprised of volume variance of $516,356 and a cost variance
of $(433,025).  The higher per barrel costs in 2008 reflect the
significant amounts of downhole repair and other well work carried on in 2008 in
an effort to slow production decline, versus very little such work conducted in
2007.




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Gains (losses)on risk management
activities. In connection with
short term debt financing entered into in October 2007 we entered into a crude
oil derivative contract with an unrelated counterparty to set a price floor of
$65 per barrel for 75% of our estimated crude oil production for the next two
years, and a price ceiling of $83.50 for 45% of the same level of
production.  During the nine months ended December 31, 2008 we
recorded total gains on the derivative activities of $997,169, comprised of
$505,623 of realized losses and $1,502,792 of unrealized gains reflecting the
reversal of previously recorded unrealized losses.  For the comparable 2007
periods we recorded derivative losses of $636,196  comprised of
recognized losses of  $57,674 and unrealized losses of
$578,435




Depreciation, depletionand,
amortization.  For the nine months ended December 31, 2008, we
reflected depreciation, depletion, and amortization and accretion
of  $1,046,166, made up of $784,263, ($15.31/bbl), related to oil
and gas properties, $144,132 related to other assets), and accretion of the
asset retirement obligation of $117,771 as compared to $1,097,255 made up of
$902,058, ($13.25/bbl), related to oil and gas properties, $128,810 related to
other assets and accretion of the asset retirement obligation of $66,387 for the
corresponding three months ended December 31, 2007. The period-to period
increase in dollars per barrel primarily reflects the increased base of proved
property costs being amortized over a lower reserve base in 2008 as compared to
2007Impairment of unproved
properties.  As of December 31, 2008 and in conjunction with
the periodic assessment of impairment of unproved properties, we-evaluated the
carrying value of our unproved properties giving consideration to lower crude
oil prices and the difficulties encountered in securing capital to develop the
properties.  Accordingly, during the nine months ended December 31,
2008 we recorded $39,300,000 of impairment expense of unproved properties,
reflecting the excess of the carrying value over estimated realizable value of
the assets. No such impairment was recognized during the nine months ended
December 31, 2007.




General and administrative
expense.  For the nine months ended December 31, 2008, we
reflected general and administrative expenses of $ 2,788,415 as compared to
$5,788,574 for the corresponding nine months ended December 31,
2007.  The decrease reflects a general lower level of activity in 2008
compared to 2007 and staff reductions carried out in March and April of
2008.  As of December 31, 2008 we had six employees in the corporate
office and three in the field office in Wyoming as compared to seventeen and
six, respectively, as of December 31, 2007. Salaries and benefit costs for the
nine months ended December 31, 2008 were $1,007,380 as compared to $2,215,634
for the same period in 2007.  Stock-based compensation expense was
reduced to $648,531 in 2008 as compared to $1,045,093 in 2007 reflecting the
expiration of stock options previously held by terminated
employees.  In addition to personnel related cost reductions we
implemented cost saving measures in several other cost categories including: 1)
lower accounting and financial reporting contractor fees of $116,257 in 2008
compared to $462,730 in 2007; 2) lower IT consulting and systems costs of
$95,388 in 2008 compared to $165,584 in 2007; 3) lower investor relations fees
of $ 67,260 in 2008 compared to $119,304 in 2007; 4) lower recruiting fees of
zero in 2008 compared to $263,270 in 2007; 5) lower travel and entertainment
expenses of $62,398 in 2008 compared to $160,217 in 2007; and 6) lower legal
fees of $234,999 in 2008 as compared to $293,491 in 2007  In addition
audit, tax compliance and Sarbanes Oxley fees were reduced to $191,773 in 2008
from $522,318 in 2007.  These cost savings were partially offset by
higher office rent expense of $300,909 in 2008 compared to $188,855 in 2007
reflecting a full nine months of higher rent on the larger office space we
occupied in August 2007.  We continue to initiate efforts to minimize
general and administrative expenses including the recent engagement a commercial
real estate broker to sublease or otherwise market the excess office space we
have following our staff reductions earlier this year.


Liquidated damages pursuant to
registration rights arrangement.  Our Registration Statement on
Form S-1 was declared effective by the SEC on October 31, 2007 and has been
maintained effective since that date.  Accordingly, we recorded no
liquidated damages pursuant to the registration rights arrangement in the nine
months ended December 31, 2008, as compared to $2,645,393 in the comparable
period in 2007.




Interest expense and financing
costs.For the nine months ended December 31, 2008, we
reflected interest expense and financing costs of $4,594,282 as compared to
$1,555,417 for the corresponding nine months ended December 31,
2007.  The 2008 amount is comprised of interest paid on the Note
Payable issued in October 2007 of $1,069,733 and amortization of deferred
financing costs and discount on notes payable of  $3,524,549.The 2007
amount is comprised of $442,108 of interest paid on the Note Payable and
$1,13,309 of amortization of deferred financing costs and discount on Note
Payable.




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The
following is a summary of Rancher Energy’s comparative cash flows:




For
      the Nine Months Ended
              December
      31,2008
            
            
            2007Cash
      flows from:Operating
      activities
            
            $
            (2,399,188
            )
            
            $
            (3,560,062
            )Investing
      activities
            
            $
            (670,188
            )
            
            $
            (2,393,803
            )Financing
      activities
            
            $
            (2,341,470
            )
            
            $
            11,077,073




Cash
flows used for operating activities decreased as a result of lower general and
administrative expenses as discussed above, partially offset by payments to
settle derivative activity losses and interest expense incurred in connection
with the October 2007 short term financing.




Cash
flows used for investing activities decreased in the 2008 period compared to the
2007 period as we expended significantly less on oil and gas properties,
$230,000 in 2008 compared to $2,088,000 in 2007.  In response to our
lack of success in securing additional financing during the period, we have
curtailed capital spending to the minimum required to maintain current levels of
crude oil production.




Cash
flows used for financing activities  in 2008 includes the repayment of
a portion of the debt incurred in 2007 ($2,240,000) and  financing
costs incurred to complete requirements of the short term debt agreement
..  The source of cash in 2007 represents the proceeds for the short
term debt, net of offering and finance costs.




Off-Balance Sheet
Arrangements




Under the
terms of the Term Credit Agreement entered into in October 2007 we were required
to hedge a portion of our expected production and we entered into a costless
collar agreement for a portion of our anticipated future crude oil production.
The costless collar contains a fixed floor price (put) and ceiling price
(call). If the index price exceeds the call strike price or falls below the put
strike price, we receive the fixed price and pay the market price. If the market
price is between the call and the put strike price, no payments are due from
either party. During the nine months ended December 31, 2008 we reflected
realized losses of $506,623 and unrealized gains of $1,502,792 from the
hedging activity, compared to realized losses of $57,674 and unrealized losses
of $578,435 for the comparable period of 2007..




We have
no other off-balance sheet financing nor do we have any unconsolidated
subsidiaries.




Critical Accounting Policies
and Estimates




Critical
accounting policies and estimates are provided in Part II, Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, to the
Annual Report on Form 10-K for the year ended March 31, 2008. Additional
footnote disclosures are provided in Notes to Consolidated Financial Statements
in Part I, Financial Information, Item 1, Financial Statements to this Quarterly
Report on Form 10-Q for the three months ended December 31, 2008.




Item 3.  Quantitative and Qualitative Disclosure About Market
Risk.




Commodity Price
Risk




Our
revenues could be subject to significant fluctuation based on pricing applicable
to our oil production.  However, because of our relatively low level
of current oil and gas production, we have not been exposed to a great degree of
market risk.  Our ability to raise additional capital at attractive
pricing, our future revenues from oil and gas operations, our future
profitability and future rate of growth depend substantially upon the market
prices of oil and natural gas, which fluctuate widely. With increases to our
production, exposure to this risk will become more significant. We expect
commodity price volatility to continue. In connection with our short term
financing in October 2007, we entered into an oil hedge agreement covering
approximately 75% of our proved developed producing reserves scheduled to be
produced during a two-year period. Terms of future debt facilities may also
require that we hedge a portion of our expected future production.




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Financial Market
Risk




The debt
and equity markets have recently exhibited adverse conditions. The unprecedented
volatility and upheaval in the capital markets may impact our ability to
refinance or extend our existing short term debt when it matures on April 30,
2009.  Alternatively, market conditions may affect the availability of
capital for prospective purchasers of our assets or equity as contemplated under
our arrangement with Growth Capital.




Item 4.  Controls and Procedures.




Disclosure Controls and
Procedures




We
conducted an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Accounting Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. The term “disclosure controls and procedures,” as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(Exchange Act), means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by the company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission’s rules and forms. Disclosure controls and procedures also
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
company’s management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. We identified a material
weakness in our internal control over financial reporting and, as a result of
this material weakness, we concluded as of March 31, 2008 and as of the end of
the period covered by this Quarterly Report on Form 10-Q, that our disclosure
controls and procedures were not effective.




Changes in Internal Control over
Financial Reporting




There
have been no changes in our internal control over financial reporting during the
most recently completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




PART II. OTHER INFORMATION.




Item 2.  Unregistered Sales of Equity Securities and Use of
Proceeds.




On
December 31, 2008, pursuant to our compensation arrangement with our
non-employee directors, we issued 2,653,845 shares of our common stock in the
aggregate under our 2006 Stock Incentive Plan to our non-employee directors for
their service on our Board of Directors and for attending board and committee
meetings, as the case may be.  More specifically, we issued to the
following directors the shares specified: (i) William A. Anderson 634,615
shares; (ii) Joseph P. McCoy, 721,154 shares; (iii) Patrick M. Murray,
432,692 shares; (iv) Myron M. Sheinfeld, 432,692 shares, and (v) Mark Worthey,
432,692 shares.





The
foregoing issuances were made pursuant to Section 4(2) of the Securities
Act.





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Item 6.  EXHIBITS.




Exhibit
            Description3.1
            Amended
      and Restated Articles of Incorporation (17)3.2
            Articles
      of Correction (22)3.3
            Amended
      and Restated Bylaws (2)4.1
            Form
      of Stock Certificate for Fully Paid, Non-Assessable Common Stock of the
      Company (1)4.2
            Form
      of Unit Purchase Agreement (2)4.3
            Form
      of Warrant Certificate (2)4.4
            Form
      of Registration Rights Agreement, dated December 21, 2006 (3)4.5
            Form
      of Warrant to Purchase Common Stock (3)10.1
            Burke
      Ranch Unit Purchase and Participation Agreement between Hot Springs
      Resources Ltd. and PIN Petroleum Partners Ltd., dated February 6,
      2006(4)10.2
            Employment
      Agreement between John Works and Rancher Energy Corp., dated June 1, 2006
      (5)10.3
            Assignment
      Agreement between PIN Petroleum Partners Ltd. and Rancher Energy Corp.,
      dated June 6, 2006 (5)10.4
            Loan
      Agreement between Enerex Capital, Corp. and Rancher Energy Corp., dated
      June 6, 2006 (5)10.5
            Letter
      Agreement between NITEC LLC and Rancher Energy Corp., dated June 7, 2006
      (5)10.6
            Loan
      Agreement between Venture Capital First LLC and Rancher Energy Corp.,
      dated June 9, 2006 (6)10.7
            Exploration
      and Development Agreement between Big Snowy Resources, LP and Rancher
      Energy Corp., dated June 15, 2006 (5)10.8
            Assignment
      Agreement between PIN Petroleum Partners Ltd. and Rancher Energy Corp.,
      dated June 21, 2006 (5)10.9
            Purchase
      and Sale Agreement between Wyoming Mineral Exploration, LLC and Rancher
      Energy Corp., dated August 10, 2006 (4)10.10
            South
      Glenrock and South Cole Creek Purchase and Sale Agreement by and between
      Nielson and Associates, Inc. and Rancher Energy Corp., dated October 1,
      2006 (7)10.11
            Rancher
      Energy Corp. 2006 Stock Incentive Plan(7)10.12
            Rancher
      Energy Corp. 2006 Stock Incentive Plan Form of Option Agreement (7)10.13
            Denver
      Place Office Lease between Rancher Energy Corp. and Denver Place
      Associates Limited Partnership, dated October 30, 2006 (8)10.14
            Finder’s
      Fee Agreement between Falcon Capital and Rancher Energy Corp. (10)10.15
            Amendment
      to Purchase and Sale Agreement between Wyoming Mineral Exploration, LLC
      and Rancher Energy Corp. (11)10.16
            Letter
      Agreement between Certain Unit Holders and Rancher Energy Corp., dated
      December 8, 2006 (2)10.17
            Letter
      Agreement between Certain Option Holders and Rancher Energy Corp., dated
      December 13, 2006(2)10.18
            Product
      Sale and Purchase Contract by and between Rancher Energy Corp. and the
      Anadarko Petroleum Corporation, dated December 15, 2006 (12)10.19
            Amendment
      to Purchase and Sale Agreement between Nielson and Associates, Inc. and
      Rancher Energy Corp. (13)10.20
            Securities
      Purchase Agreement by and among Rancher Energy Corp. and the Buyers
      identified therein, dated December 21, 2006 (3)10.21
            Lock-Up
      Agreement between Rancher Energy Corp. and Stockholders identified
      therein, dated December 21, 2006 (3)10.22
            Voting
      Agreement between Rancher Energy Corp. and Stockholders identified
      therein, dated as of December 13, 2006 (3)10.23
            Form
      of Convertible Note (14)







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Exhibit
            Description10.24
            First
      Amendment to Securities Purchase Agreement by and among Rancher Energy
      Corp. and the Buyers identified therein, dated as of January 18, 2007
      (16)10.25
            Rancher
      Energy Corp. 2006 Stock Incentive Plan Form of Restricted Stock Agreement
      (17)10.26
            First
      Amendment to Employment Agreement by and between John Works and Rancher
      Energy Corp., dated March 14, 2007 (18)10.27
            Employment
      Agreement between Richard Kurtenbach and Rancher Energy Corp., dated
      August 3, 2007(19)10.28
            Term
      Credit Agreement between Rancher Energy Corp. and GasRock Capital LLC,
      dated as of October 16, 2007 (20)10.29
            Term
      Note made by Rancher Energy Corp. in favor of GasRock Capital LLC, dated
      October 16, 2007 (20)10.30
            Mortgage,
      Security Agreement, Financing Statement and Assignment of Production and
      Revenues from Rancher Energy Corp. to GasRock Capital LLC, dated as of
      October 16, 2007 (20)10.31
            Security
      Agreement between Rancher Energy Corp. and GasRock Capital LLC, dated as
      of October 16, 2007 (20)10.32
            Conveyance
      of Overriding Royalty Interest by Rancher Energy Corp. in favor of GasRock
      Capital LLC, dated as of October 16, 2007 (20)10.33
            ISDA
      Master Agreement between Rancher Energy Corp. and BP Corporation North
      America Inc., dated as of October 16, 2007 (20)10.34
            Restricted
      Account and Securities Account Control Agreement by and among Rancher
      Energy Corp., GasRock Capital LLC, and Wells Fargo Bank, National
      Association, dated as of October 16, 2007 (20)10.35
            Intercreditor
      Agreement by and among Rancher Energy Corp., GasRock Capital LLC, and BP
      Corporation North America Inc., dated as of October 16, 2007 (21)10.36
            First
      Amendment to Denver Place Office lease between Rancher Energy Corp. and
      Denver Place Associates Limited Partnership, dated March 6, 2007. (18)10.37
            Carbon
      Dioxide Sale & Purchase Agreement between Rancher Energy corp. and
      ExxonMobil Gas & Power Marketing Company, dated February 14, 2008
      (Certain portions of this agreement have been redacted and have been filed
      separately with the Securities and Exchange Commission pursuant to a
      Confidential Treatment Request). (21)10.38
            Letter
      Agreement between Rancher Energy Corp. and Growth Capital Partners,
      LP(22)10.39
            First
      Amendment to Term Credit Agreement, dated October 22, 2008(23)31.1
            Certification
      Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Executive
    Officer)31.2
            Certification
      Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Accounting
      Officer)32.1
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 200232.2
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002







(1)  Incorporated
by reference from our Current Report on Form 8-K filed on April 3,
2007.


(2)
Incorporated by reference from our Form 10-Q for the quarterly period ended
September 30, 2007.


(3)
Incorporated by reference from our Current Report on Form 8-K filed on December
18, 2006.


(4)
Incorporated by reference from our Form SB-2 Registration Statement filed on
June 9, 2004.


(5)
Incorporated by reference from our Current Report on Form 8-K filed on December
27, 2006.


(6)
Incorporated by reference from our Quarterly Report on Form 10-Q/A filed on
August 28, 2006.


(7)
Incorporated by reference from our Annual Report on Form 10-K filed on June 30,
2006.


(8)
Incorporated by reference from our Current Report on Form 8-K filed on June 21,
2006.


(9)
Incorporated by reference from our Current Report on Form 8-K filed on October
6, 2006.


(10)
Incorporated by reference from our Current Report on Form 8-K filed on November
9, 2006.


(11)
Incorporated by reference from our Current Report on Form 8-K/A filed on
November 14, 2006.


(12)
Incorporated by reference from our Current Report on Form 8-K filed on December
4, 2006.


(13)
Incorporated by reference from our Current Report on Form 8-K filed on December
22, 2006.


(14)
Incorporated by reference from our Current Report on Form 8-K filed on December
27, 2006.


(15)
Incorporated by reference from our Current Report on Form 8-K filed on January
8, 2007.


(16)
Incorporated by reference from our Current Report on Form 8-K filed on January
25, 2007.


(17)
Incorporated by reference from our Annual Report on Form 10-K filed on June 29,
2007.


(18)
Incorporated by reference from our Current Report on Form 8-K filed on March 20,
2007.


(19)
Incorporated by reference from our Current Report on Form 8-K filed on August 7,
2007.


(20)
Incorporated by reference from our Current Report on Form 8-K filed on October
17, 2007.


(21)
Incorporated by reference from our Current Report on Form 8-K filed on February
14, 2008.


(22)
Incorporated by reference from our Current Report on Form 8-K filed on August 7,
2008.


(23)
Incorporated by reference from our Current Report on Form 8-K filed on October
23, 2008.






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SIGNATURES






Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




RANCHER ENERGY CORP.,
      RegistrantDated:  February
      17, 2009
            By:
            /s/
      John WorksJohn
      Works, President, Chief Executive Officer,Chief
      Financial Officer, Secretary and Treasurer(Principal
      Executive Officer)Dated:  February
      17, 2009
            By:
            /s/
      Richard E. KurtenbachRichard
      E. Kurtenbach, Chief Accounting Officer(Principal
      Accounting Officer)