Lucero Energy : Q2 2023 MD&A and Financial Statements

Management's Discussion and Analysis

For the three and six months ended

June 30, 2023 and 2022

MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis (the "MD&A") has been prepared by management and was reviewed and approved by the Board of Directors of Lucero Energy Corp. ("Lucero" or the "Company") on August 3, 2023. This MD&A should be read in conjunction with the Company's unaudited interim consolidated financial statements as at and for the three and six months ended June 30, 2023 and the audited consolidated financial statements as at and for the year ended December 31, 2022. The reader should be aware that the operating results discussed below may not be indicative of future performance.

The financial data presented below has been prepared in accordance with International Financial Reporting Standards ("IFRS"), unless otherwise indicated.

Frequently Used Terms

Term	Description
Bbl(s)	Barrel(s)
Boe	Barrel(s) of oil equivalent
Bbls/d	Barrels per day
Boepd	Barrels of oil equivalent per day
HH	Henry Hub, reference price paid in US$ for natural gas deliveries
Mcf	Thousand cubic feet
Mmbtu	Million British Thermal Units
Mmbtu/d	Million British Thermal Units per day
NGLs	Natural gas liquids
WTI	West Texas Intermediate, reference price paid in US$ for crude oil of standard grade

Barrel of Oil Equivalent Advisory

Where amounts are expressed on a Boe basis, natural gas volumes have been converted to Boe using a ratio of 6,000 cubic feet of natural gas to one barrel of oil (6 Mcf:1 Bbl). This Boe conversion ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. The value ratio between the commodities, based on the price of crude oil compared to natural gas, could be significantly different from the energy equivalency of 6 Mcf: 1 Bbl, and therefore utilizing this conversion ratio may be misleading as an indication of value.

Presentation of Volumes

The Company's reserves have been categorized as Tight Oil, Shale Gas, and Natural Gas Liquids pursuant to National Instrument 51- 101, Standards of Disclosure for Oil and Gas Activities ("NI 51-101"). Production volumes and per Boe calculations are presented on a gross working interest basis, before royalty interests, unless otherwise stated.

Functional and Presentation Currency

Amounts in this MD&A are in Canadian dollars, which is the Company's presentation currency, unless otherwise stated. Transactions of the Company's US subsidiary are recorded in US dollars, as this is the primary economic environment in which this subsidiary operates. The US subsidiary has a US dollar functional currency. In translating the financial results from US dollars to Canadian dollars, the Company uses the following method: assets and liabilities are translated at the exchange rate in effect as at the date of the consolidated balance sheet; revenues and expenses are translated at the rate effective at the time of the transaction or the average rate for the period; and changes in shareholders' equity are translated at the rate effective at the time of the transaction. Unrealized gains and losses resulting from the translation to the Canadian dollar presentation currency are included in other comprehensive income.

Lucero Energy Corp.

Q2 2023

Page 2

MANAGEMENT'S DISCUSSION AND ANALYSIS

Non-GAAP and Other Financial Measures

Throughout this MD&A and in other materials disclosed by the Company, Lucero uses certain measures to analyze historical financial performance, financial position and cash flow. These non-GAAP and other financial measures are not defined by IFRS and therefore may not be comparable to performance measures presented by others. These non-GAAP and other financial measures should not be considered to be more meaningful than GAAP measures which are defined by IFRS, such as net income or cash provided by operating activities, as indicators of the Company's performance.

Non-GAAP Financial Measures

Exploration and Development Expenditures

Lucero uses exploration and development expenditures to measure the Company's investments in capital compared to the Company's annual capital budget. The most directly comparable GAAP measure to exploration and development expenditures is additions to property, plant and equipment in the cash used in investing activities. The reconciliation between additions to property, plant and equipment, as defined by IFRS, and exploration and development expenditures, as defined herein, is as follows:

	Three months ended	Six months ended
		June 30,		June 30,
($ thousands)	2023	2022	2023	2022
Additions to property, plant and equipment	$30,583	$8,227	$62,642	$20,018
Capitalized general and administrative expenses	(782)	(873)	(1,526)	(1,602)
Exploration and development expenditures	$29,801	$7,354	$61,116	$18,416

Capital Expenditures (Proceeds)

In addition to Exploration and Development Expenditures, Lucero uses capital expenditures to quantify the Company's investments in property, plant and equipment. The most directly comparable GAAP measure to capital expenditures is cash provided by (used in) investing activities. The reconciliation between cash provided by (used in) investing activities, as defined by IFRS, and capital expenditures, as defined herein, is as follows:

	Three months ended	Six months ended
		June 30,		June 30,
($ thousands)	2023	2022	2023	2022
Cash (provided by) used in investing activities	($86,642)	$22,179	($51,325)	$42,189
Change in non-cash investing working capital	3,982	(5,301)	724	(13,520)
Capitalized share-based compensation	1,285	427	2,027	747
Decommissioning obligations	(2,076)	(1,802)	(1,457)	(2,886)
Deferred Proceeds pursuant to the Disposition	(6,644)	-	(6,644)	-
Gain on disposition	450	-	450	-
Capital expenditures (proceeds)	($89,645)	$15,503	($56,225)	$26,530

Lucero Energy Corp.

Q2 2023

Page 3

MANAGEMENT'S DISCUSSION AND ANALYSIS

Funds Flow and Funds Flow, Excluding Transaction Related Costs

Funds flow represents cash provided by operating activities prior to changes in non-cash working capital and including cash finance expenses. Funds flow, excluding transaction related costs, represents cash provided by operating activities prior to changes in non-cash working capital and transaction related costs, including cash finance expenses. Lucero considers these measures to be useful as they assist in the determination of the Company's ability to generate liquidity necessary to finance capital expenditures, settlement of decommissioning obligations and service its debt. Transaction related costs are incurred during asset acquisitions or dispositions, corporate acquisitions, or corporate reorganizations and are typically not considered a cost incurred in the normal course of business. As a result, excluding transaction related costs from funds flow further assists in the determination of the Company's ability to generate liquidity in the normal course of business.

	Three months ended	Six months ended
		June 30,		June 30,
($ thousands)	2023	2022	2023	2022
Cash provided by operating activities	$43,183	$44,634	$78,101	$82,876
Finance expenses - cash	(1,366)	(1,627)	(2,953)	(3,690)
Changes in non-cash operating working capital	(10,539)	(7,990)	(3,976)	(10,568)
Other	(15)	-	-	-
Funds flow	$31,263	$35,017	$71,172	$68,618
Transaction related costs	2,454	-	2,454	2,100
Funds flow, excluding transaction related costs	$33,717	$35,017	$73,626	$70,718

Adjusted Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA")

Lucero uses adjusted EBITDA, which represents cash provided by operating activities prior to changes in non-cash working capital, to measure the Company's ability to generate funds to service debt and other obligations and to fund the Company's operations, without the impact of changes in non-cash working capital which can vary based solely on timing of settlement of accounts receivable and accounts payable. The reconciliation between cash flow from operating activities, as defined by IFRS, and adjusted EBITDA, as defined herein, is as follows:

	Three months ended	Six months ended
		June 30,		June 30,
($ thousands)	2023	2022	2023	2022
Cash provided by operating activities	$43,183	$44,634	$78,101	$82,876
Changes in non-cash operating working capital	(10,539)	(7,990)	(3,976)	(10,568)
Adjusted EBITDA	$32,644	$36,644	$74,125	$72,308

Operating Netback and Operating Netback Prior to Hedging

Operating netback represents petroleum and natural gas revenues, plus or minus any realized gain or loss on financial derivatives, less royalties, operating expenses, production taxes, and transportation expenses. Operating netback prior to hedging represents operating netback prior to any realized gain or loss on financial derivatives. Lucero believes that in addition to net income and cash provided by operating activities, operating netback and operating netback prior to hedging are useful supplemental measures as they assist in the determination of the Company's operating performance, leverage, and liquidity. Operating netback is commonly used by investors to assess performance of oil and gas properties and the possible impact of future commodity price changes on energy producers.

The table below discloses Lucero's operating netback and operating netback prior to hedging, including the reconciliation to the Company's most closely comparable GAAP measure, petroleum and natural gas revenues.

	Three months ended	Six months ended
		June 30,		June 30,
($ thousands)	2023	2022	2023	2022
Petroleum and natural gas revenues	$64,764	$94,736	$138,491	$179,579
Royalties	(10,888)	(18,075)	(24,019)	(33,918)
Operating expenses	(10,081)	(8,500)	(19,692)	(16,164)
Production taxes	(4,979)	(7,589)	(10,849)	(13,389)
Transportation expenses	(1,747)	(1,909)	(3,489)	(3,613)
Operating netback prior to hedging	$37,069	$58,663	$80,442	$112,495
Realized loss on financial derivatives	-	(20,255)	-	(34,577)
Operating netback	$37,069	$38,408	$80,442	$77,918

Lucero Energy Corp.

Q2 2023

Page 4

MANAGEMENT'S DISCUSSION AND ANALYSIS

Working Capital (Net Debt)

Working capital (net debt) represents current assets (excluding financial derivative assets), less total liabilities (excluding decommissioning obligations, deferred tax liability, lease liability and financial derivative liability). Lucero believes working capital (net debt) is a key measure to assess the Company's liquidity position at a point in time. Working capital (net debt) is not a standardized measure and may not be comparable with similar measures for other entities. The reconciliation between current assets, as defined by IFRS, and working capital (net debt), as defined herein, is as follows:

	As at June 30, 2023	As at December 31, 2022	As at June 30, 2022
Total current assets	$99,865	$34,098	$40,700
Total liabilities	(97,023)	(149,123)	(182,652)
Decommissioning obligations	4,479	5,993	5,288
Deferred tax liability	41,609	30,553	12,064
Financial derivative liability	-	-	15,934
Lease liability	821	1,053	1,215
Working capital (net debt)	$49,751	($77,426)	($107,451)

Non-GAAP Financial Ratios

Adjusted EBITDA per Share Basic and Diluted

The Company calculates adjusted EBITDA per share basic and diluted as adjusted EBITDA divided by weighted average basic and diluted shares outstanding, respectively. Adjusted EBITDA is a non-GAAP financial measure. Lucero believes that adjusted EBITDA per share basic and diluted are key industry performance measures of the Company's ability to generate liquidity and are common measures within the oil and gas industry.

Funds Flow and Funds Flow, Excluding Transaction Costs per Share Basic and Diluted

The Company calculates funds flow per share basic and diluted as funds flow divided by weighted average basic and diluted shares outstanding, respectively. Funds flow, excluding transaction costs per share basic and diluted is calculated as funds flow, excluding transaction costs divided by weighted average basic and diluted shares outstanding, respectively. Funds flow and funds flow, excluding transaction costs are non-GAAP financial measures. Lucero believes that funds flow per share basic and diluted and funds flow, excluding transaction costs per share basic and diluted are key industry performance measures of the Company's ability to generate liquidity and are common measures within the oil and gas industry.

Operating Netback per Boe and Operating Netback Prior to Hedging per Boe

The Company calculates operating netback per Boe as operating netback divided by production for the period. Operating netback prior to hedging per Boe is calculated as operating netback prior to hedging divided by production for the period. Operating netback and operating netback prior to hedging are non-GAAP financial measures. Lucero believes that operating netback per Boe and operating netback prior to hedging per Boe are key industry performance measures of operational efficiency and are common measures within the oil and gas industry.

Supplementary Financial Measures

In this MD&A, the Company uses the following supplementary financial measures, which have the following meaning.

"Average realized NGLs price" (per Bbl) is comprised of NGLs commodity sales from production, as determined in accordance with IFRS, divided by the Company's NGLs production, expressed in US$ or C$, as applicable.

"Average realized shale gas price" (per Mcf) is comprised of shale gas commodity sales from production, as determined in accordance with IFRS, divided by the Company's shale gas production, expressed in US$ or C$, as applicable.

"Average realized tight oil price" (per Bbl) is comprised of tight oil commodity sales from production, as determined in accordance with IFRS, divided by the Company's tight oil production, expressed in US$ or C$, as applicable.

"Depletion and depreciation expenses per BOE" is comprised of the Company's depletion and depreciation expenses, as determined in accordance with IFRS, divided by the Company's total production (on a BOE basis).

(continued)

Lucero Energy Corp.

Q2 2023

Page 5