Mr. Robert Cross reports

ZODIAC EXPLORATION INC. ANNOUNCES ACQUISITION OF MUSKWA RESOURCES LTD.

Zodiac Exploration Inc. has entered into a definitive agreement with Muskwa Resources Ltd. whereby Zodiac has agreed, subject to certain conditions, to acquire all of the issued and outstanding common shares of Muskwa. Muskwa is a private oil and gas company incorporated in 2008 with approximately 54,240 acres of land in central Alberta, primarily in the Duvernay and Nordegg formations, and pending asset acquisitions in Montana from Jackfish Exploration Inc. and Tanglewood Energy Inc. that will add up to approximately 24,000 net acres of land upon satisfaction of certain conditions under the agreements relating to the Jackfish and Tanglewood acquisitions, including satisfaction of the earning conditions under the Jackfish farm-in agreement (as defined herein).

The acquisition is expected to be completed by way of an amalgamation and is subject to customary approvals, including approval by Muskwa shareholders and the approval of the TSX Venture Exchange. Closing of the acquisition is expected to occur on or prior to Nov. 30, 2013.

Transaction highlights

Alberta assets of Muskwa:

• Muskwa is a top holder of Duvernay rights in Alberta with a total of 54,240 acres of land in central Alberta, primarily in the Duvernay and Nordegg formations (49,760 contiguous 100-per-cent-working-interest acres in the Duvernay light oil resource window) plus an option to acquire up to an additional 6,880 acres.
• Muskwa's land position has significant stacked resource potential in the Duvernay, Nordegg, Montney and Beaverhill Lake formations.
• GLJ Petroleum Consultants Ltd. has provided Muskwa with an evaluation dated Oct. 25, 2012, and effective as of June 30, 2012, in accordance with the requirements of National Instrument 51-101 -- Standards of Disclosure for Oil and Gas Activities on the undiscovered petroleum initially in place on the 39,680 acres of lands held by Muskwa at such time. Using the same methodology as GLJ utilized in the preparation of the GLJ report, a member of Muskwa's management team, who is a qualified reserves evaluator for the purposes of National Instrument 51-101, has provided an estimate of the undiscovered petroleum initially in place effective as of Dec. 31, 2012, for the additional 11,520 acres acquired by Muskwa since the date of the GLJ report, which estimates are set forth as shown in the table.
• The industry has spent over $6-billion on land, corporate acquisitions and wells on the Duvernay play.
• Significant interest and activity exists in the area in which Muskwa holds land with over 90 wells drilled by large producers actively proving up the Duvernay light oil window with commercial results and there have been several recent commercial discoveries in the Duvernay light oil window to the south of Muskwa's land position

             UNDISCOVERED PETROLEUM INITIALLY IN PLACE(1)

Formation       Estimate     GLJ report     Muskwa internal       Total
                         (STB 000)(2)(4)        estimate(3)  (STB 000)(4)
                                               (STB 000)(4)

Duvernay    Low estimate        434,116            142,132        576,248
            Best estimate       868,232            284,275      1,152,507
            High estimate     1,519,407            497,473      2,016,880
Middle
Nordegg     Low estimate        120,401             70,713        191,114
            Best estimate       229,941            122,412        352,362
            High estimate       344,912            183,635        528,547
Lower
Nordegg     Low estimate        192,076            117,311        309,387
            Best estimate       320,126            195,517        515,643
            High estimate       512,212            312,828        825,030
Notes:
1. Undiscovered petroleum initially in place is that quantity of 
petroleum that is estimated, on a given date, to be contained in 
accumulations yet to be discovered. There is no certainty that any 
portion of the resources will be discovered. If discovered, there is no 
certainty that it will be commercially viable to produce any portion of 
the resources. Further subcategorization of the reported resources 
volumes was not possible at the time the foregoing estimates were made as 
a recovery project could not be defined for such resource volumes.
2. The GLJ report is dated Oct. 25, 2012, and effective as of June 30, 
2012.
3. The Muskwa internal estimate was prepared on Jan. 15, 2013, with an 
effective date as of Dec. 31, 2012, and was prepared by a member of 
management, who is a qualified reserves evaluator for the purposes of 
National Instrument 51-101, using the same methodology as utilized by GLJ 
in its preparation of the GLJ report.
4. STB: stock tank barrels. Figures reported in thousands of stock tank 
barrels of oil. 

Jackfish assets (Montana):

• Muskwa has entered into a definitive purchase and sale agreement dated Oct. 3, 2013, with Jackfish, whereby Muskwa will acquire, prior to closing of the acquisition and subject to customary closing conditions, the entire interest of Jackfish under a farm-in agreement to which Jackfish is currently a party whereby, assuming closing of the transaction with Jackfish, Muskwa will have the right to farm in on approximately 12,000 gross acres (9,000 net acres after earning is completed under the farm-in agreement) located in southern Montana, which management of Zodiac and Muskwa believe are prospective for light oil in the Grey Bull (Cretaceous) formation.
• Zodiac has reviewed the 2-D seismic results for the channel play in the Grey Bull formation at a depth of approximately 1,500 metres and is encouraged by these results.
• Assuming completion of the transactions, Zodiac plans to shoot a 3-D seismic program and drill two evaluation wells by June 30, 2014, and will be required to do so in order to fulfill the earning requirements under the Jackfish farm-in agreement.
• Management of Muskwa and Zodiac believe that the acquisition of the Jackfish assets is a low-cost exploration opportunity (approximately $600,000 (U.S.) to drill, test, complete and equip wells on the lands making up the Jackfish assets).

Tanglewood assets (Montana):

• Muskwa has entered into a definitive purchase and sale agreement dated Oct. 7, 2013, with Tanglewood whereby it is proposed that Muskwa will acquire, prior to closing of the acquisition and subject to customary closing conditions, approximately 30,000 gross acres (15,000 net acres) located in northern Montana.
• Zodiac has reviewed the 3-D seismic results for a Nisku play at approximately 1,500 metres and is encouraged by these results.
• Management of Muskwa and Zodiac believe that the acquisition of the Tanglewood assets is a low-cost exploration opportunity (approximately $600,000 (U.S.) to drill, test, complete and equip wells on the lands comprising the Tanglewood assets) adjacent to existing production in the prospective Devonian horizons.

Pro forma highlights:

• Large conventional and unconventional light oil asset base across several regions of North America provides excellent diversification;
• Conventional light oil assets offer potential for near-term light oil production and cash flow to maintain financial flexibility;
• Based on the GLJ report and the management resource estimates set forth above, Muskwa and its assets provide a multibillion-barrel, unconventional light oil resource opportunity in North America's prolific shale regions;
• Drill-ready prospects in Montana provide potential near-term production catalysts;
• Addition of proven technical and management team members to assist in the growth of Zodiac.

Detailed asset overview

Alberta assets (100-per-cent working interest)

Zodiac is particularly excited about the acquisition of Muskwa's material prospective acreage position in the Duvernay formation. Often cited as Canada's answer to the prolific Eagle Ford shale in the United States, the Duvernay formation is estimated, as of June, 2012, by the Alberta Geological Survey to have 443 trillion cubic feet of natural gas and 73 billion barrels of oil and natural gas liquids in place.

There have been numerous significant commercial results over recent months in the Kaybob area to the south of Muskwa's land position. In 2012, Athabasca Oil Corp. announced a well into the light oil window of the Duvernay that had initial 30-day production of 780 barrels of oil equivalent per day (Athabasca corporate presentation at Barclays CEO Energy-Power Conference, Sept. 12, 2013). EnCana Corp. recently announced a well in the area with a production test in excess of 2,000 barrels of oil equivalent per day (EnCana press release, May 28, 2013). Trilogy Energy Corp. recently announced exciting results from a four-well pad with average production test rates of 1,940 barrels of oil equivalent per day (Trilogy press release, September 26, 2013).

There has also been extensive acquisition activity in the area as well. Previous transactions in the Duvernay include the joint venture between EnCana and a wholly owned subsidiary of PetroChina Company Ltd. involving 445,000 acres at an implied purchase price of $9,800 per acre (including carry) (EnCana press release, Dec. 13, 2012), Shell's acquisition of 29,760 acres of Duvernay rights from Lightstream Resources Ltd. (formerly PetroBakken Energy Ltd.) for $82.5-million ($2,772 per acre) (Lightstream press release, April 11, 2012) and Sonde Resources Corp.'s sale of 24,383 acres of Duvernay acreage for $75-million ($3,125 per acre) (Sonde Resources press release, Feb. 8, 2012).

Jackfish assets (Montana) (75-per-cent working interest after earning)

Muskwa has entered into a definitive purchase and sale agreement dated Oct. 3, 2013, with Jackfish to acquire the right to farm in on approximately 12,000 gross acres in Montana pursuant to the Jackfish farm-in agreement which management of Muskwa and Zodiac believe are prospective for light oil in the Grey Bull formation. In connection with the Jackfish acquisition, Muskwa will issue Jackfish 10,173,324 Muskwa shares at a deemed value of 10 cents per Muskwa share and will pay Jackfish $385,000 in cash. One hundred per cent of the shareholders of Jackfish have entered into voting support agreements with Muskwa pursuant to which they have agreed to vote their shares of Jackfish in favour of the Jackfish acquisition. Muskwa anticipates closing the Jackfish acquisition on or before Oct. 11, 2013. Assuming completion of the Jackfish acquisition by Muskwa and the acquisition by Zodiac and Muskwa, Zodiac plans to execute a 3-D seismic program over the coming months and to drill two evaluation wells to test a Grey Bull channel sand play on the Jackfish lands. Completion of the 3-D seismic program and the drilling, testing and completion of two evaluation wells by June 30, 2014, will satisfy Zodiac's earning obligations under the Jackfish farm-in agreement and will allow Zodiac to earn a 75-per-cent working interest in 12,000 acres. It is a condition to closing of the acquisition, in favour of Zodiac, that Muskwa shall have completed the Jackfish acquisition.

Tanglewood assets (Montana) (50-per-cent working interest)

Muskwa has entered into a definitive purchase and sale agreement dated Oct. 7, 2013, with Tanglewood to acquire approximately 15,000 net acres in Montana that management of Muskwa and Zodiac believe to be prospective for light oil in the Nisku formation. In connection with the Tanglewood acquisition, Muskwa will issue Tanglewood 10 million Muskwa shares and pay Tanglewood $100,000 in cash. Approximately 67 per cent of the shareholders of Tanglewood have entered into voting support agreements with Muskwa pursuant to which they have agreed to vote their shares of Tanglewood in favour of the Jackfish acquisition. Muskwa anticipates closing the Tanglewood acquisition on or before Oct. 31, 2013. It is a condition to closing of the acquisition, in favour of Zodiac, that Muskwa shall have completed the acquisition of the Tanglewood assets. In connection with the closing of the Tanglewood acquisition, Muskwa intends to acquire 3-D seismic covering 39 square miles of the Tanglewood assets from a company controlled by the president and chief executive officer of Zodiac for consideration consisting of 800,000 Muskwa shares.

Management and board additions

Lee Pettigrew, a current director of Muskwa, will be joining Zodiac's board of directors upon completion of the acquisition. Mr. Pettigrew is currently president and chief executive officer of Mercari Capital Corp., a private merchant bank, and brings more than 20 years of senior investment banking experience and capital markets expertise to the Muskwa board. Mr. Pettigrew began his career on Wall Street with the First Boston Corp. After joining Gordon Capital, he moved to Calgary in 1992 to co-head Gordon's energy practice. In 1995, he became one of nine founding partners of Newcrest Capital Inc., where he headed the energy group and ran the Calgary office until the firm's $250-million sale to Toronto-Dominion Bank. After serving as a managing director of TD Securities for two years, Mr. Pettigrew became a founding partner and largest shareholder of Orion Securities and played a major part in the growth of the firm until its sale to Macquarie Bank. After serving as a managing director of Macquarie for two years, he left to pursue early stage energy merchant banking. Mr. Pettigrew is a graduate (with distinction) of the Richard Ivey School of Business Administration at the University of Western Ontario.

It is expected that in connection with closing of the acquisition, three members of Muskwa's management team, Rick Jackson, Max Zureski and David Bilenduke, will join Zodiac in management roles.

Rick Jackson, PEng, is the current president and chief executive officer of Muskwa. Mr. Jackson is an experienced engineer and manager, with over 30 years industry experience. He spent 28 years with Chevron Canada managing operations with over 25,000 barrels of oil equivalent per day of production and annual operating budgets in excess of $40-million. He has hands-on experience in production, completions, facilities and reservoir evaluations. Mr. Jackson held key positions in strategic planning and New Ventures at Chevron. With these responsibilities, he identified, evaluated and closed on several major initiatives. In his final years at Chevron, Mr. Jackson was the lead negotiator for divestiture of all of Chevron's Canadian assets.

Max Zureski, CA, CBV, is the current chief financial officer and vice-president, finance, of Muskwa. Mr. Zureski has 15 years of experience in accounting and finance. He began his career at Deloitte, obtaining his chartered accountant and chartered business valuator designations. During his time at Deloitte, Mr. Zureski worked extensively on various energy assignments, domestically and internationally. Mr. Zureski began in equity research and later investment banking with BMO Capital Markets with a focus on the oil and gas, pipeline, and power sectors. He worked on numerous financings, and merger and acquisition assignments. Mr. Zureski later worked as an equity research analyst covering the junior oil and gas, and alternative energy sectors for an independent Canadian dealer.

Dave Bilenduke is the current vice-president, exploration, of Muskwa. Mr. Bilenduke has a 15-year career spanning both conventional and unconventional plays across the Western Canadian sedimentary basin. He has participated in unconventional start-ups from pilot to commercial rollout. He has held positions with increasing responsibility with Canadian Superior, Trident and NuVista. Through Muskwa, Mr. Bilenduke went in house at Daylight to help map that company's unconventional potential on its lands, and subsequently developed, mapped and recommended the lands acquired by Daylight that helped establish the company's Duvernay position. Mr. Bilenduke currently serves as vice-president, exploration, of Muskwa.

Board approvals and recommendations

In connection with Zodiac's review and consideration of the proposed acquisition, Zodiac established a special committee comprising Graeme Phipps (chairman) and John Newman to oversee and supervise the acquisition and the negotiation of the acquisition agreement. The special committee was formed as a result of Robert Cross, chairman of the board of directors of Zodiac, also holding the position as chairman of the board of directors of Muskwa. The board of directors of Zodiac has resolved, with Mr. Cross abstaining, based upon the recommendation of the special committee and the verbal fairness opinion of Zodiac's financial adviser as further described below, that the consideration to be paid by Zodiac pursuant to the acquisition is fair, from a financial point of view, to the shareholders of Zodiac, and is in the best interests of the shareholders of Zodiac.

The board of directors of Muskwa has unanimously approved the acquisition, with Mr. Cross abstaining, and Muskwa has resolved to recommend that its shareholders vote in favour of the acquisition. Holders of approximately 30 per cent of the outstanding Muskwa shares, including all of the directors and officers of Muskwa, have entered into voting support agreements with Zodiac pursuant to which they have agreed to vote their Muskwa shares in favour of the acquisition.

Terms of the acquisition agreement

Under the terms of the acquisition agreement, Muskwa has agreed not to solicit or initiate discussions regarding any other business combination or sale of material assets and has granted Zodiac the right to match any superior proposals. The acquisition agreement also provides for a mutual $300,000 non-completion fee payable to Zodiac or Muskwa, in certain circumstances, if the acquisition is not completed.

The exchange ratio for the Muskwa shares shall be one common share of Zodiac for each issued and outstanding Muskwa share. Additionally, all stock options and performance warrants of Muskwa will be assumed by Zodiac and entitle the holders thereof to acquire an equivalent number of Zodiac shares for a period of 12 months from the closing date of the acquisition. All of the outstanding warrants to purchase Muskwa shares will entitle holders to acquire an equivalent number of Zodiac shares in accordance with their terms.

The Zodiac shares issued in exchange for the Muskwa shares pursuant to the acquisition, other than Muskwa shares issued upon conversion of currently outstanding convertible securities of Muskwa and Muskwa shares issuable pursuant to the Jackfish acquisition and the Tanglewood acquisition, will be subject to voluntary escrow provisions. Upon closing of the acquisition, 15 per cent of the escrowed shares will be immediately released from escrow with a further 15 per cent of the escrowed shares to be released from escrow every three months thereafter.

Pursuant to the terms of the acquisition agreement, Zodiac has agreed to provide Muskwa with a bridge loan in the amount of $2-million to assist Muskwa with the financing of certain operational expenses in connection with its exploration activities as well as certain of its general and administrative expenses. The bridge loan has a term of 180 days, an interest rate of 6 per cent per year and is secured against all of the present and after acquired property of Muskwa.

Closing of the acquisition is anticipated to occur on or before Nov. 30, 2013. It is anticipated that Muskwa will obtain approval for the acquisition from the shareholders of Muskwa by way of written consent resolution or, in the alternative, at a special meeting of shareholders of Muskwa to be called to consider the acquisition.

Current capitalization of Muskwa

Muskwa currently has 55,538,827 Muskwa shares issued and outstanding, 5,704,000 Muskwa options outstanding at a weighted average exercise price of 20 cents per Muskwa share, 2,704,400 Muskwa performance warrants outstanding at a weighted average exercise price of 10 cents per Muskwa share and 30,183,249 Muskwa warrants outstanding at a weighted average exercise price of 37 cents per Muskwa share. Muskwa will issue 10,173,324 Muskwa shares as part of the Jackfish acquisition and will issue a further 10 million Muskwa shares as part of the Tanglewood acquisition plus an additional 800,000 Muskwa shares pursuant to the acquisition of the Tanglewood seismic. Muskwa currently has $495,500 due to certain Muskwa shareholders pursuant to shareholder loans and a $250,000 promissory note the principal amount and all accrued and unpaid interest which shall be converted into Muskwa shares immediately prior to closing of the acquisition at 10 cents per Muskwa share. Muskwa also has outstanding $165,000 principal amount of convertible debentures which will convert into Muskwa shares in accordance with their terms of 10 cents per unit immediately prior to closing of the acquisition. Each unit will consist of one Muskwa share and one-quarter of one share purchase warrant exercisable at 40 cents per Muskwa share for a period of two years from the date of issuance. Additionally, Muskwa has outstanding $500,000 principal amount of 10-per-cent convertible debentures due Feb. 5, 2014, which debentures are convertible into units at 30 cents per unit with each unit comprising one Muskwa share and one-half of one share purchase warrant exercisable at 60 cents per Muskwa share until Feb. 5, 2015. The Muskwa II convertible debentures will be assumed by Zodiac in connection with the closing of the acquisition.

In total, immediately before the completion of the acquisition, Muskwa will have 84,921,329 Muskwa shares issued and outstanding, 30,595,749 Muskwa warrants outstanding at a weighted average price of 37 cents per Muskwa share, 5,704,000 Muskwa options outstanding at an exercise price of 20 cents per Muskwa share and 2,704,000 Muskwa performance warrants outstanding at an exercise price of 10 cents per Muskwa share.

Zodiac financial adviser

In reaching its decision with respect to the recommendation of the acquisition, the special committee relied on, among other things, a fairness opinion of Canaccord Genuity Corp., the independent financial adviser to the special committee with respect to the acquisition. The fairness opinion provided by Canaccord indicates that, as at Oct. 3, 2013, and subject to the certain limitations, assumptions and qualifications as set forth in the fairness opinion, that the consideration to be paid by Zodiac pursuant to the acquisition is fair, from a financial point of view, to the holders of Zodiac shares.

We seek Safe Harbor.