Oilsands Quest files form 10-Q quarterly report; Receives non-compliance notification from NYSE; Negotiates letter of intent for possible Wallace Creek sale

CALGARY, Sept. 14, 2011 /CNW/ --
CUSIP# 678046 10 3


NYSE Amex: BQI

CALGARY, Sept. 14, 2011 /CNW/ - Oilsands Quest Inc. (NYSE Amex:BQI)
('Oilsands Quest', 'OQI' or 'the Company') has filed its Form 10-Q
Quarterly Report for the quarter ended July 31, 2011 with the United
States Securities and Exchange Commission. The full document is
available online at www.sec.gov and www.sedar.com; the Management's
Discussion and Analysis (MD&A) is presented below.

Management's Discussion and Analysis

The following discussion addresses material changes in our results of
operations and capital resources and uses for the three months ended
July 31, 2011, compared to the three months ended July 31, 2010, and
our financial condition and liquidity since April 30, 2011.  We presume
that readers have read or have access to our 2011 Annual Report on Form
10-K/A, which includes disclosure regarding critical accounting
policies and estimates as part of Management's Discussion and Analysis
of Financial Condition and Results of Operation.  Unless otherwise
stated, all dollar amounts are expressed in U.S. dollars.  All future
payments in Canadian dollars have been converted to U.S. dollars using
an exchange rate of $1.00 U.S. = $0.9538 CDN, which was the July 31,
2011 exchange rate.

Overview

Recent Events

    --  The Company is currently negotiating a Letter of Intent from a
        third-party interest for the sale of the Wallace Creek assets.
    --  As previously announced, we have relinquished the licenses in
        Saskatchewan and the southernmost permits at Raven Ridge in
        Alberta as we did not view these areas as having the prospect
        for future development.  All of our activities in Saskatchewan
        will now be focused on the development of the Axe Lake leases.

Three Months Ended July 31, 2011

    --  On May 17, 2011 we provided new resource estimates for Wallace
        Creek following the 2011 winter drilling program.
    --  On June 27, 2011, we received an extension of our permits at
        Wallace Creek until March 31, 2013.
    --  On July 6, 2011 we provided an update on the Strategic
        Alternatives Review Process and announced a $60 million rights
        offering to all stockholders at July 28, 2011. The rights
        offering was terminated on September 12, 2011.
    --  We provided an operational update at the TD Unconventional Oil
        Conference in Calgary on July 6, 2011.
    --  After analysis of available drilling and seismic data, we have
        concluded that the lands in the south part of Raven Ridge on
        Permit No. 7006080098 are not prospective and relinquished this
        permit in August 2011. Relinquishing this land will have no
        impact on the Company's current resource estimates or
        development plans.

Operations Summary:

Axe Lake Area - Reservoir Development Activities

We received approval from the Government of Saskatchewan to convert
portions of the Axe Lake permits to 15-year leases. These leases, the
first oil sands leases in Saskatchewan, are one of the key elements the
Company needs in place to proceed to development of a commercial oil
sands production facility.

The two leases, OSA00001 and 0SA00002, will give us the certainty of
land tenure we need to underpin commercial development at Axe Lake and
are governed under the terms of the Petroleum and Natural Gas
Regulations, 1969 ('1969 Regulations').  These leases expire on March
31, 2027 and may be continued beyond this date if they meet certain
requirements of the 1969 Regulations.

We continued the procurement of services and materials for the planned
steam-assisted-gravity drainage ('SAGD') pilot. The proposed pilot will
consist of one pair of 100 meter long horizontal wells, with the upper
well placed five meters below the glacial till cap, or overburden, and
is designed to make use of the existing surface facilities. The SAGD
pilot will demonstrate the steam containment properties of the glacial
till cap and provide information essential for the front-end
engineering design for the commercial development. Further activity on
the pilot project will be dependent on securing additional financing. 

Development of a commercial project remains subject to financing,
regulatory and other contingencies such as successful reservoir tests,
board of directors' approvals, and other risks inherent in the oil
sands industry.

Exploration

After analysis of available drilling and seismic data, we have concluded
that the lands in the south part of Raven Ridge on Permit No.
7006080098 are not prospective and relinquished this permit in August
2011. Relinquishing this land will have no impact on the Company's
current resource estimates or development plans.

On June 27, 2011, the Company received approval from Alberta Energy to
extend the Wallace Creek permits for an additional 67 days to March 31,
2013. This extension will allow for two full seasons of winter
exploration programs. 

Environmental and Regulatory

The Company is in discussion with the Saskatchewan Ministry of Energy
and Resources ('SMER') to assess a re-abandonment issue relating to the
abandonment of early exploration core holes.  We have drilled 359
exploration core holes in Saskatchewan and during a review of our
development plans and well records, we determined that 229 of the
early-year wells were not abandoned to a standard that meets our
thermal development requirements or were not abandoned in accordance
with the regulatory requirements

We have applied for waivers on 83 core holes, the majority of which are
located outside the current potential commercial development area and
the regulator has indicated that they are willing to consider such
waivers on a case by case basis.  Our waiver applications are based on
the fact that these core holes fall outside the current commercial
development area and are therefore located in areas that are not
expected to be economically recoverable.  We have included
approximately 146 core holes in our management best estimate of the
re-abandonment costs as described in our financial statements.

During the year ended April 30, 2011, we completed an 18 hole
re-abandonment program.  We successfully re-abandoned 14 core holes and
were only partially successful in our attempt to re-abandon the other
four core holes. Those four core holes may still contain conduits which
will require the Company to undertake further monitoring should a SAGD
project be implemented within the vicinity of these core holes. The
re-abandonment of these four core holes occurred early in the program,
and we anticipate high success rates on the re-abandonments still to
come.

The remaining 128 core holes are comprised of a combination of locations
that are in or adjacent to the commercial development area plus a
portion of the core holes for which we are seeking waivers.  Our best
estimate of the undiscounted/gross costs to complete this program over
the next four years is $26.8 million. 

Corporate

On August 17, 2010, we announced that we had initiated a process to
explore strategic alternatives for enhancing shareholder value.  The
Board's decision reflected careful consideration of our financial
position and the capital required to execute the business plan.  In
light of the significant incremental capital required to advance the
exploration and development of the oil sands assets in Saskatchewan and
Alberta, the Board determined that it was in the best interests of
shareholders to engage financial advisors and formally explore all
alternatives.  The process of exploring and evaluating strategic
alternatives was overseen by a Special Committee chaired by Brian
MacNeill, and included Ronald Blakely and Paul Ching.

The Special Committee considered all alternatives to increase
shareholder value, including strategic financing opportunities, asset
divestitures, joint ventures and/or a corporate sale, merger or other
business combination. We retained TD Securities Inc. ('TD') as a
financial advisor to assist us with this process.

Feedback from parties in the process has illustrated that potential
future partners or acquirers require a further level of development,
reducing the remaining areas of uncertainty, in order to be prepared to
make a substantial investment. The Company is therefore seeking funding
to advance its assets toward commercial development, while remaining
open to offers of joint venture opportunities, asset sales or other
alternatives.

On July 18, 2011 we announced a rights offering, under which all
existing shareholders were eligible to purchase, on an equal,
proportional basis, additional shares of the Company. The rights
offering was terminated on September 12, 2011, and all proceeds
received from shareholders who had subscribed to the rights offering
will be returned to them.  The Company is considering a future rights
offering, the proceeds of which would be used to advance the Company's
development plan at Axe Lake. The key operational priorities are to
operate the planned pilot project at Axe Lake in order to demonstrate
that the Axe Lake reservoir can be produced using proven SAGD
technology and conduct additional overburden testing in order to
further refine the aerial extent of the glacial till that overlies the
reservoir and demonstrate its extent and integrity as a cap for SAGD
production. 

Outlook

Assuming we have the necessary capital resources, our reservoir
development and exploration activities over the next few months will be
focused on preparing to execute the SAGD pilot at Axe Lake. All of
these plans are subject to our receipt of the necessary financing.

The next phase of testing, subject to regulatory approvals, will be a
SAGD pilot at Test Site 1.  This will include the drilling of a new
SAGD well pair in close proximity to the existing wells at Test Site 1
to build on our growing knowledge of the reservoir and cap rock
characteristics and test the commercial viability of SAGD at Axe
Lake.  The test plan will use one 100 meter long horizontal well pair,
with the upper well placed five meters below the top of the interface
between the overburden and the oil sands, and will also make use of the
existing surface facilities.  SAGD has been the most widely used, and
therefore best understood, in situ recovery technique for the
production of immobile bitumen (at initial reservoir conditions) in the
McMurray/Dina formations. 

The objectives of the pilot are to:

    --  test the effects of steam contact on the glacial till
        overburden at Axe Lake and demonstrate that the cap will
        perform as a competent steam containment barrier in SAGD
        operations;
    --  confirm early stage SAGD production and steam rates with a
        scalable well length in order to improve forecasting for a
        commercial project;
    --  determine the optimal producing pressure for a commercial
        project;
    --  establish gas production rates and composition and produced
        water composition for facility design; and
    --  better understand the initial critical water saturation
        (minimum saturation at which water becomes mobile) in bitumen
        rich zones for use in forecast model.

Following the successful completion and interpretation of the initial
steam test results, we may submit an application to continue the test
for up to another six months in order to further evaluate injection
pressures to help determine the optimal operational pressure for
designing a commercial project.

Based on the drilling results at Wallace Creek and our knowledge of the
regional geology, we believe there is good potential for that project
area to support a commercial SAGD project. Further seismic work or
delineation drilling is required to confirm this potential and retain
certain portions of these permits. 

The Company may offer and sell shares of common stock by way of
'at-the-market' ('ATM') distributions on NYSE Amex, until January 18,
2012. Funds raised from the ATM program will be used for general
corporate purposes.  In addition, the Company may conduct a new,
smaller, rights offering as described above under the 'Corporate'
section.

The Company does not currently have sufficient capital resources to
carry out the exploration and development plans described above.  There
can be no assurance that a future rights offering will result in the
Company raising sufficient funds to carry out the exploration and
development plans described below.

Liquidity and Capital Resources

The following discussion of liquidity and capital resources should be
read in conjunction with the consolidated financial statements included
in Part I, Item 1. 'Financial Statements'. The consolidated financial
statements have been prepared assuming that we will continue as a going
concern.

At July 31, 2011, the Company held cash and cash equivalents totaling
$9.4 million (April 30, 2011 - $16.0 million).

During the three months ended July 31, 2011, the Company expended $4.6
million on operating activities and $1.9 million on property and
equipment. Management anticipates that the Company will be able to fund
its activities at a reduced level through October 2011 with its cash
and cash equivalents as at July 31, 2011. Accordingly, there is
substantial doubt about our ability to continue as a going concern and
without additional funding, we may not be able to maintain operations
beyond that date. Additional financing will also be required if our
activities are changed in scope or if actual costs differ from
estimates of current plans. To fund operations, the Company conducted a
rights offering under which the existing shareholders were given the
right to purchase additional shares in the Company based on their
pro-rata share ownership. During the rights offering, the Company
received a Letter of Intent from a third-party interest to purchase the
Wallace Creek assets and the rights offering was terminated on
September 12, 2011.  The Company is continuing to negotiate the terms
of the Letter of Intent.  The Company may conduct a new, smaller,
rights offering in the event that the Letter of Intent is executed. The
proceeds from any agreements entered into pursuant to the Letter of
Intent and any new rights offering will be used to continue with the
delineation and development of the Axe Lake assets (as described more
fully in the Outlook section), and for general corporate purposes. Our
development strategy will also consider other sources of financing,
asset sales or seeking partners on a joint venture basis on our
specific projects to fund the development of such projects in a timely
and responsible manner.

There can be no assurance that any agreements entered into pursuant to
any Letter of Intent and any new rights offering will result in the
Company raising sufficient funds to carry out its exploration and
development plans. There is also no assurance that debt or equity
financing or joint venture partner arrangements will be available to us
on acceptable terms, if at all, to meet these requirements.  The
Company has no revenues, and its operating results, profitability and
the future rate of growth depend solely on management's ability to
successfully implement the business plans and on the ability to raise
additional capital. See 'Outlook' above.

As of January 17, 2011, the Company has entered into an equity
distribution agreement ('Agreement') with Knight Capital Americas, L.P.
('KCA'), a subsidiary of Knight Capital Group, Inc. Under the terms of
the Agreement, the Company may offer and sell shares of common stock by
way of 'at-the-market' (ATM) distributions on NYSE Amex, up to a
maximum of US$20 million until January 18, 2012, through KCA as sales
agent. The shares are distributed at market prices prevailing at the
time of each sale and the timing, price and number of shares sold are
at our discretion.  The number of shares sold on any given day is
expected to be relatively small compared to the total volume of shares
traded. As of July 31, 2011, 5,537,137 shares have been distributed
under this arrangement for gross proceeds of $3.1 million.  Funds
raised from the ATM program are used to finance general corporate
purposes. The ATM program was suspended during the Rights Offering
period until September 12, 2011, and  is expected to be suspended
during any future rights offering where KCA or any of its affiliates
acts as the dealer manager. 

Results of Operations

Net loss

Three months ended July 31, 2011 as compared to three months ended July
31, 2010.  The Company experienced a net loss of $5.8 million or $0.02 per share
for the three months ended July 31, 2011 as compared to a net loss of
$16.0 million or $0.05 per share for the three months ended July 31,
2010.  The decline in the net loss in the current period as compared to
the prior period is primarily due to the reduction in exploration
activity, a reduction in impairment of property that was recognized in
2010 on our Saskatchewan Oil Sands Licenses, a reduction in stock-based
compensation expense activity and an increase in foreign exchange gain
which were partially offset by an increase in depreciation and
accretion. 

The Company expects to continue to incur operating losses and will
continue to be dependent on additional sales of equity or debt
securities and/or property sales or joint ventures to fund its
activities in the future.

Exploration costs

Three  months ended July 31, 2011 as compared to three  months ended
July 31, 2010.  Exploration costs for the three months ended July 31, 2011 were $0.5
million (2010 - $11.7 million).    Exploration expenditures in the
three months ended July 31, 2011 include $0.5 million of additional
asset retirement obligations that were revised during the current
period in relation to the re-abandonment of a certain number of core
holes at Axe Lake. Compared to the same period in the previous year,
exploration expenditures decreased due to a reduction in drilling and
exploration activity during the current period.

General and administrative

            Corporate

Three  months ended July 31, 2011 as compared to three months ended July
31, 2010.  General and administrative expenses settled with cash for the three
months ended July 31, 2011 were $4.1 million (2010 - $3.8 million).  
Expenditures in the three month period ended July 31, 2011 consist of
salaries ($1.6 million), legal and other professional fees ($1.8
million) and general office costs ($0.7 million).   General and
administrative expenses in the three months ended July 31, 2010 consist
of salaries ($1.5 million), legal and other professional fees ($1.2
million) and general office costs ($1.1 million).  At July 31, 2011,
there were 16 employees and no seasonal field employees, and at July
31, 2010, there were 46 employees including 5 seasonal field
employees.    Although total personnel levels have declined, salaries
increased during the current period compared to the same period last
year due to severance and termination payments. The increase in
professional fees during the three months ended July 31, 2011 is
related to additional costs incurred as part of the formal strategic
alternative process. The decrease in general office costs during the
three months ended July 31, 2011 is mainly caused by downsizing
activities. 

            Stock-based compensation

Three  months ended July 31, 2011 as compared to three months ended July
31, 2010.  Stock-based compensation expense for the three months ended July 31,
2011 was a recovery of $0.025 million (2010 - $1.0 million) and
consists of stock-based compensation related to the issuance of options
to directors, officers and employees.  The decrease during the three
month period compared to the same period in the prior year is due to
fewer options remaining to vest including options forfeited caused by a
reduction in the number of employees.  A total of 0.9 million options
were forfeited and 1.0 million options expired during the three months
ended July 31, 2011.

Foreign exchange (gain) loss

Three months ended July 31, 2011 as compared to three months ended July
31, 2010. A foreign exchange gain of $0.1 million (2010 - loss of $0.3 million)
during the three months ended July 31, 2011 resulted from holding more
U.S. funds in the OQI Sask during the current period compared to the
same period last year with increased volatility of the U.S. dollar
against the Canadian dollar. 

Depreciation and accretion 

Three months ended July 31, 2011 as compared to three months ended July
31, 2010.  Depreciation and accretion expense for the three months ended July 31,
2011 was $1.3 million (2010 - $1.1 million). Depreciation expense
relates to camp facilities, equipment and corporate assets which are
being depreciated over their useful lives of 3 to 5 years.  Accretion
expense relates to the asset retirement obligation recognized on the
re-abandonment of a certain number of wells in the Axe Lake area and on
the airstrip, camp site, access roads and reservoir test sites which
are being brought into income over a period of 1 to 30 years.  The
increase during the three month period ended July 31, 2011 compared to
the same period last year is due to the additional accretion on asset
retirement obligation resulting from the re-abandonment of a certain
number of wells in the Axe Lake area that was identified in the year
ended April 30, 2010. 

Impairment

Three months ended July 31, 2011 as compared to three months ended July
31, 2010.  The impairment for the three months ended July 31, 2011 was $nil million
(2010 - $2.0 million).   The impairment in 2010 was recognized on the
Saskatchewan Oil Sands Licenses due to their high likelihood of
relinquishment at July 31, 2010. These licenses were relinquished in
August 2011.

Three months ended July 31, 2011 as compared to three months ended July
31, 2010.  Interest income for the three months ended July 31, 2011 was $0.02
million (2010 - $0.01 million).  Interest income is earned because the
Company pre-funds its activities and the resulting cash on hand is
invested in short-term deposits.

Deferred income tax benefit

Three months ended July 31, 2011 as compared to three months ended July
31, 2010.  The deferred income tax benefit for the three months ended July 31,
2011 was $nil million (2010 - $3.9 million).  During the three months
ended July 31, 2011, no deferred income tax benefit was recognized
since a full valuation allowance was taken on the taxable temporary
differences associated with property and equipment capitalized on the
balance sheet. At April 30, 2011, the deferred tax benefit associated
with the impairment on undeveloped properties was recorded to the
extent of the deferred tax liability amount on the balance sheet
derived from the excess appreciated asset value over the tax basis of
the Company's net assets. Therefore, in addition to recording a full
valuation allowance on all non-capital losses incurred in accordance
with the Company's accounting policy, a valuation allowance is now
taken on taxable temporary differences associated with property and
equipment capitalized on the balance sheet.

Previously, the Company recognized a full valuation allowance on all
non-capital losses and generated deferred tax benefits by expensing all
exploration costs for accounting purposes while capitalizing these
costs for income tax purposes.  This resulted in a higher tax basis for
the Company's property and equipment when compared to their carrying
value.

Recently Issued Accounting Standards Not Yet Adopted

There have been no recent accounting pronouncements or changes in
accounting pronouncements during the three months ended July 31, 2011,
as compared to the recent accounting pronouncements described in the
Company's Annual Report on Form 10-K/A, that are of significance, or
potential significance to the Company. 

Off-Balance Sheet Arrangements 

The Company has no off-balance sheet arrangements that have or are
reasonably likely to have a current or further effect on its financial
condition, changes in financial condition, revenues or expenses,
results of operations liquidity, capital expenditures or capital
resources that are material to investors.

Notice of Non-Compliance

On September 12, 2011 Oilsands Quest received notice from the staff of
the NYSE Amex LLC (the 'Exchange') that, based on their review of the
Company's Form 10-K/A for the fiscal year ended April 30, 2011 and
discussions and correspondence with management, the Company is not in
compliance with certain of the Exchange's continued listing standards
as set forth in Part 10 of the Exchange's Company Guide.  Specifically,
the Exchange noted that the Company is not in compliance with Section
1003(a)(iv) of the Company Guide because the Company has sustained
losses which are so substantial in relation to the Company's overall
operations or its existing financial resources, or its financial
condition has become so impaired that it appears questionable, in the
opinion of the Exchange, as to whether the Company will be able to
continue operations and/or meet its obligations as they mature.

In order to maintain listing of the Company's common stock on the
Exchange, the Company must submit a plan by October 12, 2011,
addressing how the Company intends to regain compliance with Section
1003(a)(iv) by January 12, 2011.  The Company expects to submit such a
plan by the October 12, 2011 deadline.  If the Exchange accepts the
plan, then the Company may be able to continue its listing during the
plan period, up to January 12, 2012, during which time the Company will
be subject to periodic reviews to determine whether it is making
progress consistent with the plan.  If the plan is accepted but the
Exchange determines that the Company is not making progress consistent
with the plan or that the Company is not in compliance with all
continued listing standards of the Company Guide by January 12, 2012,
then the Company expects the Exchange will initiate delisting
proceedings.  If the Company fails to submit a plan by October 12,
2011, or if the plan submitted is not acceptable to the Exchange, the
Company expects the Exchange will initiate delisting proceedings at
that time. 

The Company's common stock continues to trade on the Exchange under the
symbol 'BQI,' however, the Exchange has advised the Company that the
Exchange is utilizing the financial status indicator fields in the
Consolidated Tape Association's Consolidated Tape System and
Consolidated Quote Systems High Speed Tapes to identify companies that
are in noncompliance with the Exchange's continued listing standards.
Accordingly, the Company will become subject to the trading symbol
extension '.BC' to denote its noncompliance.

Cautionary statement about forward-looking statements

This news release includes certain statements that may be deemed to be
'forward-looking statements.' All statements, other than statements of
historical facts, included in this press release that address
activities, events or developments that our management expects,
believes or anticipates will or may occur in the future are
forward-looking statements. Such forward-looking statements include
discussion of such matters as:

    --  the Company's ability to maintain sufficient cash to accomplish
        its business objectives.
    --  the Company's plans to raise additional capital;
    --  implementation of the Company's business plan;
    --  the amount and nature of development and exploration
        expenditures;
    --  the timing of exploration and development activities;
    --  potential reservoir recovery optimization processes; and
    --  business strategies and development of our business plan and
        drilling programs.

Forward-looking statements are statements other than relating to
historical fact and are frequently characterized by words such as
'plan', 'expect', 'project', 'intend', 'believe', 'anticipate',
'estimate', 'potential', 'prospective' and other similar words or
statements that certain events or conditions 'may' 'will' or 'could'
occur. Forward-looking statements such as references to Oilsands
Quest's drilling program, geophysical programs, reservoir field testing
and analysis program, preliminary engineering and economic assessment
program for a first commercial project, and the timing of such programs
are based on the opinions and estimates of management at the date the
statements are made, and are subject to a variety of risks and
uncertainties and other factors that could cause actual events or
results to differ materially from those anticipated in the
forward-looking statements, which include but are not limited to the
ability to raise additional capital, risks associated with the
Company's ability to implement its business plan, risks inherent in the
oil sands industry, regulatory and economic risks, land tenure risks,
lack of infrastructure in the region in which the company's resources
are located, risks associated with the Company's ability to implement
its business plan and those factors listed under the caption 'Risk
Factors' in the Company's 10Q filed with the Securities and Exchange
Commission (the 'SEC') on September 14, 2011. The Company undertakes no
obligation to update forward-looking information if circumstances or
management's estimates or opinions should change, except as required by
law. The reader is cautioned not to place undue reliance on
forward-looking statements.

About Oilsands Quest

Oilsands Quest Inc. (www.oilsandsquest.com) is exploring and developing
oil sands permits and licences, located in Saskatchewan and Alberta,
and developing Saskatchewan's first commercial oil sands discovery.  It
is leading the establishment of the province of Saskatchewan's emerging
oil sands industry.

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Investor Relations
Email: ir@oilsandsquest.com
Investor Line: 1-877-718-8941