Canadian Sub-Surface Energy Services Corp.
TSX : CSE

Canadian Sub-Surface Energy Services Corp.

May 15, 2006 09:00 ET

Canadian Sub-Surface Energy Services Announces Q1 2006 Financial Results

CALGARY, ALBERTA--(CCNMatthews - May 15, 2006) - Canadian Sub-Surface Energy Services Corp. (TSX:CSE) (the "Company") is pleased to announce its financial and operating results for the first quarter ended March 31, 2006 where record revenues and earnings were achieved. During the quarter, the Company recorded total revenue of $22.4 million, normalized EBITDA (1) of $6.8 million and net earnings of $2.4 million. In the prior year first quarter, the business generated total revenue of $14.1 million, normalized EBITDA of $4.1 million and net earnings of $1.6 million. The Company's available fleet of wireline and swabbing units was expanded by an additional 2 slickline trucks during the current quarter, bringing the total available fleet to 36 units at March 31, 2006 (with 13 of the 36 units owned by owner-operators). The Company exited the quarter with 32 major production testing packages.

Operational Highlights

- In conjunction with the February 14, 2006 acquisition of Canadian Sub-Surface Energy Services Inc., Canadian Sub-Surface Gas Testing Inc. and 1156853 Alberta Ltd. (the "CanSub Group"), the Company successfully completed a $34.0 million (gross) equity offering.

- The Company's Class A common shares commenced trading on the TSX on February 17, 2006.

Canadian Sub-Surface Energy Services Corp. provides cased-hole wireline, production testing and related services to oil and gas companies operating in the Western Canadian Sedimentary Basin.



Canadian Sub-Surface Energy Services Corp.

Management's Discussion and Analysis



Financial Highlights

Following is selected financial information from the unaudited, interim
consolidated financial statements of the Company for the three-month
periods ended March 31, 2006 and 2005.

------------------------------------------------------------------------

Three Three
Months Ended Months Ended
(in thousands of dollars, March 31, March 31,
or as otherwise noted) 2006 2005 % Change
------------------------------------------------------------------------
Revenue 22,402 14,146 + 58%
------------------------------------------------------------------------
Gross Margin 8,554 5,098 + 68%
------------------------------------------------------------------------
Normalized EBITDA (1) (2) 6,753 4,089 + 65%
------------------------------------------------------------------------
Normalized EBITDA as a % of revenue 30.1% 28.9% + 1.2%
------------------------------------------------------------------------
Net Earnings 2,352 1,581 + 47%
------------------------------------------------------------------------
Class A common shares outstanding -
subsequent to February 14, 2006
transaction (in thousands) 13,961 N/A N/A
------------------------------------------------------------------------
Diluted common shares - at March 31,
2006 (in thousands) (3) 15,123 N/A N/A
------------------------------------------------------------------------

(1) Refer to the "Non-GAAP measures" section contained in the MD&A below
for details.

(2) EBITDA means earnings before interest, taxes, depreciation and
amortization and excludes stock based compensation. Normalized
EBITDA means EBITDA adjusted for certain equipment lease expenses
that are included in operating expenses. Refer to the section below
titled "Reconciliation of EBITDA and Normalized EBITDA to Net
Earnings".

(3) Based on 13.961 million Class A common shares plus 1.162 million
stock options outstanding at March 31, 2006


The following Management's Discussion and Analysis ("MD&A") is for the consolidated financial statements of Canadian Sub-Surface Energy Services Corp. (the "Company", formerly Canada West Capital Inc. ("CWC")) as at and for the three-months ended March 31, 2006. These financial statements include the Company's three wholly-owned subsidiaries, Canadian Sub-Surface Energy Services Inc., Canadian Sub-Surface Gas Testing Inc. and 1156853 Alberta Ltd. (collectively the "CanSub Group"). The CanSub Group was acquired by CWC as part of a reorganization of CWC effective Februrary 14, 2006. Subsequent to the acquisition, the former shareholders of the CanSub Group held the largest percentage of Class A common voting shares of the new consolidated entity and therefore the CanSub Group was deemed to be the acquirer for accounting purposes. Accordingly, the transaction has been accounted for as a reverse takeover (using the purchase method) whereby the assets and liabilities of CWC were recorded at their fair market values at the February 14, 2006 transaction date. The comparative financial results for the three-month period ended March 31, 2005 are the financial results of the CanSub Group.

The consolidated financial statements for the three-month period ended March 31, 2006, have been prepared taking into consideration information available as at May 12, 2006 and should be read in conjunction with the unaudited, interim financial statements of the Company for the three-month period ended March 31, 2006.

Transaction between CWC and the CanSub Group

Just prior to the February 14, 2006 transaction, CWC was publicly traded on the NEX Board of the TSX Venture. Since ceasing active operations in the high-tech sector during 2003, CWC had been actively pursuing a business combination with an operating entity. On December 30, 2005, CWC and the CanSub Group entered into an Arrangement Agreement which included the reorganization of CWC's share capital, a $34.0 million (gross) private placement financing and the acquisition of the CanSub Group. Effective February 14, 2006 (pursuant to approval from the courts and shareholders of CWC), CWC closed a $34.0 million financing through the issuance of 8,095,238 Class A common shares at a price of $4.20 per share, then completed the acquisition of the CanSub Group for a net purchase price (subject to adjustment) of approximately $49.1 million. The purchase price consisted of a payment of $24.6 million in cash and the remaining $24.6 million in shares. The share component consisted of 5,491,905 Class A common shares and 357,143 Class B preferred shares (both share classes valued at $4.20 per share). As part of the Arrangement Agreement, CWC changed its name to Canadian Sub-Surface Energy Services Corp. Shares of the newly formed corporation commenced trading on the TSX on February 17, 2006.

Comparative Information

Since the CanSub Group has been deemed the acquirer for accounting purposes, the comparative financial statements reflect the financial results of the CanSub Group. The audited, consolidated financial statements for the CanSub Group for the year end December 31, 2005 were previously posted on SEDAR. The audited financial statements for Canada West Capital Inc. for the year ended December 31, 2005 were also posted on SEDAR.

Business Units and Segmentation

The Company's operations are conducted through its two main operating divisions: Wireline and Testing. The Wireline division is comprised primarily of wireline services (which include cased-hole electric line and slickline) and also includes swabbing and well optimization services. The Testing division includes primarily natural gas production testing services. A portion of the electric line and slickline services in the Wireline division are conducted through three owner-operators, who own their equipment and employ the crews who work on the units. One of the advantages of utilizing the owner operators is that they represent the Company in areas where the Company does not operate. There are no owner operators involved in the business of Testing. For the current quarter, the three owner operators collectively accounted for $4.9 million (or approximately 21.8 %) of consolidated revenue.

Events Subsequent to March 31, 2006

On May 9, 2006, the Company entered into an exclusive asset purchase agreement with Colter Production Services Inc. ("Colter"), a Calgary-based natural gas production testing company, to purchase all of the assets of Colter's production testing business. In addition, the Company entered into asset purchase agreements with three owner/operators: Southern Wireline Services Ltd., Sure Shot Perforators Ltd. and VCEE Wireline Services Ltd. (the "Owner/Operators"). CanSub has agreed to purchase all of the assets of each respective business of the Owner/Operators, which in aggregate include 13 wireline units based in two locations in Alberta and one location in Saskatchewan. All of these acquisitions are arms-length transactions.

The aggregate purchase price of the acquisition of Colter and the Owner/Operators is approximately $29.85 million, with the Colter acquisition amounting to $13.75 million and the balance attributed to the Owner/Operators. The purchase price will be financed with $16.30 million in cash and $13.55 million through the issuance of common shares of CanSub. The number of shares to be issued in connection with the acquisitions was based on a deemed price of $7.37 per common share. The valuation of the share component for accounting purposes will be determined based on the fair market value of the Company's shares at the acquisition date. The closing of the acquisitions is scheduled to occur not later than May 31, 2006.

In connection with the acquisition of Colter and the Owner/Operators, the Company has entered into an agreement with a syndicate of underwriters to sell on a bought deal basis, by way of private placement, 2,333,333 common shares at a price of $7.50 per common share for gross proceeds of approximately $17.5 million. The underwriters have been granted an option to purchase an additional 200,000 common shares up to the day immediately preceding the closing date at the issue price. The net proceeds of the offering will be used to fund the Colter acquisition, the Owner/Operator acquisitions and for general working capital purposes. Closing of the private placement financing is scheduled to occur concurrently with the closing of the acquisitions not later than May 31, 2006.

Seasonality

The Company's wireline and production testing operations are seasonal. The oil and gas industry is generally more active during the winter months (historically from November through March) as the movement of heavy equipment is easier over frozen ground. In the spring months, road bans and wet weather can limit the ability to move equipment and adversely impacts the Company's revenue generating capability. Rain in the summer and fall months can also have a significant impact on the Company's revenue. However, when equipment is not in use, crews are not required and therefore operating costs normally decrease in slow operating periods.

Forward-looking statements

Certain statements contained in this MD&A constitute forward-looking statements. When used in this document the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "seek", "propose", "estimate", "expect" and similar expressions, as they relate to the business of the Company, are intended to identify forward-looking statements. Such statements reflect the Company's current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including, without limitation, those described in this MD&A under the heading "Risks and Uncertainties", and "Outlook". Many factors could cause the Company's actual results, performance or achievements to vary from those anticipated in this MD&A. Should one or more risks or uncertainties materialize, or should assumptions underlying forward-looking statements prove incorrect, actual results may vary materially from those described in this MD&A as intended, planned, anticipated, believed, estimated or expected. The Company does not assume any obligation to update these forward-looking statements if conditions or opinions should change.

Results of Operations



Revenues

The break-down of consolidated revenue between the Wireline and Testing
divisions is as follows:

------------------------------------------------------------------------
Three Three
Months Ended Months Ended
March 31, March 31,
2006 2005
$000s (unaudited) (unaudited) % Change
------------------------------------------------------------------------
Wireline 14,163 8,111 +74.6%
------------------------------------------------------------------------
Testing 8,239 6,035 +36.5%
------------------------------------------------------------------------
Consolidated 22,402 14,146 +58.4%
------------------------------------------------------------------------


As a result of continuing robust industry conditions during the first quarter of 2006, the Company experienced high equipment utilization rates. Revenue from the Wireline division during the current quarter amounted to $14.2 million (or 63% of total Company revenue) with the remaining $8.2 million generated by the Testing division.

A significant portion of the current quarter Wireline divisional revenue (or approximately $12.5 million) was related solely to the wireline fleet (electric line and slickline), which averaged 31.0 units during the first quarter of 2006. The remaining $1.7 million of revenue in this division was attributed mainly to swabbing services ($0.7 million) and and well optimization ($0.9 million). Swabbing revenue was generated from an average of 3.0 swabbing trucks in operation during the quarter. The wireline units completed approximately 2,351 jobs at an average revenue per job of approximately $5,305. Of the 31.0 average wireline units which contributed to revenue in 2006, an average of 12.0 units were run by the owner operators. The owner operator units generated $4.9 million of sales or 34.5% of total Wireline division revenue.

In the first quarter of 2005, Wireline divisional revenue amounted to $8.1 million, of which $7.8 million was attributed solely to the wireline fleet (electric line and slickline; which averaged 25.0 units during that period). Revenue from owner operator units during the 2005 period was $3.1 million or 38% of total divisional revenue. During the prior year quarter, the wireline units completed approximately 2,029 jobs at average revenue of $3,855 per job. The increase in average revenue per wireline job recognized in the first quarter of 2006 of approximately 38% was attributed to: price increases implemented during the fourth quarter of 2005, higher utilization rates for the electric line units as compared to the slickline units (note that the electric line units charge out at higher rates than slickline), an increase in higher profile work, more lucrative jobs in northern Alberta and British Columbia and an increase in Coal Bed Methane work ("CBM") for the electric line units. The CBM work is performed by the electric line units and typically involves perforating many intervals resulting in larger billings per job.

The Testing division revenue in the first quarter of 2006 of $8.2 million was generated from an average fleet of 32.0 major testing packages. Revenue during 2006 reflects price increases of approximately 5% to 15% implemented during the fourth quarter of 2005. The 2005 testing revenue of $6.0 million was generated from an average in-service fleet of 26.0 major testing packages.



Gross Margins

The break-down of gross margin between the Wireline and Testing
divisions is as follows:

------------------------------------------------------------------------
Three Three
Months Ended Months Ended
March 31, March 31,
2006 2005
$000s (unaudited) (unaudited) % Change
------------------------------------------------------------------------
Gross Margins:
------------------------------------------------------------------------
Wireline 4,918 2,370 + 107.5%
------------------------------------------------------------------------
Testing 3,636 2,728 + 33.3%
------------------------------------------------------------------------
Consolidated 8,554 5,098 + 67.8%
------------------------------------------------------------------------
Gross Margin %
------------------------------------------------------------------------
Wireline 34.7% 29.2% + 5.5%
------------------------------------------------------------------------
Testing 44.1% 45.2% - 1.1%
------------------------------------------------------------------------
Consolidated 38.2% 36.0% + 2.2%
------------------------------------------------------------------------


Consolidated gross margins for the first quarter of 2006 were $8.6 million or 38.2% as compared to margins of $5.1 million or 36.0% in the prior year first quarter. The improvement in Wireline divisional margins of approximately 5.5% was attributed primarily to a lower portion of sales coming from owner operator units and price increases that were implemented during the fourth quarter of 2005. These items were partially offset by increases in employee and fuel costs. Testing margins on a percentage basis were materially consistent between the current and prior period quarters with price increases in the current quarter also offset by increases in employee costs.



Selling, General and administrative expenses

The Company's selling, general and administrative expenses are recorded
on a consolidated basis and not broken out for each division as the two
divisions share the same management team and accounting, administration
and sales staff.

------------------------------------------------------------------------
Three Three
Months Ended Months Ended
March 31, March 31,
2006 2005
$000s (unaudited) (unaudited) % Change
------------------------------------------------------------------------
Total Selling, general and
admin expenses 2,519 1,161
------------------------------------------------------------------------
Less: stock-based compensation
expense 648 -
------------------------------------------------------------------------
Net 1,871 1,161 + 61.2%
------------------------------------------------------------------------


Selling, general and administrative expenses (net of stock-based compensation expense) increased from $1.2 million in 2005 to $1.9 million in 2006. This reflects a significant staff increase in the management, accounting, administration, sales and technical reporting departments as a result of the Company's substantial growth and includes expenses related to operating as a public company. As a result of the higher activity levels, increases in leased facility space, insurance and other related items also impacted current period expenses.

The stock-based compensation expense in 2006 relates to options that vested in the CanSub Group just prior to the February 14, 2006 transaction date plus the expense associated with options granted to the employees of the newly formed consolidated entity from February 14th through to March 31. See discussion of options that were issued by the newly formed entity in the section below titled "Stock Option Plan".



Other expenses

------------------------------------------------------------------------
Three Three
Months Ended Months Ended
March 31, March 31,
2006 2005
$000s (unaudited) (unaudited) % Change
------------------------------------------------------------------------
Depreciation and amortization 600 311 + 92.9%
------------------------------------------------------------------------
Long-term interest 93 50 + 86.0%
------------------------------------------------------------------------
Other interest 37 54 - 31.5%
------------------------------------------------------------------------


Depreciation and amortization

Depreciation and amortization expense in the current quarter is approximately double the expense recorded in 2005, primarily reflecting the significant increase in the capital asset base subject to depreciation from 2005 to 2006. The Company exited March 31, 2006 with total capital assets (property, plant and equipment plus intangible assets) of $19.2 million as compared to total capital assets at March 31, 2005 of $7.2 million.

Long-term interest expense

Long-term interest expense increased from $50,000 in the first quarter of 2005 to $93,000 in the current quarter reflecting a net increase in long-term debt over the past year. Total long-term debt (comprised of callable debt, long-term debt and capital leases) increased from $3.7 million at March 31, 2005 to $8.6 million at March 31, 2006. The significant increase is primarily attributed to a new capital lease entered into in the fourth quarter of 2005 for $2.5 million plus the conversion of several operating leases into capital leases (totaling approximately $3.4 million) during the first quarter of 2006.

Other interest

Other interest, which is comprised primarily of interest on the Company's operating loans, decreased from $54,000 in the first quarter of 2005 to $37,000 in the current quarter. This reflects the significant reduction in operating loans during the first quarter of 2006, as a portion of the proceeds from the $34.0 million equity financing was applied against these loans.

Income taxes

The Company recognized Income tax expense of $2.2 million (consisting entirely of future tax expense) during the first quarter of 2006 as compared to income tax expense of $1.2 million (comprised primarily of current tax expense) recognized in the first quarter of 2005. The future tax expense in the current quarter primarily reflects the deferral of taxes due to the operations of the CanSub Group being through a partnership which was established in 2005.

Net Earnings

The Company recorded net earnings for the quarter ended March 31, 2006 of $2.3 million as compared to net earnings in the first quarter of 2005 of $1.6 million.

Normalized EBITDA

Normalized EBITDA for the first quarter of 2006 was $6.8 million as compared to Normalized EBITDA of $4.1 million for the first quarter of 2005 (see section below titled "Reconciliation of Normalized EBITDA to Net Earnings).

Capital Expenditures

Capital expenditures during the current quarter of $6.4 million were comprised of the following: $3.4 million of leased wireline, production testing and other equipment was capitalized as the related operating leases were converted to capital leases during the quarter. These leases were for various wireline, production testing and other equipment that had been initially leased under operating leases from years 2003 to 2005. The remaining $3.0 million in capital expenditures were primarily for progress payments on wireline and swabbing units as well as components of testing packages being manufactured for deployment in 2006.

As previously announced by the Company, the capital expenditure budget for calendar 2006 (which excludes the conversion of operating leases to capital leases as mentioned above) of $14.3 million includes the following: 8 wireline trucks (3 electric line, 5 slickline), 5 swabbing truck and 11 major testing packages.

Future Income tax Asset and Deferred Credit

As noted above, the CanSub Group was the deemed acquirer for accounting purposes in the February 14, 2006 business combination with CWC. In accounting for the acquisition of CWC, a future income tax asset of $12.8 million was recognized as well as a deferred credit of $10.0 million. The net future income tax asset recorded on the March 31, 2006 balance sheet of $9.5 million reflects the $12.8 million tax asset from the CWC acquisition net of the items noted in note 13 of the March 31, 2006 interim financial statements.

The Company had the following tax amounts available at December 31, 2005 to apply against future taxable income: non-capital losses of $24.4 million and unclaimed scientific research and development expenditures ("SRED") of $9.4 million. In addition, the Company had $1.9 million in investment tax credits which may be claimed against taxes otherwise payable for federal purposes. The expiry dates of these tax amounts are outlined in note 13 to the interim March 31, 2006 financial statements.

Long-Term Debt (excluding Preferred Share Liability)

The Company's long-term debt is comprised of: callable debt, capital leases and long-term debt which totaled $8.6 million in aggregate (including current and long-term portions) at March 31, 2006. There were no additions to callable debt or long-term debt during the current quarter. However, the Company added $3.4 million in capital lease liabilities during the quarter which reflects the conversion of several operating leases into capital leases. The related capitalized equipment of $3.4 million was reflected as an addition to property and equipment (see "Capital Expenditures" section).

Preferred Share Liability

At March 31, 2006, the Company had 991,044 Class B preferred shares outstanding with a redemption price of $4.20 (redeemable at the option of the holder only) resulting in a total liability of $4.2 million. As part of the February 14, 2006 transaction, the former shareholders of CWC were issued 633,901 Class B preferred shares and the former shareholders of the CanSub Group were issued the remaining 357,143 Class B preferred shares. The Class B shares issued to the CWC shareholders were in exchange for preferred shares that CWC had outstanding prior to the transaction date. As a result of the CWC reorganization, the Class B preferred shares issued to the CWC shareholders were revalued resulting in an increase to the liability of approximately $0.4 million. This revaluation was recorded as a transaction cost and applied against share capital.

The Class B preferred shares are non-voting, have a cumulative dividend of 2.5% per annum, are convertible at the option of the holder to Class C shares and have priority as to payment of the redemption price ($4.20 per share) and all declared but unpaid dividends on winding up, liquidation or dissolution of the Company. These shares have all of the characteristics of a debt instrument and have been classified as such on the March 31, 2006 balance sheet.

Notes Payable and Shareholders' Loans

The balances in Notes Payable and Shareholders' loans at December 31, 2005 (which totaled $2.1 million) were completely repaid during the first quarter of 2006 resulting in a nil balance at March 31, 2006.

Share Capital

The Company's share capital figure on the balance sheet at the beginning of the current quarter (ie at December 31, 2005) of $0.5 million represents the share capital of the CanSub Group on that date. The corresponding number of common shares outstanding at December 31, 2005 reflects the number of Class A common shares received by the CanSub Group as part of the February 14, 2006 transaction (adjusted for any shares received by CanSub Group shareholders for options exercised between December 31, 2005 and February 14, 2006). See note 15 in the interim financial statements for the three-month period ended March 31, 2006 for a description of the changes in share capital during the current quarter. The Company exited the first quarter of 2006 with 13.96 million Class A common shares outstanding.

Stock Option Plan

As part of the February 14, 2006 transaction, the shareholders of the Company approved a stock option plan that allows the Company to issue options totaling a maximum of 10% of the Company's issued and outstanding Class A common shares. Effective February 14, 2006 the Company issued its first tranche of options to directors, officers, employees and consultants totaling 1.145 million options. These options have an exercise price of $4.20, a five year term and vest one-third per year over three years commencing on the first anniversary date of the grant. The other options issued since February 14th have the same terms other than the exercise prices which are based on the trading value of the Company's shares on the grant date. As at May 12, 2006, the Company had 1.168 million stock options outstanding, which represents 8.4% of the outstanding Class A common shares on that date.

Liquidity

As at March 31, 2006 the Company had net working capital of $5.5 million. In addition, the Company had an $8.5 million operating loan facility with a major Canadian chartered bank, of which only $1.7 million had been drawn at March 31, 2006 and also had a $13.0 million leasing credit facility from the same bank which the Company had drawn $5.9 million at the end of the first quarter.

The Company recorded cash flow from operations (before non-cash working capital changes) during the first quarter of 2006 of $6.6 million. Cash utilized to finance changes in non-cash working capital of $4.9 million was attributed to: an increase in accounts receivable of $5.4 million, an increase in inventories of $0.4 million, an increase in deposits and other of $0.7 million and a decrease in income taxes payable of $1.3 million. These were offset by an increase in accounts payable of $1.7 million and an increase in related parties of $1.5 million (related to the CanSub Group purchase price adjustment). After taking into account the $4.9 million utilized in the non-cash working capital changes, the net cash flow from operations was $1.7 million.

As part of the February 14th transaction, the Company completed a $34.0 million financing, which yielded net proceeds of approximately $31.9 million (after deducting underwriting fees but before deducting transaction costs). A significant portion of the net proceeds were used to fund the $24.6 million cash portion of the CanSub Group acquisition price. The remaining proceeds were used to reduce the operating loan and to finance working capital requirements.

Related Party Transactions

The related party transactions during the first quarter of 2006 are described in note 4 to the interim financial statements of the Company. At March 31, 2006 the Company had an amount payable of $1.5 million to former shareholders of the CanSub Group, all of whom are now shareholders of the new consolidated entity. This amount reflects an increase in the initial purchase price of the CanSub Group from $49.1 million to $50.6 million, and will be paid out in cash during the second quarter of 2006.

Use of estimates and assumptions

The financial statements of the Company have been prepared by management in accordance with Canadian Generally Accepted Accounting Principals ("GAAP"). The timely preparation of these financial statements in conformity with Canadian GAAP requires that management make estimates and assumptions and use judgment regarding the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. The most significant are estimates for depreciation and amortization, goodwill, intangible assets, stock based compensation and other components of employee compensation and valuation of future income tax assets. The financial statements have, in management's opinion, been prepared within reasonable limits of materiality and within the framework of the Company's accounting policies.

Risks and Uncertainties

The Company's operations face a number of risks and uncertainties in the normal course of business that may be beyond its control, but which could have a material adverse effect on the financial affairs of the business, including its operating results.

In particular, the demand, pricing and terms of oilfield services largely depend upon the level of industry activity for Canadian natural gas, and to a lesser extent, oil exploration and development. The level of activity in the Canadian and oil and gas exploration and development industry is volatile. No assurance can be given that expected trends in oil and gas production activities will continue or that demand for oilfield services will reflect the level of activity in the industry. Any prolonged substantial reduction in oil and natural gas prices would likely affect oil and gas production levels and therefore affect the demand for services of oil and gas customers.

Additional risks might include: the potential impact of environmental regulations including the Kyoto protocol, seasonality and weather patterns, pricing and availability of capital equipment, the actions taken or strategies adopted by competitors, certain governmental regulations, credit risk, availability of financing and other operating risks or hazards.

Outlook

Commodity prices continue to support strong demand for oilfield services in western Canada with many industry analysts predicting continued high levels of activity for the remainder of 2006. Management is cautiously optimistic, as unseasonably warm weather throughout much of North America this past winter has lead to high natural gas inventory storage levels and has created some volatility and downward pressure on natural gas prices. However, based on the medium to longer term improved outlook for natural gas prices, industry analysts have noted that most oil and gas companies in western Canada will continue to maintain their planned capital expenditure programs for 2006.

Given the Company's acquisitions of the assets of the four businesses described above, and the Company's equipment additions planned for the remainder of 2006, management expects to continue year over year growth if industry conditions stay robust.



RECONCILIATION OF EBITDA AND NORMALIZED EBITDA TO NET EARNINGS

------------------------------------------------------------------------
Three months Three months
ended Mar. 31 ended Mar. 31
In $000's 2006 2005
(unaudited) (unaudited)
------------------------------------------------------------------------
Net earnings 2,352 1,581
------------------------------------------------------------------------
Add back (deduct):
------------------------------------------------------------------------
Depreciation and amortization expense 600 311
------------------------------------------------------------------------
Long-term and other interest expense 130 104
------------------------------------------------------------------------
Income taxes 2,167 1,199
------------------------------------------------------------------------
Non-controlling interest 786 742
------------------------------------------------------------------------
Stock-based compensation expense 648 -
------------------------------------------------------------------------
Gain on disposal of capital assets (2) -
------------------------------------------------------------------------
EBITDA (1) 6,681 3,937
------------------------------------------------------------------------
Normalization adjustments:
------------------------------------------------------------------------
Equipment lease expenses included in
operating expenses (2) 72 152
------------------------------------------------------------------------
Normalized EBITDA (1) 6,753 4,089
------------------------------------------------------------------------
(1) Refer to "Non-GAAP Measures" section below.

(2) Certain of the Company's wireline units, swabbing units, testing
packages and related equipment is leased through operating leases
(with the related lease payments being expensed as a component of
operating expenses in the statement of operations). If the Company
had owned these assets, the related depreciation expense would have
been an add back in determining an EBITDA figure. In order to be
comparable to companies that own their capital assets (as compared
to CanSub which uses operating leases to finance a portion of its
fleet), the equipment lease payments expensed are reflected as an
add back in the Company's normalized EBITDA calculation.


NON-GAAP MEASURES

EBITDA represents earnings before interest, income taxes, depreciation and amortization and is a widely used financial indicator in the oilfield services sector. Normalized EBITDA represents EBITDA adjusted for certain equipment lease expenses that are recorded in operating expenses. EBITDA and normalized EBITDA should not be considered as an alternative to operating income or operating earnings, as an indicator of financial performance. EBITDA and normalized EBITDA are not measures determined in accordance with Canadian Generally Accepted Accounting Principals ("GAAP") and therefore EBITDA and normalized EBITDA as presented may not be comparable to similarly titled measures of other companies.



CANADIAN SUB-SURFACE ENERGY SERVICES INC.
Consolidated Balance Sheets
(in thousands of dollars)

(Unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------
March 31, December 31,
2006 2005
------------------------------------------------------------------------

Assets
Current assets:
Accounts receivable $ 19,512 $ 14,085
Deposits and other 1,610 402
Current portion of loans receivable (note 7) 119 126
Income taxes receivable 29 -
Inventory 385 -
Due from related parties (note 4) 176 -
------------------------------------------------------------------------
21,831 14,613

Due from related parties (note 4) - 174
Loans receivable (note 7) - 37
Property and equipment (note 5) 18,612 12,715
Future income tax asset (note 3) 9,496 -
Intangible assets (note 6) 538 601
Goodwill 1,401 1,401
------------------------------------------------------------------------
$ 51,878 $ 29,541
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness (note 8) $ 1,700 $ 4,924
Accounts payable and accrued liabilities 9,045 6,574
Due to related parties (notes 1 and 4) 1,500 -
Callable debt (note 9) 1,510 1,832
Notes payable (note 10) - 1,266
Current portion of long-term debt (note 11) 99 99
Shareholders' loans (note 14) - 803
Income taxes payable - 1,258
Current portion of obligations under
capital leases (note 12) 2,448 1,346
------------------------------------------------------------------------
16,302 18,102

Obligations under capital leases (note 12) 4,484 2,657
Long-term debt (note 11) 82 107
Preferred share liability (note 11) 4,162 -
Future income taxes (note 13) - 2,180
Deferred credit (note 3) 9,956 -
------------------------------------------------------------------------
34,986 23,046

Non-controlling interest - 2,520

Shareholders' equity:
Share capital (note 15) 34,677 500
Contributed surplus (note 15) 2,516 1,868
Retained earnings (deficit) (20,301) 1,607
------------------------------------------------------------------------
16,892 3,975
Commitments (note 19)
Subsequent events (note 23)
------------------------------------------------------------------------
$ 51,878 $ 29,541
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

On behalf of the Board:
"Harry Knutson" "Darshan Kailly"
Director Director

CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Consolidated Statements of Earnings and Retained Earnings (Deficit)
(in thousands of dollars; except per share amounts)

(Unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended
March 31,
--------------------------
2006 2005
------------------------------------------------------------------------
Revenue $ 22,402 $ 14,146

Expenses:
Operating 13,848 9,048
Selling, general and administrative 2,519 1,161
Depreciation and amortization 600 311
Interest on long-term debt 93 50
Other interest 37 54
------------------------------------------------------------------------
17,097 10,624

------------------------------------------------------------------------
Earnings before income taxes 5,305 3,522

Income taxes (note 13):
Current - 1,188
Future 2,167 11
------------------------------------------------------------------------
2,167 1,199

------------------------------------------------------------------------
Earnings before non-controlling interest 3,138 2,323

Non-controlling interest (786) (742)
------------------------------------------------------------------------
Net earnings 2,352 1,581

Retained earnings, beginning of period 1,607 2,622

Purchase of non-controlling interest 3,306 -

Cash and Class B preferred shares paid to
CanSub Group shareholders (27,566) -

Equity of 1156853 Alberta Ltd. (note 20) - (2,294)

------------------------------------------------------------------------
Retained earnings (deficit), end of period $ (20,301) $ 1,909
------------------------------------------------------------------------
------------------------------------------------------------------------

Net earnings per common share (note 16)
Basic $ 0.25 $ 0.31
Diluted $ 0.24 $ 0.31
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Consolidated Statements of Cash Flows
(in thousands of dollars)

(Unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended
March 31,
--------------------------
2006 2005
------------------------------------------------------------------------
Cash provided by (used in):

Operations:
Net earnings $ 2,352 $ 1,581
Depreciation and amortization 600 311
Gain on disposal of equipment 2 -
Future income taxes 2,167 11
Stock based compensation 648 -
Non-controlling interest 786 742
------------------------------------------------------------------------
6,555 2,645
Change in non-cash working capital
related to operating activities (note 17) (4,905) (3,823)
------------------------------------------------------------------------
1,650 (1,178)
------------------------------------------------------------------------

Financing:
Decrease in amounts due from related parties (2) 224
Repayment of callable debt (322) (247)
Increase (decrease) in bank indebtedness (1,712) 1,509
Increase (decrease) in notes payable (1,266) 1,676
Repayment of long-term debt (25) (25)
Increase (decrease) in shareholders' loans 177 (119)
Repayment of shareholders' loans (981) -
Increase in obligations under capital lease 3,448 -
Repayment of obligations under capital lease (519) (96)
Decrease (increase) in loans receivable 44 (46)
Net proceeds on issuance of common shares 31,905 -
Proceeds from exercise of stock options 810 -
Transaction costs related to acquisition of CWC (1,105) -
Cash portion of payment to CanSub Group
shareholders (note 1) (26,066) -
------------------------------------------------------------------------
4,386 2,876
------------------------------------------------------------------------

Investing:
Acquisition of property and equipment (6,438) (471)
Disposal of property and equipment 4 -
Equipment held for resale - 991
Change in non-cash working capital related to
investing activities 398 76
------------------------------------------------------------------------
(6,036) 596
------------------------------------------------------------------------

Equity of 1156853 Alberta Ltd. - (2,294)

------------------------------------------------------------------------
Net change in cash - -

Cash, beginning of period - -

------------------------------------------------------------------------
Cash, end of period $ - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Notes to the Consolidated Financial Statements
(in thousands of dollars)

Three months ended March 31, 2006
(Unaudited)


1. Basis of presentation and nature of operations:

These consolidated financial statements include the accounts of Canadian Sub-Surface Energy Services Corp. (the "Company", formerly named Canada West Capital Inc. ("CWC")) and its three wholly-owned subsidiaries, Canadian Sub-Surface Energy Services Inc, Canadian Sub-Surface Gas Testing Inc. and 1156853 Alberta Ltd. (the "CanSub Group"). The CanSub Group was acquired by CWC effective February 14, 2006. Subsequent to the acquisition, the former shareholders of the CanSub Group held the largest percentage of Class A common voting shares of the Company and therefore the CanSub Group was deemed to be the acquirer for accounting purposes. Accordingly, the transaction has been accounted for as a reverse takeover (using the purchase method) whereby the assets and liabilities of CWC were recorded at their fair market values (note 3) at the February 14th transaction date. The comparative figures for the three-month period ended March 31, 2005 are from the combined consolidated financial results of the CanSub Group.

CWC was incorporated on June 14, 1998 under the Business Corporations Act (Ontario). It was then continued under the Canada Business Corporations Act on January 13, 2004 and further continued under the Business Corporation's Act (Alberta) subsequent to the February 14, 2006 transaction. Just prior to the February 14th transaction, CWC was publicly traded on the NEX Board of the TSX Venture. On December 30, 2005, CWC and the CanSub Group entered into an Arrangement Agreement which included the reorganization of CWC's share capital, a $34.0 million brokered private placement financing and the acquisition of the CanSub Group. On February 14, 2006, CWC closed the $34.0 million (net proceeds of $31.905 million after deducting related commissions) financing through the issue of 8,095,238 shares at a price of $4.20 per share, and then completed the acquisition of the CanSub Group for a net purchase price (subject to adjustment) of $49.132 million. The initial purchase price consisted of the payment of $24.566 million in cash and the remaining $24.566 million in shares. The share component consisted of 5,491,905 Class A common shares and 357,143 Class B shares (both share classes valued at $4.20 per share). The purchase price was increased by $1.5 million to a total of $50.632 million as a result of the purchase price adjustment clause contained in the Arrangement Agreement. The purchase price adjustment is payable in cash to the CanSub Group of shareholders and is reflected in current liabilities on the March 31, 2006 balance sheet. As part of the Arrangement Agreement, CWC changed its name to Canadian Sub-Surface Energy Services Corp. Shares of the Company commenced trading on the TSX on February 17, 2006.

The Company provides the following oilfield services in western Canada through its operating divisions: Wireline services (including cased-hole electric line and slickline), swabbing, well optimization and production testing.

2. Summary of significant accounting policies:

The interim consolidated financial statements of the Company have been prepared by management in accordance with Canadian Generally Accepted Accounting Principals ("GAAP") applied on a consistent basis using the same accounting principals as the audited, combined consolidated financial statements of the CanSub Group at December 31, 2005.

(a) Principles of consolidation:

For the period ended March 31, 2006, these consolidated financial statements include the accounts of the Company and its three wholly owned subsidiaries: Canadian Sub-Surface Energy Services Inc., Canadian Sub-Surface Gas Testing Inc. and 1156853 Alberta Ltd. For the comparative period ended March 31, 2005, the consolidated financial statements include the accounts of Canadian Sub-Surface Energy Services Inc., it's 46.5% owned subsidiary Canadian Sub-Surface Gas Testing Inc. ("Gas Testing") and 1156853 Alberta Ltd. (a Company controlled by shareholders of Canadian Sub-Surface Energy Services Inc.) ("115"). The remaining 53.5% of Gas Testing shares were owned by shareholders of the CanSub Group. Also included from the acquisition date of December 1, 2005 is 789047 Alberta Ltd., a 100% owned subsidiary of Canadian Sub-Surface Energy Services Inc.

All significant intercompany balances and transactions have been eliminated.

(b) Property and equipment:

During the three-month period ended March 31, 2006, the Company revised its accounting estimates related to several property and equipment depreciation rates. The details of this change are listed below. This change has been accounted for on a prospective basis.

Property and equipment is stated at cost. Depreciation has been calculated using the declining balance method over the estimated useful lives of the assets at the following annual rates:



------------------------------------------------------------------------
Revised rate Previous rate
------------------------------------------------------------------------

Trucks 25% 30%
Truck equipment 15% 15%
Field equipment 15% 20%
Furniture and office equipment 20% 10%
Computer hardware and software 30% 30%
------------------------------------------------------------------------
------------------------------------------------------------------------


(c) Inventory:

Inventory consisting of parts and operating supplies is carried at the lower of cost, determined on a first in first out basis, and net realizable value.

(d) Long-lived assets:

On a periodic basis, management assesses the carrying value of long-lived assets for indications of impairment. Indications of impairment include items such as an ongoing lack of profitability and significant changes in technology. When an indication of impairment is present, the Company tests for impairment by comparing the carrying value of the asset to its net recoverable amount. If the carrying amount is greater than the net recoverable amount, the asset is written down to its estimated fair value.

(e) Intangible assets:

The Company amortizes its intangible assets over their estimated useful lives of 3 years on a straight-line basis.

(f) Goodwill:

Goodwill represents the portion of the purchase price paid on the acquisition of businesses in excess of the value assigned to identifiable net assets acquired. Goodwill is tested for impairment at least annually. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting segment is compared with its fair value. When the fair value of a reporting segment exceeds its carrying amount, goodwill of the reporting segment is considered not to be impaired and the second step of the impairment test is unnecessary. The second step is carried out when the carrying amount of a reporting segment exceeds its fair value, in which case the implied fair value of the reporting segment's goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. When the carrying amount of a reporting segment's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.

(g) Income taxes:

The Company follows the asset and liability method of accounting for future income taxes, whereby temporary differences arising from the difference between the tax basis of an asset or liability and its carrying amount on the balance sheet are used to calculate future income tax liabilities or assets. Future income tax liabilities or assets are calculated using income tax rates currently enacted or substantively enacted in the period that the temporary differences are expected to reverse.

(h) Revenue recognition:

The Company's services are provided based upon orders and contracts with its customers that include fixed or determinable prices on the basis of the services rendered method, with agreed upon daily or hourly rates plus recovery of certain costs. Revenue is recognized when services are rendered and only when collectibility is reasonably assured.

(i) Stock based compensation:

The Company records stock based compensation expense for stock options granted to employees, officers, directors and consultants using the fair value method. Under this method, stock based compensation is recorded over the vesting period of the option based on the fair value of the option at the grant date.

(j) Per share amounts

Basic earnings per common share is calculated by dividing the income available to common shareholders by the weighted average number of common shares outstanding during the period.

Diluted earnings per common share is based on the treasury stock method. Under the treasury stock method, the weighted average number of common shares outstanding assumes that the proceeds to be received on the exercise of dilutive share options are used to repurchase common shares at the average market price during the period.

(k) Financial instruments:

The Company's financial instruments consist of bank indebtedness, accounts receivable, deposits and other, loans receivable, income tax receivable, accounts payable and accrued liabilities, related party amounts, callable debt, long-term debt, obligations under capital lease and bank debt. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying values, due to the short period to maturity of the instruments, unless otherwise noted.

The Company is exposed to interest rate risk to the extent that the bank debt, bank indebtedness and obligations under capital leases have variable interest rates.

The Company is exposed to credit risk in the event it is unable to collect, in full, the accounts receivable from its customers. The Company employs established credit approval practices and accounts receivable are closely monitored by management to mitigate credit risk.

It is not practicable to determine the fair value of loans receivable and due from related parties, due to the limited amount of comparable market information available.

(l) Use of estimates:

The financial statements of the Company have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The timely preparation of these financial statements in conformity with Canadian GAAP requires that Management make estimates and assumptions and use judgment regarding the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. The most significant are the estimates for depreciation and amortization, goodwill, intangible assets, stock based compensation, valuation of income tax assets and certain components of employee compensation. Accordingly, actual results could differ from those estimates. The financial statements have, in management's opinion, been prepared within reasonable limits of materiality and within the framework of the Company's accounting policies.

3. Transaction with Canada West Capital Inc.:

The transaction described in note 1 was accounted for by the purchase method with the CanSub Group being the deemed acquirer of CWC. The results of operations of CWC are included in the consolidated financial statements from February 14, 2006. Consideration of $1,569 consisted of 373,689 Class A common shares (with a deemed value of $4.20 per share) issued to the CWC shareholders.



The fair values of the net assets acquired were as follows:

------------------------------------------------------------------------
Cash $ 1,512
Accounts receivable 47
Future income tax asset related to
non-capital losses and unclaimed
scientific research and development
expenditures 12,768
Future income tax asset - transaction costs 185
Current liabilities (768)
Preferred share liability (2,219)
Deferred credit (9,956)
------------------------------------------------------------------------
Net assets acquired $ 1,569
------------------------------------------------------------------------
------------------------------------------------------------------------


4. Related party transactions:

(a) The amounts due to and from related parties are non-interest bearing, unsecured, and have no specified terms of repayment.

Included in due from related parties is an amount due from a company controlled by a significant shareholder of the Company: March 31, 2006 - $138 (December 31, 2005 - 174).

The purchase price adjustment payable of $1,500 is payable to the shareholders of the Company who were previously shareholders of the CanSub Group (see note 1).

(b) For the period ended March 31, 2006, legal fees of $203 were charged from a professional services firm in which one of the Company's directors is a partner.



5. Property and equipment:

------------------------------------------------------------------------
Accumulated Net book
March 31, 2006 Cost depreciation value
------------------------------------------------------------------------

Trucks $ 4,053 $ 1,077 $ 2,976
Truck equipment 9,335 2,747 6,588
Field equipment 11,329 2,880 8,449
Furniture and office equipment 143 45 98
Computer hardware and software 722 221 501
------------------------------------------------------------------------
$ 25,582 $ 6,970 $ 18,612
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Accumulated Net book
December 31, 2005 Cost depreciation value
------------------------------------------------------------------------
Trucks $ 3,200 $ 949 $ 2,251
Truck equipment 6,925 2,609 4,316
Field equipment 8,356 2,649 5,707
Furniture and office equipment 129 40 89
Computer hardware and software 540 188 352
------------------------------------------------------------------------
$ 19,150 $ 6,435 $ 12,715
------------------------------------------------------------------------
------------------------------------------------------------------------


Included in property and equipment at March 31, 2006 are assets under capital leases with a total cost of $8,282 (December 31, 2005 - $4,839) and net book value of $7,050 (December 31, 2005 - $ 6,863).

6. Intangible assets:

At March 31, 2006 the Company's intangible assets consisted of a patent pending downhole technology, a customer list and contracts. The carrying value of these intangibles at March 31, 2006 was $538 (December 31, 2005 - $601) net of amortization of $222 (December 31, 2005 - $159).

7. Loans receivable:

Loans receivable represents amounts due from several owner operators for equipment they are leasing from the Company. These loans are repayable in monthly instalments of $14,820 (including interest) and are secured by reimbursements to the owner operators. The interest rates on these loans range between 5.9% and 7.9%. All loans are scheduled to be repaid by March 31, 2007.

8. Bank indebtedness:

At March 31, 2006, the Company had a revolving loan facility with a major chartered bank with total credit available equal to the lesser of $8,500 and 75% of the accounts receivable balances less than 90 days of age. The facility bears interest at the bank prime rate plus 0.75% per annum, and is due on demand. This loan facility is secured by the security described in note 9.



9. Callable debt:

------------------------------------------------------------------------
March 31, December 31,
2006 2005
------------------------------------------------------------------------
Equipment loans $ 275 $ 365
Acquisition loan 925 1,025
Demand loan 223 307
Other 87 135
------------------------------------------------------------------------
$ 1,510 $ 1,832
------------------------------------------------------------------------
------------------------------------------------------------------------


The equipment loans, acquisition loan and demand loan are all held by one major chartered bank, are due on demand and repayable in aggregate principal monthly amounts of $68,421 plus interest at the bank prime rate plus 1.0% per annum. These loans and the revolving loan facility (note 8) are secured by:

(a) a general security agreement covering all present and future property of the Company (exclusive of the security otherwise noted to which they have a second charge); and

(b) assignment of all risk insurance proceeds.

The other callable debt relates to a loan that is held by a Canadian chartered bank, secured by certain equipment of the Company, is due on demand and has monthly repayments of $15,155 (which includes principal and interest) at the bank prime rate plus 1.25%.

Principal payments due over the next four years, on the callable debt (unless demanded), are as follows:



------------------------------------------------------------------------
April 1 - March 31
2006 - 2007 $ 790
2007 - 2008 395
2008 - 2009 300
2009 - 2010 25
------------------------------------------------------------------------
$ 1,510
------------------------------------------------------------------------
------------------------------------------------------------------------


At December 31, 2005, the Company was in violation of one of its debt covenants that required the maintenance of a certain working capital ratio. This occurred as a result of the Company utilizing its operating loan to finance the acquisition of various capital assets. At March 31, 2006, the Company is in compliance with all debt covenants.



10. Notes payable:

The notes payable balance is comprised of the following:

------------------------------------------------------------------------
March 31, December 31,
2006 2005
------------------------------------------------------------------------
Note payable to shareholder $ - $ 271
Note payable - other - 995
------------------------------------------------------------------------
$ - $ 1,266
------------------------------------------------------------------------
------------------------------------------------------------------------


Amounts outstanding at December 31, 2005 were repaid during February 2006 and did not bear interest.

11. Long-term debt:

The Company's long-term debt is with the Business Development Corporation of Canada and is secured by certain equipment, an additional security interest in present and future property (subject only to existing registered charges) and personal guarantees from certain shareholders for 50% of the balance outstanding. The debt is repayable in monthly principal instalments of $8 plus interest at the bank's prime rate.



Principal repayments over the next two years are as follows:

------------------------------------------------------------------------
April 1 - March 31:
2006 - 2007 $ 99
2007 - 2008 82
------------------------------------------------------------------------
$ 181
------------------------------------------------------------------------
------------------------------------------------------------------------


Class B non-voting preferred shares:

(i) Authorized:
Unlimited number of Class B non-voting preferred shares

(ii) Issued and outstanding:

------------------------------------------------------------------------
Number of
Shares Amount
------------------------------------------------------------------------
Shares issued to CanSub Group
shareholders (note 1) 357,143 $ 1,500

Conversion of 4,437,307
preferred shares of CWC
to Class B shares 633,901 2,662
------------------------------------------------------------------------
Balance - March 31, 2006 991,044 $ 4,162
------------------------------------------------------------------------
------------------------------------------------------------------------


The Class B preferred shares are non-voting, have a cumulative dividend of 2.5% per annum, are convertible at the option of the holder to Class C shares and have priority as to payment of the redemption price ($4.20/share) and all declared but unpaid dividends on winding up, liquidation or dissolution of the Company. These shares have all the characteristics of debt and as such have been classified as such on the Balance Sheet. These shares arose out of the Arrangement Agreement between the CanSub Group and CWC that was effective on February 14, 2006.



12. Obligations under capital lease:

------------------------------------------------------------------------
March 31, December 31,
2006 2005
------------------------------------------------------------------------

Wells Fargo Equipment Finance Co.,
payable in monthly instalments of
$9,146 principal plus interest at
a rate of 7.86%. The loan is
secured by equipment/tools under
the lease and matures in January 2007 $ 140 $ 164

HSBC Bank Canada, payable in monthly
instalments of $7,618 which includes
principal and interest at 5.9%. The
loan is secured by equipment under
the lease 75 96

HSBC Bank Canada, payable in monthly
instalments of $7,127 which includes
principal and interest at 6.2%. The
loan is secured by equipment under
the lease 109 129

HSBC Bank Canada, payable in monthly
instalments of $7,944, which includes
principal and interest at 6.3%. The
loan is secured by equipment under
the lease 260 284

HSBC Bank Canada, payable in monthly
instalments of $27,053, which includes
principal and interest at 6.0%. The
loan is secured by equipment under
the lease 740 814

HSBC Bank Canada payable in monthly
instalments of $59,434 which includes
principal and interest at 5.9%. The
loan is secured by equipment under lease 2,305 2,446

HSBC Bank Canada payable in monthly
instalments of $18,809 which includes
principal and interest at 6.1%. The
loan is secured by equipment under lease 587 -

HSBC Bank Canada payable in monthly
instalments of $58,926 which includes
principal and interest at 6.1%. The
loan is secured by equipment under lease 1,840 -

ABN Amro Leasing payable in monthly
instalments of $13,437 which includes
principal and interest at 6.7%. The
loan is secured by equipment under lease 370 -

ABN Amro Leasing payable in monthly
instalments of $114,342 which includes
principal and interest at 6.5%. The
loan is secured by equipment under lease 420 -

Miscellaneous equipment leases 86 70
------------------------------------------------------------------------
6,932 4,003

Less current portion (2,448) (1,346)
------------------------------------------------------------------------
$ 4,484 $ 2,657
------------------------------------------------------------------------
------------------------------------------------------------------------



Principal payments due over the next five years (during which the lease obligation will be fully repaid) are as follows:



------------------------------------------------------------------------
April 1 - March 31:
2006 - 2007 $ 2,448
2007 - 2008 2,230
2008 - 2009 1,856
2009 - 2010 390
2010 - 2011 8
------------------------------------------------------------------------
$ 6,932
------------------------------------------------------------------------
------------------------------------------------------------------------


At March 31, 2006, the Company had a leasing credit line available from HSBC Bank Canada with a total limit of $13,000. At March 31, 2006, there was a total of $5,916 (including capital and operating leases) (December 31, 2005 - $6,332) drawn on this line.

13. Income taxes:

Income tax expense is calculated using the combined federal and provincial statutory income tax rate. The reconciliation of income tax expense calculations and the provision reported in the financial statements is as follows:



------------------------------------------------------------------------
Three months Three months
ended ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Earnings before income taxes $ 5,305 $ 3,522
------------------------------------------------------------------------
Combined federal and provincial income
tax rate 33.6% 33.6%

Expected income tax provision 1,782 1,183

Benefit realized from small business
deduction - (14)
Non-deductible stock based
compensation expense 218 -
Non-deductible expenses 172 3
Other (5) 27
------------------------------------------------------------------------
Income tax expense $ 2,167 $ 1,199
------------------------------------------------------------------------
------------------------------------------------------------------------


The components of the future income tax asset are as follows:

------------------------------------------------------------------------
March 31, December 31,
2006 2005
------------------------------------------------------------------------
Non capital losses and unclaimed
scientific research and
development expenses $ 10,868 $ -
Other 1,900 -
------------------------------------------------------------------------
$ 12,768 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------

The components of the future income tax liability are as follows:

------------------------------------------------------------------------
March 31, December 31,
2006 2005
------------------------------------------------------------------------
Property and equipment $ 3,059 $ 2,004
Capital lease liability (2,207) (1,192)
Partnership income 3,448 1,352
Transaction costs (1,009) 16
Other (19) -
------------------------------------------------------------------------
$ 3,272 $ 2,180
------------------------------------------------------------------------
------------------------------------------------------------------------

The Company has losses of $24.4 million available to reduce future
taxable income. These losses expire as follows:

------------------------------------------------------------------------
2006 $ 4,022
2007 4,940
2008 4,296
2009 3,221
2010 7,159
2011 272
2012 498
------------------------------------------------------------------------
$ 24,408
------------------------------------------------------------------------
------------------------------------------------------------------------


Research and development costs of $9.4 million are available to reduce future taxable income and do not expire. Capital losses of $3.5 million are available to reduce future capital gains and do not expire. Investment tax credits can be claimed against federal income taxes payable and expire between 2006 and 2012.

The above amounts are subject to review and assessment by taxation authorities.

14. Shareholders' loans:

The amounts due to shareholders are without interest or specific terms of repayment. These loans were fully repaid during the three month period ended March 31, 2006.

15. Share capital:

On February 13, 2006 the Company amended its articles of incorporation to alter its authorized capital by designating the following: an unlimited number of Class A voting shares, an unlimited number of Class B non-voting preferred shares, an unlimited number of Class C non-voting common shares and an unlimited number of preferred shares issuable in series. The rights, privileges, restrictions and conditions are disclosed below for each class of shares.

(a) Common shares:

(i) Authorized:

Unlimited number of Class A voting common shares
Unlimited number of Class C non-voting common shares

(ii) Issued and outstanding:



------------------------------------------------------------------------
Number of
Class A voting common shares Amount
------------------------------------------------------------------------

Balance at December 31, 2005 1,991 $ 500
Purchase and cancellation of Company shares (1,991) -
Issue of shares to CanSub Group shareholders 5,125,247 -
Exercise of CanSub Group options 366,658 810
Issue of shares pursuant to February 14, 2006
private placement 8,095,238 31,905
Issue of shares to shareholders of CWC (note 3) 373,689 1,569
Transaction costs applied to share capital - (998)
Income tax benefit of transaction costs and
Commissions related to private placement - 891
------------------------------------------------------------------------
Balance at March 31, 2006 13,960,832 $ 34,677
------------------------------------------------------------------------
------------------------------------------------------------------------


The Class C common shares are non-voting and have rights to receive a proportionate share (on parity with Class A shares) of the remaining assets of the corporation in the event of liquidation, dissolution, or winding up of the Company subject to the preferential rights of the Class B shares and preferred shares. Issued and outstanding at March 31, 2006 - nil (December 31, 2005 - nil).

(b) Preferred Shares:

(i) Authorized:

Unlimited number of preferred shares, issuable in one or more series with rights and privileges to be determined by the Board of Directors.

(ii) Issued and outstanding at March 31, 2006 - nil (December 31, 2005 - nil).

(c) Stock options:

As part of the February 14, 2006 transaction, the shareholders of CWC approved a stock option plan that allows the Company to issue options totaling a maximum of 10% of the Company's issued and outstanding shares. Effective February 14, 2006, the Company issued its first tranche of options to directors, officers, employees and consultants totaling 1,145,000 options. These options have a five year term and vest one-third per year over three years commencing on the first anniversary date of the grant. The other options issued during the quarter have the same term and vesting provisions.

(d) Contributed surplus:



------------------------------------------------------------------------
Contributed surplus at December 31, 2005 $ 1,868

Stock based compensation expense 648
------------------------------------------------------------------------
Contributed surplus at March 31, 2006 $ 2,516
------------------------------------------------------------------------
------------------------------------------------------------------------


The Company uses the fair value method of accounting for stock based compensation arrangements. For those options issued on February 14, 2006 and subsequently, the fair value was calculated using the Black-Scholes option pricing model. The following assumptions were used to determine the fair value of options on the date of grant:



------------------------------------------------------------------------
Risk free interest rate 4.06%
Term 5 years
Vesting period 3 years
Expected share volatility 50%
------------------------------------------------------------------------
------------------------------------------------------------------------


Changes in the number of options outstanding during the three month period ended March 31, 2006 are summarized below. There were no options issued and outstanding during the prior year three-month period ended March 31, 2005.



------------------------------------------------------------------------
Three months ended
March 31, 2006
-----------------------
Weighted
average
Number of exercise
options price
------------------------------------------------------------------------
Class A common shares:
Balance at December 31, 2005 366,658 $ 2.21
Exercised prior to February 14, 2006 (366,658) 2.21
------------------------------------------------------------------------
Balance at February 14, 2006 - -
Granted: February 14 - March 31, 2006 1,170,750 4.26
Forfeited (8,000) 4.20
------------------------------------------------------------------------
Balance at March 31, 2006 1,162,750 $ 4.26
------------------------------------------------------------------------
------------------------------------------------------------------------


Due to the vesting requirements listed above, no stock options were exercisable at March 31, 2006. Similarly, no options expired during the period.

The Company recorded stock based compensation expense and the related credit to contributed surplus of $648 for the three months ended March 31, 2006 (March 31, 2005 - nil). Of this amount, $567 was realized prior to February 14, and the remaining $81 was realized subsequently. The fair value of the options granted is $2.03 per option.

16. Per share amounts:

The weighted average number of shares for the period ended March 31, 2006 is 9,579,705 (March 31, 2005 - 5,125,247). The number of shares outstanding at March 31, 2005 included the effect of the transaction described in notes 1 and 3.

Reconciliation of earnings per share and diluted earnings per share:



------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------

Net income available to common shareholders $ 2,352 $ 1,581
Weighted average number of common shares 9,579,705 5,125,247
Basic earnings per share $ 0.25 $ 0.31
------------------------------------------------------------------------

Net income available to common shareholders $ 2,352 $ 1,581
Weighted average number of common shares 9,579,705 5,125,247
Dilutive effect of stock options 377,866 -
Diluted weighted average number of
common shares 9,957,571 5,125,247
------------------------------------------------------------------------

Diluted earnings per share $ 0.24 $ 0.31
------------------------------------------------------------------------


17. Supplementary cash flow information:

Changes in non-cash working capital:

------------------------------------------------------------------------
Three months Three months
ended ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Accounts receivable $ (5,380) $ (5,483)
Deposits and other (658) (5)
Accounts payable and accrued liabilities 1,703 658
Due to related parties 1,500 -
Income taxes payable (recoverable) (1,287) 1,083
Inventory (385) -
------------------------------------------------------------------------
$ (4,507) $ (3,747)
------------------------------------------------------------------------
Non-cash working capital change related
to operating activities $ (4,905) $ (3,823)
Non-cash working capital change related
to investing activities 398 76
------------------------------------------------------------------------
$ (4,507) $ (3,747)
------------------------------------------------------------------------
Interest paid $ 108 $ 86
Income taxes paid $ 1,287 $ 104
------------------------------------------------------------------------
------------------------------------------------------------------------


18. Seasonality:

The operations of the Company are seasonal. The oil and gas industry is generally more active during the winter months as the movement of heavy equipment is easier over frozen ground. In the spring months, road bans and wet weather can hamper the ability to move equipment and adversely impacts the Company's revenue generating capability. Rain in the summer and fall months can have a significant impact on the Company's revenue. When equipment is not in use, crews are not required and therefore operating costs normally decrease in slow operating periods.

19. Commitments:

(a) At March 31, 2006, the Company had the following annual commitments under equipment operating lease agreements:



------------------------------------------------------------------------
April 1 - March 31:
2006 - 2007 $ 917
2007 - 2008 553
2008 - 2009 127
2009 - 2010 14
------------------------------------------------------------------------
------------------------------------------------------------------------

(b) At March 31, 2006, the Company had the following annual commitments
under office and warehouse lease agreements:

------------------------------------------------------------------------
April 1 - March 31:
2006 - 2007 $ 708
2007 - 2008 542
2008 - 2009 499
2009 - 2010 491
2010 - 2011 456
------------------------------------------------------------------------
------------------------------------------------------------------------


(c) At March 31, 2006, the Company had commitments to purchase $7,542 of wireline, swabbing, production testing and related equipment. Delivery of these items is scheduled to occur in 2006.

20. Equity of 1156853 Alberta Ltd.

The adjustment for the equity of 115 represents the investment by 115 in the shares of Canadian Sub-Surface Energy Services Inc. and Canadian Sub-Surface Gas Testing Inc.

21. Comparative information:

Certain comparative figures have been reclassified to conform with the current period presentation.

22. Segmented information:

The Company's reportable operating segments, as determined by management, are strategic operating units that offer different products and services, and do not transact with one another. The Company has two reportable operating segments: Wireline and Gas Testing. These two segments operate in one geographic area, the Western Canadian Sedimentary Basin.

The Wireline segment provides primarily cased hole electric line and slick line services and also provides swabbing and well optimization to the oil gas industry.

The Gas Testing segment provides production testing and production evaluation services to the oil and gas industry.

All selling and administrative expenses related to the Company have not been allocated between the segments.



------------------------------------------------------------------------
Three months ended
March 31, 2006
-----------------------------------
Wireline Gas Testing Total
------------------------------------------------------------------------

Revenue $ 14,163 $ 8,239 $ 22,402
Operating expenses 9,245 4,603 13,848
------------------------------------------------------------------------
Operating margin 4,918 3,636 8,554

Selling, general and administrative 2,519
Depreciation 449 151 600
------------------------------------------------------------------------
Earnings from operations 5,435

Goodwill - 1,401 1,401
Property and equipment 12,667 5,945 18,612
Capital expenditures 3,886 2,552 6,438
Total assets $ 37,043 $ 14,835 $ 51,878
------------------------------------------------------------------------


------------------------------------------------------------------------
Three months ended
March 31, 2005
-----------------------------------
Wireline Gas Testing Total
------------------------------------------------------------------------
Revenue $ 8,111 $ 6,035 $ 14,146
Operating expenses 5,741 3,307 9,048
------------------------------------------------------------------------
Operating margin 2,370 2,728 5,098

Selling, general and administrative 1,161
Depreciation 238 73 311
------------------------------------------------------------------------
Earnings from operations 3,626

Goodwill - 1,401 1,401
Property and equipment 4,749 2,410 7,159
Capital expenditures 382 91 472
Total assets $ 14,375 $ 10,305 $ 24,680
------------------------------------------------------------------------


23. Subsequent events:

On May 9, 2006, the Company entered into an exclusive asset purchase agreement with Colter Production Services Inc. ("Colter"), a Calgary-based natural gas production testing company, to purchase all of the assets of Colter's production testing business. In addition, the Company entered into asset purchase agreements with three owner/operators: Southern Wireline Services Ltd., Sure Shot Perforators Ltd. and VCEE Wireline Services Ltd. (the "Owner/Operators"). The Company has agreed to purchase all of the assets of each respective business of the Owner/Operators, which in aggregate includes 13 wireline units based in two locations in Alberta and one location in Saskatchewan. All of these acquisitions are arms-length transactions.

The aggregate purchase price of the acquisition of Colter and the Owner/Operators is approximately $29.85 million, with the Colter acquisition amounting to $13.75 million and the balance attributed to the Owner/Operators. The purchase price will be financed with $16.30 million in cash and $13.55 million through the issuance of common shares of CanSub. The number of shares to be issued in connection with the acquisitions will be issued at a deemed price of $7.37 per common share. The valuation of the share component for accounting purposes will be determined based on the fair market value of the Company's shares at the acquisition date. The closing of the acquisitions is scheduled to occur not later than May 31, 2006.

In connection with the acquisition of Colter and the Owner/Operators, the Company has entered into an agreement with a syndicate of underwriters to sell on a bought deal basis, by way of private placement, 2,333,333 common shares at a price of $7.50 per common share for gross proceeds of approximately $17.5 million. The underwriters have been granted an option to purchase an additional 200,000 common shares up to the day immediately preceding the closing date at the issue price. The net proceeds of the offering will be used to fund the Colter acquisition, the Owner/Operator acquisitions and for general working capital purposes. Closing of the private placement financing is scheduled to occur concurrently with the closing of the acquisitions not later than May 31, 2006.

This news release contains forward-looking statements that involve risks and uncertainties, which may cause actual results to differ materially from the statements made. When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect" and similar expressions are intended to identify forward-looking statements. Such statements reflect the views of Canadian Sub-Surface Energy Services Corp. with respect to future events and are subject to such risks and uncertainties. Many factors could cause our actual results to differ materially from the statements made including those factors detailed from time to time in filings made by the Company with Canadian securities regulatory authorities. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated or expected. Canadian Sub-Surface Energy Services Corp. does not intend and does not assume any obligation to update these forward-looking statements.


The Toronto Stock Exchange has neither approved nor disapproved of the information contained herein.

Contact Information

  • Canadian Sub-Surface Energy Services Corp.
    Brad Gabel
    President & CEO
    (403) 262-3247
    Email: bgabel@cansub.com
    or
    Canadian Sub-Surface Energy Services Corp.
    Chris Martin
    Vice President, Finance & CFO
    (403) 262-3247
    Email: cmartin@cansub.com