Canadian Sub-Surface Energy Services Corp.
TSX : CSE

Canadian Sub-Surface Energy Services Corp.

November 13, 2007 08:30 ET

Canadian Sub-Surface Energy Services Announces Q3 2007 Financial Results

CALGARY, ALBERTA--(Marketwire - Nov. 13, 2007) - Canadian Sub-Surface Energy Services Corp. ("CanSub" or "the Company") (TSX:CSE) announced today its financial and operating results for the three and nine month periods ended September 30, 2007.



Financial Highlights

(in thousands of dollars, except per share amounts or as otherwise noted)

----------------------------------------------------------------------------
Three Three Nine Nine
months months months months
ended ended ended ended
Sept Sept Sept Sept
30, 2007 30, 2006 % 30, 2007 30, 2006 %
(unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Revenue 17,533 20,625 (15%) 49,857 53,741 (7%)
----------------------------------------------------------------------------
Gross Margin 4,784 7,423 (36%) 11,553 17,876 (35%)
----------------------------------------------------------------------------
Gross Margin % 27.3% 36.0% (24%) 23.2% 33.3% (30%)
----------------------------------------------------------------------------
Cash Flow (1) 2,170 5,002 (57%) 3,667 11,526 (68%)
----------------------------------------------------------------------------
Normalized
EBITDA (1)(2) 2,690 5,228 (49%) 4,869 12,158 (60%)
----------------------------------------------------------------------------
Normalized
EBITDA as a
% of revenue 15.3% 25.3% (40%) 9.8% 22.6% (57%)
----------------------------------------------------------------------------
Net Earnings
(loss) (830) 2,192 (138%) (3,713) 5,350 (169%)
----------------------------------------------------------------------------
Net Earnings
(loss) per
share - basic
and diluted ($0.04) $0.12 - ($0.19) $0.36 -
----------------------------------------------------------------------------
Average
number of
common shares
outstanding
(in thousands) 19,324 18,333 - 19,324 17,326 -
----------------------------------------------------------------------------
(1) Refer to the "Non-GAAP measures" section below for details.
(2) EBITDA means earnings before interest, taxes, depreciation and
amortization and excludes stock based compensation expense. 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".


Operational Highlights

Revenue during Q3 2007 was $17.5 million as compared to revenue of $20.6 million recognized during Q3 2006. Normalized EBITDA was $2.7 million during Q3 2007 bringing year to date Normalized EBITDA for 2007 to $4.9 million. Financial results for 2007 continue to be negatively impacted by low equipment utilization rates due to the significant slow-down in natural gas drilling. As a result of the continuing weakness in natural gas prices, the total number of wells drilled (rig released) in the Western Canadian Sedimentary Basin ("WCSB") decreased from 7,095 in Q3 2006 to 5,397 during Q3 2007 - a 24% decline. On a year to date basis, the total number of wells drilled for the nine months ended September 30, 2007 was 13,135 as compared to 17,633 for the same period in 2006 - a 26% decrease.

Due to the current industry slow-down, there has been increased pricing pressure on most of the services offered by CanSub. As a result, CanSub has competitively priced its services (depending on the service and geographic region) in order to keep equipment utilized and crews working. This reduced pricing has resulted in margin erosion, some of which has been offset by previously announced cost cutting measures and operational optimization.

To respond to the overall drop in activity levels, CanSub continues to optimize operations and conserve financial resources by:

- Moving equipment and manpower to areas with greater activity levels. During the third quarter, CanSub established a new hub in Rainbow Lake (northern Alberta) and in early November, another new hub was established in Fort Nelson (northeast British Columbia). In addition, the Company is looking to move equipment to other areas in Alberta, British Columbia and Saskatchewan which have strong levels of activity.

- Reviewing all expenses related to manpower, equipment and facilities. CanSub management continues to implement cost control measures in each of these areas to ensure operating expenses are minimized without affecting the ability to deliver quality service to the Company's clients. The Company estimates that these measures will result in annualized reductions in operating and overhead expenses of approximately $2.0 million.

- Curtailing capital expenditures on a go-forward basis. The capital expenditure budget for 2007 was substantially completed at the end of the third quarter and there are minimal capital expenditures planned for the first six months of 2008. CanSub currently has an optimal equipment mix at each of its hubs and is not planning further expansion until there is evidence of an increase in drilling and completion activity levels. CanSub will continue to review opportunities for growth and attempt to take advantage of current industry conditions.

Despite the industry slow-down, the Company's wireline division (which accounts for approximately 60% of annual revenue) has been able to sustain reasonable utilization rates for its equipment due to its diversified service portfolio. In addition to services related to the completion of natural gas wells, this division also provides services related to oil wells, workovers of producing wells and abandonments. The Company's production testing division (which accounts for the remaining 40% of annual revenue) has a significant exposure to natural gas well drilling, and has experienced the greatest negative impact as a result of the industry slow-down.

During October, the Alberta government announced royalty changes for conventional oil and gas production as well as oilsands production in the province. Under these changes, most of which are scheduled to take effect on January 1, 2009, there will be an overall net increase in royalties paid by producers for production from Alberta wells. Based on the interpretation of the new royalty regime by industry sources, the conventional wells that will see the largest increase in royalties will be the medium depth oil and gas wells generally found through central Alberta.

As a result of the increased royalties in Alberta, it is anticipated that oil and gas producers will shift investment dollars into the neighboring provinces of British Columbia and Saskatchewan. CanSub is well situated to take advantage of this change. The following Company hubs are already servicing areas in British Columbia and Saskatchewan:

- Estevan, Saskatchewan - 3 electric line ("E-line") units servicing the highly active oil basin of southeast Saskatchewan with some work in southwest Manitoba.

- Weyburn, Saskatchewan area - 4 production testing packages as well as a portion of the Company's well optimization group servicing southeast and south central Saskatchewan.

- Provost, Alberta - 3 E-line units servicing east central Alberta as well as west central Saskatchewan (near the Lloydminister area).

- Medicine Hat, Alberta - 3 E-line units, 3 slickline units and 2 swabbing units servicing southeast Alberta and southwest Saskatchewan.

- Grande Prairie and Fairview, Alberta - 3 E-line and 7 slickline units servicing northwest Alberta and northeast British Columbia.

- Fort Nelson, British Columbia - established in early November, this hub will service northeast British Columbia with one initial E-line unit.

During Q3 2007, the Company added 1 net wireline unit (3 additions, net of retirement of 2 older units) and also added 1 swabbing unit. Below is a summary of CanSub's equipment fleet at September 30, 2007 as well as the budgeted equipment additions for the remainder of 2007.



----------------------------------------------------------------------------
# of Wireline # of Swabbing # of Testing
Units Units packages
----------------------------------------------------------------------------
Operating fleet at June
30, 2007 41 9 61
----------------------------------------------------------------------------
Additions during Q3
2007 3 - -
----------------------------------------------------------------------------
Units retired during
Q3 2007 (2) - -
----------------------------------------------------------------------------
Fleet size at Sept. 30
2007 42 9 61
----------------------------------------------------------------------------
Budgeted additions to
fleet during Q4 2007 3 1 -
----------------------------------------------------------------------------
Budgeted fleet size at
December 31, 2007 45 10 61
----------------------------------------------------------------------------


At the end of the third quarter, CanSub's wireline fleet consisted of 21 E-line units and 21 slickline units (after factoring in the conversion of 2 E-line units to slickline units during Q3).

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

The following Management's Discussion and Analysis ("MD&A") is for the consolidated financial statements of Canadian Sub-Surface Energy Services Corp. ("CanSub" or "the Company") as at and for the three and nine month periods ended September 30, 2007 and 2006. The consolidated financial statements and MD&A have been prepared taking into consideration information available as at November 8, 2007 and should be read in conjunction with the interim consolidated financial statements of the Company for the three and nine month periods ended September 30, 2007 and the audited consolidated financial statements of the Company for the year ended December 31, 2006.

Forward-looking statements

Certain statements in this MD&A, including (i) statements that may contain words such as "anticipate", "could", "expect", "seek", "may" "intend", "will", "believe", "should", "project", "forecast", "plan" and similar expressions, including the negatives thereof, (ii) statements that are based on current expectations and estimates about the markets in which the Company operates and (iii) statements of belief, intentions and expectations about developments, results and events that will or may occur in the future, constitute "forward-looking statements" and are based on certain assumptions and analysis made by the Company. Forward-looking statements in this MD&A include, but are not limited to, statements with respect to future capital expenditures, including the amount, nature and timing thereof; oil and natural gas prices and demand; other development trends within the oil and natural gas industry; business strategy; expansion and growth of the Corporation's business and operations and other such matters. Such forward-looking statements are subject to important risks and uncertainties, which are difficult to predict and that may affect the Company's operations, including but not limited to the impact of general economic conditions in Canada and the United States; industry conditions, including the adoption of new environmental, safety and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and natural gas prices; oil and natural gas product supply and demand and related demand for oilfield services; risks inherent in the Company's ability to generate sufficient cash flow from operations to meet its current and future obligations; increased competition; the lack of availability of qualified personnel or labor unrest; fluctuation in foreign exchange or interest rates; stock market volatility; opportunities available to or pursued by the Company and other factors, many of which are beyond the control of the Company. The Company's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do transpire or occur, what benefits the Company will derive therefrom. Subject to applicable law, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

February 14, 2006 Transaction between Canada West Capital and the CanSub Group

On February 14, 2006, Canada West Capital Inc. ("CWC") an inactive, public company acquired all of the shares of Canadian Sub-Surface Energy Services Inc., Canadian Sub-Surface Gas Testing Inc. and 1156853 Alberta Ltd. (collectively the "CanSub Group"). Subsequent to the acquisition, the former shareholders of the CanSub Group held the largest percentage of common shares of the new consolidated entity and controlled the management of the Company. Therefore the CanSub Group was deemed to be the acquirer for accounting purposes. Accordingly, the transaction was 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. CWC changed its name to Canadian Sub-Surface Energy Services Corp. as part of the transaction.

Internal corporate reorganization effective May 31, 2006

Immediately after the February 14, 2006 transaction, the CanSub Group of companies became wholly-owned subsidiaries of the Company. The three entities comprising the CanSub Group were amalgamated on May 31, 2006 and the amalgamated entity was subsequently wound up into the Company on June 1, 2006.

During 2005, the CanSub Group established a partnership through which the operating activities were conducted. The partnership has a June 30 year end (with the initial year end being June 30, 2006).

Comparative Information

Since the CanSub Group has been deemed the acquirer for accounting purposes, the comparative financial statements for the three and nine month periods ended September 30, 2006 include the financial results of the CanSub Group from January 1 to February 14, 2006 and then the results of the Company thereafter.

Business Units and Segmentation

The Company's operations are conducted through the partnership and consist of 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. Prior to June 1, 2006, a portion of the electric line and slickline services in the Wireline division were conducted through three private owner-operators, who owned their equipment and employed the crews who worked on the units. One of the advantages of utilizing the owner-operators is that they represented the Company in areas where the Company did not operate. There are no owner operators involved in the Testing division. The Company realized average margins of approximately 18% on the revenues generated by the owner operator wireline units. On May 31, 2006, the Company acquired all of the business assets of these three owner operators.

Acquisition of Colter Production Services on May 31, 2006

On May 31, 2006, the Company completed the acquisition of the business assets of Colter Production Services Inc. ("Colter"), a private production testing Company operating in Alberta. Commencing June 1, 2006 the revenues and earnings from Colter have been included in the Company's financial statements.

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 (particularly in the Testing division) and therefore operating costs normally decrease in slow operating periods.

Results of Operations

Revenues

The break-down of consolidated revenue between the Wireline and Testing divisions for the three and nine-month periods ended September 30, 2007 and
2006 are as follows:



----------------------------------------------------------------------------
Three Three Nine Nine
months months months months
ended ended ended ended
Sept Sept Sept Sept
30, 2007 30, 2006 % 30, 2007 30, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Wireline 11,496 13,073 (12%) 30,975 34,216 (9%)
----------------------------------------------------------------------------
Testing 6,037 7,552 (20%) 18,882 19,525 (3%)
----------------------------------------------------------------------------
Consolidated 17,533 20,625 (15%) 49,857 53,741 (7%)
----------------------------------------------------------------------------


Equipment utilization rates for both the Testing and Wireline divisions during Q3 2007 were lower than Q3 2006 reflecting more equipment in the WCSB chasing fewer jobs. Due to a continuing weakness in natural gas prices, oil and gas producers continued to defer natural gas drilling and completion projects. The slow-down in natural gas activities translated in to a significant decline in the total number of wells drilled (natural gas plus oil) as 7,095 wells were drilled in Q3 2006 compared to only 5,397 wells drilled in Q3 2007. As a result of the lower equipment utilization rates, many of CanSub's services came under pricing pressure resulting in reduced revenues and margins.

Despite the industry slow-down, the Company's wireline division (which accounts for approximately 60% of current annual revenue) has been able to sustain reasonable utilization rates for its equipment due to its diversified service portfolio. In addition to services related to the completion of natural gas wells, this division also provides services related to oil wells, workovers of producing wells and abandonments. The Company's production testing division (which accounts for the remaining 40% of annual revenue) has a significant exposure to natural gas well drilling, and has experienced the greatest negative impact as a result of the industry slow-down.

In Q3 2007, Wireline divisional revenue amounted to $11.5 million. Of that amount, $9.5 million was related solely to the wireline fleet (electric line ("E-line") and slickline units), which averaged 42 units in operation during the period. The remaining $2.0 million of revenue was attributed to swabbing and well optimization services. The wireline units completed approximately 1,530 jobs during the current quarter at an average per job revenue of approximately $6,184. This figure was higher than the per job revenue reported in Q1 and Q2 2007 ($5,684 and $5,625 per job respectively) as the sales mix in the current quarter consisted of a greater percentage of E-line jobs than in Q2 and Q1. E-line work, which consists primarily of perforating, logging and abandonment services, has higher associated revenues. The benefit of having a greater portion of E-line work in the sales mix was partially offset by pricing discounts to customers for both E-line and Slickline services.

In Q3 2006, Wireline divisional revenue amounted to $13.1 million. Of that amount, $11.5 million was attributed solely to the wireline fleet (E-line and slickline units) which averaged 33.5 units in operation. Swabbing and well optimization services comprised the remaining $1.6 million in revenue. The wireline units completed approximately 1,882 jobs at an average per job revenue of $6,128 with a sales mix of E-line and Slickline jobs that was similar to Q3 2007.

A significant portion of CanSub's wireline units that were added to the fleet over the past year have been working out of the Company's recently established northern Alberta operating hubs of Whitecourt, Grande Prairie and High Level. Work in these areas is generally billed out at higher rates to customers as wells are typically deeper and more complex. As a result, it would be expected that average per job wireline revenues would be higher in Q3 2007 as compared to Q3 2006 (given that the sales mix of electric line and slickline was similar). However, increases in rates from more northern area work was offset by pricing discounts implemented in the current quarter.

Testing division revenue in Q3 2007 was $6.0 million generated from an in-service fleet of 61 testing packages. The Q3 2006 Testing revenue of $7.6 million was generated from an in-service fleet of 56 packages. Although the testing fleet has increased over the past year, lower equipment utilization combined with lower pricing resulted in the $1.6 million revenue decline. This division has seen the greatest impact from the industry slow-down as it is geared towards new natural gas well completions. Pricing of services in this division is expected to remain extremely competitive until natural gas related activities in the WCSB recover.

Gross Margins (refer to Non-GAAP measures below)

The break-down of gross margins between the Wireline and Testing divisions during the current and prior periods is as follows:



----------------------------------------------------------------------------
Three Three Nine Nine
months months months months
ended ended ended ended
Sept Sept Sept Sept
30, 2007 30, 2006 % 30, 2007 30, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Gross Margins:
----------------------------------------------------------------------------
Wireline 3,410 5,036 (32%) 7,112 11,194 (36%)
----------------------------------------------------------------------------
Testing 1,374 2,387 (42%) 4,441 6,682 (34%)
----------------------------------------------------------------------------
Consolidated 4,784 7,423 (36%) 11,553 17,876 (35%)
----------------------------------------------------------------------------
Gross Margin %:
----------------------------------------------------------------------------
Wireline 29.7% 38.5% (23%) 23.0% 32.7% (30%)
----------------------------------------------------------------------------
Testing 22.8% 31.6% (28%) 23.5% 34.2% (31%)
----------------------------------------------------------------------------
Consolidated 27.3% 36.0% (24%) 23.2% 33.3% (30%)
----------------------------------------------------------------------------


Consolidated gross margins for Q3 2007 were $4.8 million (27.3%) as compared to Q3 2006 margins of $7.4 million or 36.0%. The erosion in margin percentage reflects lower equipment utilization rates combined with more competitive pricing.

One of the largest components of operating expenses are the wages of CanSub's field employees. CanSub has structured the compensation of most of its field employees so that all or a portion of the wage is variable. As a result, when industry activity levels are slower, the exposure to high fixed components are reduced. When activity levels are more robust, and the Company generates more revenue, compensation amounts increase. In the Wireline division, most of the field employees are paid based on a base wage plus a percentage of the field revenue they generate. In the Testing division, almost all field compensation is variable as the field employees are paid on a day rate basis.

Selling, general and administrative expenses

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



----------------------------------------------------------------------------
Three Three Nine Nine
months months months months
ended ended ended ended
Sept Sept Sept Sept
30, 2007 30, 2006 % 30, 2007 30, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
SG&A 2,094 2,195 (5%) 6,684 5,790 15%
----------------------------------------------------------------------------


SG&A expenses were approximately 5% lower in Q3 2007 as compared to Q3 2006. This partially reflects the effects of cost cutting measures initiated during the end of the third quarter. The Company's management continues to review all SG&A expenses in light of the industry slow-down. On a year to date basis, SG&A for the nine months ended September 30, 2007 was 15% higher than the same period in the prior year reflecting the increased staff due to the Company's significant growth in 2006 and due to additional costs associated with being public.



Stock-based compensation expense

----------------------------------------------------------------------------
Three Three Nine Nine
months months months months
ended ended ended ended
Sept Sept Sept Sept
30, 2007 30, 2006 % 30, 2007 30, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Stock-based
compensation
expense 338 346 (2%) 1,012 1,204 (16%)
----------------------------------------------------------------------------


Stock-based compensation expense in Q3 2007 was in line with amounts recorded in Q3 2006 reflecting a similar number of employees eligible for options in both periods. In the prior year, the nine-month figure of $1.2 million includes $567,000 associated with stock options that vested in the CanSub Group of companies just prior to the February 14, 2006 transaction. See further discussion of options in the section below titled "Stock Options".



Depreciation and amortization expense

----------------------------------------------------------------------------
Three Three Nine Nine
months months months months
ended ended ended ended
Sept Sept Sept Sept
30, 2007 30, 2006 % 30, 2007 30, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Depreciation 2,118 1,882 13% 6,049 3,326 82%
----------------------------------------------------------------------------
Amortization 635 622 (2%) 1,969 939 110%
----------------------------------------------------------------------------
Total 2,753 2,445 13% 8,018 4,265 88%
----------------------------------------------------------------------------


Depreciation expense (which relates to depreciation of the Company's property and equipment) amounted to $2.1 million during Q3 2007. The increase over the Q3 2006 expense amount reflects the higher property and equipment balance during the current quarter.

Amortization expense (which relates to amortization of the Company's intangible assets) amounted to $0.6 million during Q3 2007 which was in line with the Q3 2006 amount. The majority of this expense relates to amortization of the $11.3 million of intangible assets acquired as part of the business acquisitions of the three owner operators and Colter Production Services that closed on May 31, 2006.



Interest expense

----------------------------------------------------------------------------
Three Three Nine Nine
months months months months
ended ended ended ended
Sept Sept Sept Sept
30, 2007 30, 2006 % 30, 2007 30, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Interest on
long-term
debt 432 114 279% 1,157 375 209%
----------------------------------------------------------------------------
Other interest 36 112 (68%) 36 185 (81%)
----------------------------------------------------------------------------
Total interest 468 226 107% 1,193 560 113%
----------------------------------------------------------------------------


Total interest expense for Q3 2007 of $468,000 was approximately 2 times greater than the Q3 2006 interest expense of $226,000. The increase in 2007 primarily reflected a net increase in the average total debt balance (comprised of bank indebtedness, callable debt, long-term debt and capital leases) which was 2.0 times higher during Q3 2007 as compared to Q3 2006 with the additional increase related to higher interest rates.

Future income tax expense (reduction)

The Company recognized a future income tax reduction of $0.1 million in Q3 2007. The future income tax expense (reduction) is typically impacted by net timing differences between amounts for tax and accounting, draw-downs of the deferred credit (such draw-down in proportion to the utilization of future income tax assets originally recognized as part of the February 14, 2006 transaction with Canada West Capital), and in Q3 2007, it was impacted by losses for income tax purposes generated in this quarter.

Net Earnings (loss)

The Company recorded a net loss in Q3 2007 of $0.8 million (negative $0.04 per share - basic and diluted) as compared to net earnings of $2.2 million ($0.12 per share - basic and diluted) for Q3 2006. On a year to date basis, the Company recorded a net loss for the nine months ended September 30, 2007 of $3.7 million (negative $0.19 per share).

Retained Earnings (deficit)

On November 13, 2006, the Company's shareholders approved the reduction of the accumulated deficit by $22.7 million which eliminated the Company's accumulated deficit balance and resulted in a retained earnings balance at December 31, 2006 of $7.0 million. This revised retained earnings figure reflects the cumulative earnings of CanSub since January 1, 2006, and in the opinion of the Company's management, is more representative of the performance of the Company since the February 14, 2006 transaction. At September 30, 2007, the Company's retained earnings balance was $3.3 million.

Income Tax amounts

The Company had the following estimated tax amounts available at September 30, 2007 to apply against future taxable income: non-capital losses of $17.1 million and unclaimed scientific research and development expenditures ("SRED") of $9.4 million. In addition, the Company had approximately $1.9 million in investment tax credits which may be claimed against taxes otherwise payable for federal purposes and expire between 2007 and 2012. These tax amounts are subject to review and assessment by the taxation authorities.

Share Capital

There were no changes to Share Capital during Q3 2007 and to November 8, 2007. The number of common shares outstanding remained at 19.3 million.

Stock Options

During Q3 2007, the Company granted 113,750 options and forfeited 73,000 options for a net increase of 40,750 options. At September 30, 2007 the Company had 1.677 million options outstanding.

During February 2007, the Company's Board of Directors approved the re-pricing of 397,000 options held by employees of the Company (excluding directors, officers, senior management and other insiders). The exercise prices of these options, which ranged from $4.49 to $7.80 per option were all reduced to $4.20. As a result of this re-pricing, substantially all of the Company's outstanding options at September 30, 2007 had an exercise price of $4.20 which is equal to the price of the Company's shares issued as part of the February 14, 2006 go-public transaction. All new options granted during 2007 have been at exercise prices between $4.20 and $4.40.

Liquidity and Capital Resources

The Company recorded positive cash flow from operations (before changes in non-cash working capital) of $2.2 million for Q3 2007 as compared to positive cash flow from operations of $5.0 million in Q3 2006. The decrease in Cash flow reflects the reduced revenues and margins in Q3 2007 (see Revenue and Gross Margin analysis above).

As at September 30, 2007 the Company had working capital of $5.2 million and total long-term debt (i.e. long-term debt plus long-term portion of capital leases) of $23.6 million for a net debt position of $18.4 million. At September 30, 2007 the Company had drawn $24.5 million of its committed, revolving facility. The total credit under this facility is $44.0 million. However, the actual available amount at any one time is equal to 75% of marginable accounts receivable plus 50% of the net book value of property and equipment on the Company's balance sheet less assets pledged as security for capital lease liabilities and less certain computer equipment. This resulted in an actual available amount from this facility of approximately $31.5 million at September 30, 2007 (or an additional $7.0 million of available funds to be drawn on the facility).

The committed, revolving facility can be used to finance working capital requirements, acquire capital assets and for business acquisitions. Under terms of the facility, the initial Revolving Term Date (ie the date at which the facility reverted to a term loan, with repayments occurring evenly over a three-year period) was scheduled to be on October 26, 2007. However, at CanSub's request, the Revolving Term Date has been extended to June 30, 2008. The Company is entitled to request a one-year renewal past the June 30, 2008 date by giving the bank notice within 60 days prior to June 30. If the bank does not agree to this renewal, the balance outstanding on the facility will be capped and repaid over 36 months by monthly interest plus principal payments commencing on July 31, 2008.

At September 30, 2007, the Company was not in compliance with one of the debt covenants covering the revolving, committed facility. Subsequent to September 30, 2007, the bank provided CanSub with a waiver related to this covenant breach. The calculation of this covenant, which is done on a quarterly basis, has been amended by the bank for calculations which will be done for the quarterly periods ended December 31, 2007 and March 31, 2008.

The Company believes that its available credit facilities and cash flow from operating activities will provide sufficient capital resources to fund near term capital expenditures and on-going operations. The Company's management continues to evaluate cost cutting measures as well as its capital expenditure programs in response to the current industry conditions.

Investing Activities

The Company's net capital expenditures (ie acquisitions net of proceeds from disposals) for property and equipment during Q3 2007 amounted to $3.1 million which brings year to date net capital expenditures to $13.2 million. Capital expenditures incurred during the quarter related primarily to the 3 new wireline units placed into operation plus costs to refurbish existing equipment and costs of certain auxiliary equipment.

A significant portion of the Company's year to date capital expenditures have been for the refurbishment of older equipment as well as the acquisition of equipment which is focused on production related activities (such as slickline, swabbing and well optimization equipment).

The chart below outlines the year to date fleet additions for 2007 as well as budgeted additions for the reminder of the year.



----------------------------------------------------------------------------
# of Wireline # of Swabbing # of Testing
Units Units packages
----------------------------------------------------------------------------
Operating fleet at
December 31, 2006 35 8 61
----------------------------------------------------------------------------
Additions during Q1
2007 6 - -
----------------------------------------------------------------------------
Additions during Q2
2007 - 1 -
----------------------------------------------------------------------------
Additions during Q3
2007 3 - -
----------------------------------------------------------------------------
Retirements during Q3
2007 (2) - -
----------------------------------------------------------------------------
Operating fleet at
September 30, 2007 42 9 61
----------------------------------------------------------------------------
Budgeted additions
during remainder of
2007 3 1 -
----------------------------------------------------------------------------
Budgeted fleet size at
December 31, 2007 45 10 61
----------------------------------------------------------------------------


The 42 wireline units in operation at September 30, 2007 were comprised of 21 E-line units and 21 slickline units. The additional 3 wireline units scheduled to be placed into operation during Q4 2007 consist of 2 E-line units and 1 slickline unit. A large portion of the costs of the equipment to be placed into operation in Q4 2007 was paid at September 30, 2007 and has been recorded as a deposit on the balance sheet.

Based on the continuing industry slow-down, management has minimal capital expenditures planned for 2008.

Financing Activities

Financing activities during Q3 2007 consisted of an increase in the Company's committed, revolving facility of $4.5 million offset by repayments of the Company's capital lease obligations totaling $0.5 million.

Related Party Transactions

All related party transactions during the three and nine month periods ended September 30, 2007 were in the normal course of business at market rates. Related party transactions during calendar 2006 are outlined in the notes to the audited December 31, 2006 financial statements.

Quarterly Financial Summary

The financial results of the Company's last eight fiscal quarters are summarized below.

(in thousands of dollars, except per share amounts or as otherwise noted)



----------------------------------------------------------------------------
Three Three Three Three
months months months months
ended ended ended ended
Sept 30 June 30 Mar 31 Dec 31
2007 2007 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Revenue 17,533 7,282 25,042 19,611
----------------------------------------------------------------------------
Cash Flow (1) 2,170 (3,370) 4,867 4,110
----------------------------------------------------------------------------
Normalized
EBITDA (1) (2) 2,690 (3,010) 5,189 4,360
----------------------------------------------------------------------------
Normalized EBITDA
as a % of revenue 15.3% (41.8%) 20.7% 22.2%
----------------------------------------------------------------------------
Net Earnings (loss) (830) (4,597) 1,714 1,616
----------------------------------------------------------------------------
Net Earnings (loss)
per share - basic ($0.04) ($0.24) $0.09 $0.08
----------------------------------------------------------------------------
Net Earnings (loss)
per share - diluted ($0.04) ($0.24) $0.09 $0.08
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Three Three Three Three
months months months months
ended ended ended ended
Sept 30 June 30 Mar 31 Dec 31
2006 2006 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Revenue 20,625 10,714 22,402 16,269
----------------------------------------------------------------------------
Cash Flow (1) 5,002 (29) 6,553 3,244
----------------------------------------------------------------------------
Normalized
EBITDA (1)(2) 5,228 175 6,757 3,843
----------------------------------------------------------------------------
Normalized EBITDA
as a % of
revenue 25.3% 1.6% 30.1% 23.6%
----------------------------------------------------------------------------
Net Earnings (loss) 2,192 806 2,352 (889)
----------------------------------------------------------------------------
Net Earnings per
share - basic $0.12 $0.05 $0.25 N/A
----------------------------------------------------------------------------
Net Earnings per
share - diluted $0.12 $0.05 $0.24 N/A
----------------------------------------------------------------------------
(1) Refer to the "Non-GAAP measures" section below for details.

(2) EBITDA means earnings before interest, taxes, depreciation and
amortization and excludes stock based compensation expense. 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) Results in the various quarters are subject to seasonality. See above
section titled "Seasonality".


Commitments and obligations

See notes to the interim, unaudited financial statements for the three and nine month periods ended September 30, 2007 for a summary of the Company's commitments and obligations at September 30, 2007.

Off balance sheet financing arrangements

Other than the vehicle, equipment and facility leases described in the commitments note in the interim, unaudited financial statements for September 30, 2007, there are no material off balance sheet financing arrangements.

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, valuation of goodwill, valuation of 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.

New accounting pronouncements

On January 1, 2007, the Company adopted the following sections of the Canadian Institute of Chartered Accountants ("CICA") Handbook: Section 1530 - "Comprehensive Income" and Section 3855 - "Financial Instruments - Recognition and Measurement". The comprehensive income standard requires a separate financial statement that captures items included in other comprehensive income but excluded from income in accordance with Canadian GAAP. The new financial instrument standards deal with the recording of financial instruments at fair value in the financial statements unless certain criteria are met allowing them to be recorded at cost or amortized cost.

The adoption of these new standards has had no material impact on the Company's current or prior period net earnings or cash flows.

Two new Canadian accounting standards have been issued which will require additional disclosure in the Company's financial statements commencing January 1, 2008 regarding the Company's financial instruments, as well as the Company's capital with a description as to how the capital is managed. In addition, there is a new standard related to the measurement and disclosure of inventory which will be applied retrospectively effective January 1, 2008. Management is assessing the impact of these changes.

Risks and Uncertainties

A complete discussion on the business risks and uncertainties faced by the Company may be found under the "Risk Factors" section in the Corporation's Annual Information Form dated March 30, 2007 which is available under the Corporation's profile at www.sedar.com.

Internal Controls over Financial Reporting

There have been no changes in the design of the Company's internal controls over financial reporting that have materially affected, or likely to materially affect, the Company's internal controls over financial reporting during the quarter ended September 30, 2007.

Outlook

Weak natural gas prices continue to have a negative impact on overall industry activity levels and equipment utilization rates. In addition, the new royalty regime announced by the Alberta government during October may further reduce near term drilling activities, especially in Alberta. To deal with the current downturn, CanSub has implemented various cost cutting measures and continues to optimize operations corporately and at each operating hub. In addition, to conserve capital going forward, the Company has minimal capital expenditures planned in 2008.

Although the current competitive price environment has impacted the Company's margins, CanSub continues to see reasonable utilization rates in its Wireline division. The services in this division are geared to oil and natural gas well completions as well as to activities related to existing, producing wells. Activity related to new and existing oil wells remains strong given the current, robust oil prices. The Testing division, which is involved primarily in natural gas well completion work, is still running at lower utilization rates than the prior year at this time but is still generating positive gross margins even at reduced pricing.

The Company's management continues to closely monitor industry activity and will make further adjustments to operating costs and capital expenditures if activity levels during the next several quarters are lower than anticipated. Given the Company's strong client base and diversification of services CanSub is positioned to weather the current industry slow-down.

RECONCILIATION OF CASH FLOW, EBITDA AND NORMALIZED EBITDA TO NET EARNINGS



----------------------------------------------------------------------------
Three Three Nine Nine
months months months months
ended ended ended ended
Sept 30 Sept 30 Sept 30 Sept 30
2007 2006 2007 2006
In $000's (unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Net earnings (loss) (830) 2,192 (3,713) 5,350
----------------------------------------------------------------------------
Add back (deduct):
----------------------------------------------------------------------------
Depreciation and
amortization
expense 2,753 2,445 8,018 4,265
----------------------------------------------------------------------------
Future income tax
expense (reduction) (91) 45 (1,668) (53)
----------------------------------------------------------------------------
(Gain) loss on disposal
of capital assets - (26) 18 (26)
----------------------------------------------------------------------------
Stock-based compensation
expense 338 346 1,012 1,204
----------------------------------------------------------------------------
Non-Controlling interest - - - 786
----------------------------------------------------------------------------
Cash Flow (1) 2,170 5,002 3,667 11,526
----------------------------------------------------------------------------
Add Back (Deduct):
----------------------------------------------------------------------------
Long-term and other
interest expense 468 226 1,193 560
----------------------------------------------------------------------------
Current tax expense
(recovery) 52 - 9 -
----------------------------------------------------------------------------
EBITDA (1) 2,690 5,228 4,869 12,086
----------------------------------------------------------------------------
Normalization
adjustments:
----------------------------------------------------------------------------
Equipment lease expenses
included in operating
expenses (2) - - - 72
----------------------------------------------------------------------------
Normalized EBITDA (1) 2,690 5,228 4,869 12,158
----------------------------------------------------------------------------

(1) Refer to "Non-GAAP Measures" section below.

(2) Certain of the Company's wireline units, swabbing units, testing
packages and related equipment in the prior year were 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 between the current and prior year operating periods, the
equipment lease payments expensed in the prior periods are reflected as
an add back in the Company's Normalized EBITDA calculation.


NON-GAAP MEASURES

Cash Flow from operations represents cash provided by operations prior to excluding the impact of cash provided by (used in) non-cash working capital changes. The cash provided by (used in) operations figure is reflected in the Company's unaudited, interim statement of cash flows. EBITDA represents earnings before interest, income taxes, depreciation and amortization and stock-based compensation expense 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 is provided as a measure of operating performance without reference to financing decisions and income tax impacts, which are not controlled at the operating management level. Gross Margin represents revenue less operating expenses and is another financial indicator used in the oilfield services sector to assess performance of the business at the field level. Gross Margin will vary quarter over quarter in relation to the seasonality of the Company's business. Cash Flow, EBITDA and Normalized EBITDA are not measures determined in accordance with Canadian Generally Accepted Accounting Principals ("GAAP") and therefore these measures as presented may not be comparable to similarly titled measures of other companies.



Financial Statements of

CANADIAN SUB-SURFACE ENERGY SERVICES CORP.

For the three and nine months ended September 30, 2007
(unaudited)



CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Consolidated Balance Sheets
(In thousands of dollars)

(unaudited)

---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30, December 31,
2007 2006
---------------------------------------------------------------------------

Assets

Current assets:
Cash $ 161 $ 74
Accounts receivable 14,659 18,962
Deposits and other 1,833 2,346
Income taxes receivable 42 134
Inventory 209 302
---------------------------------------------------------------------------
16,904 21,818

Property and equipment 50,815 43,338

Future income tax asset (note 7) 6,340 5,476

Intangible assets 8,163 10,073

Goodwill 14,177 14,177

---------------------------------------------------------------------------
$ 96,399 $ 94,882
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 7,465 $ 7,556
Current portion of obligations under
capital leases 2,198 2,278
Current portion of long-term debt (note 6) 2,040 487
---------------------------------------------------------------------------
11,703 10,321

Obligations under capital leases 1,134 2,833

Long-term debt (note 6) 22,440 17,101

Deferred credit 5,919 6,723
---------------------------------------------------------------------------
41,196 36,978
Shareholders' equity:
Share capital (note 8) 47,593 47,593
Contributed surplus (note 8) 4,357 3,345
Retained earnings 3,253 6,966
---------------------------------------------------------------------------
55,203 57,904
Commitments (note 9)

---------------------------------------------------------------------------
$ 96,399 $ 94,882
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.

On behalf of the Board:

Signed "Harry Knutson" Signed "Darshan Kailly"
---------------------- -----------------------
Director Director



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

(unaudited)

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2007 2006 2007 2006
---------------------------------------------------------------------------

Revenue $ 17,533 $ 20,625 $ 49,857 $ 53,741

Expenses:
Operating 12,749 13,202 38,304 35,865
Selling, general
and administrative 2,094 2,195 6,684 5,790
Stock-based compensation 338 346 1,012 1,204
Depreciation and amortization 2,753 2,445 8,018 4,265
Interest on long-term debt 432 114 1,157 375
Other interest 36 112 36 185
Loss (gain) on disposal
of capital assets - (26) 18 (26)
---------------------------------------------------------------------------
18,402 18,388 55,229 47,658

---------------------------------------------------------------------------
Earnings (loss) before
income taxes (869) 2,237 (5,372) 6,083

Income taxes (note 7):
Current 52 - 9 -
Future (reduction) (91) 45 (1,668) (53)
---------------------------------------------------------------------------
(39) 45 (1,659) (53)

---------------------------------------------------------------------------
Earnings (loss) before
non-controlling interest (830) 2,192 (3,713) 6,136
Non-controlling interest - - - 786

---------------------------------------------------------------------------
Net earnings (loss) (830) 2,192 (3,713) 5,350

Retained earnings (deficit),
beginning of period 4,083 (19,495) 6,966 1,607

Purchase of non-controlling
interest - - - 3,306

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

---------------------------------------------------------------------------
Retained earnings (deficit),
end of period $ 3,253 $ (17,303) $ 3,253 $ (17,303)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Earnings (loss) per
common share:
Basic $ (0.04) $ 0.12 $ (0.19) $ 0.37
Diluted $ (0.04) $ 0.12 $ (0.19) $ 0.36
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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 Nine months ended
September 30, September 30,
--------------------- ---------------------
2007 2006 2007 2006
---------------------------------------------------------------------------

Cash provided by (used in):
Operations:
Net earnings (loss) $ (830) $ 2,192 $ (3,713) $ 5,350
Depreciation and amortization 2,753 2,445 8,018 4,265
Future income taxes (reduction) (91) 45 (1,668) (53)
Stock based compensation 338 346 1,012 1,204
Non-controlling interest - - - 786
Loss (gain) on disposal of assets - (26) 18 (26)
---------------------------------------------------------------------------
2,170 5,002 3,667 11,526
Change in non-cash working
capital related to operating
activities (3,066) (6,544) 4,377 (7,312)
---------------------------------------------------------------------------
(896) (1,542) 8,044 4,214
---------------------------------------------------------------------------

Financing:
Increase in long-term debt 4,546 - 6,892 -
Repayment of obligations under
capital lease (538) (571) (1,779) (1,744)
Decrease in amounts due from
related parties - - - 174
Repayment of callable debt - (226) - (718)
Increase in bank
indebtedness - 11,553 - 8,141
Repayment of notes payable - - - (1,266)
Repayment of long-term debt - (25) - (74)
Repayment of shareholders' loans - - - (803)
Increase in obligations under
capital lease - - - 3,448
Decrease in loans receivable - 15 - 163
Net proceeds on issue of common
shares - 550 - 49,139
Proceeds from exercise of stock
options - - - 810
Cash portion of payment to
CanSub Group shareholders - - - (26,066)
---------------------------------------------------------------------------
4,008 11,296 5,113 31,204
---------------------------------------------------------------------------

Investing:
Acquisition of businesses - - (375) (16,795)
Acquisition of property and
equipment (3,146) (9,106) (13,302) (20,163)
Disposal of property and
equipment - 14 74 93
Change in non-cash working
capital related to investing
activities 56 (1,786) 533 1,447
---------------------------------------------------------------------------
(3,090) (10,878) (13,070) (35,418)
---------------------------------------------------------------------------

Net change in cash 22 (1,124) 87 -

Cash, beginning of period 139 1,124 74 -
---------------------------------------------------------------------------

Cash, end of period $ 161 $ - $ 161 $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.



CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Notes to the Consolidated Financial Statements
(In thousands of dollars; except per share amounts)

Three and nine months ended September 30, 2007
(unaudited)


1. Basis of presentation and nature of operations:

The interim consolidated financial statements include the accounts of Canadian Sub-Surface Energy Services Corp. (formerly Canada West Capital Inc. ("CWC")), its wholly-owned subsidiary and a partnership (collectively the "Company"), and are presented in accordance with Canadian Generally Accepted Accounting Principles ("GAAP").

The interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the annual audited financial statements for the year ended December 31, 2006, except as noted below. The disclosures provided below are incremental to those included with the annual audited consolidated financial statements. The interim consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and the notes thereto for the year ended December 31, 2006.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end and the results of operations for the interim periods shown in these statements are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the accompanying unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary to present fairly the consolidated results of the Company's operations and cash flows for the three and nine month periods ended September 30, 2007 and 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.

On February 14, 2006 ("the transaction date"), CWC acquired all of the outstanding shares of Canadian Sub-Surface Energy Services Inc., Canadian Sub-Surface Gas Testing Inc. and 1156853 Alberta Ltd. ("115") (collectively "the CanSub Group"). After the acquisition, the former shareholders of the CanSub Group held the largest percentage of Class A common voting shares and controlled the Company's management and therefore the CanSub Group was the deemed acquirer for accounting purposes.

For the comparative period ended September 30, 2006, the combined consolidated financial statements from January 1, 2006 up to the February 14, 2006 transaction date are the accounts of the CanSub Group. The non-controlling interest recorded on the income statement is attributed to a minority interest held outside the CanSub Group. For the period between the February 14, 2006 transaction date and September 30, 2006 these consolidated financial statements include the accounts of the Company.

2. Changes in accounting policies and practices:

On January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530 "Comprehensive Income", Handbook Section 3855 "Financial Instruments - Recognition and Measurement" and Handbook Section 3861 "Financial Instruments - Disclosure and Presentation".

The adoption of these standards has had no material impact on the Company's current or prior period net earnings or cash flows. The other effects of the implementation of the new standards are described below.

(a) Comprehensive income:

The new standards introduce comprehensive income, which consists of net earnings and other comprehensive income ("OCI"). The cumulative changes in OCI are included in the accumulated other comprehensive income, which is presented as a new category within shareholders' equity in the consolidated balance sheet. The adoption of the comprehensive income standard has been made in accordance with its transitional provisions. A statement of comprehensive income has not been included in these consolidated financial statements as the Company has no adjustments that are required to be reported in OCI.

(b) Financial instruments:

The financial instrument standard establishes the recognition and measurement criteria for financial assets, financial liabilities and derivatives. All financial instruments are required to be measured at fair value on initial recognition of the instrument, except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as "held-for-trading", "available-for-sale", "held-to-maturity", "loans and receivables", or "other financial liabilities" as defined by the standard.

Financial assets and financial liabilities "held-for-trading" are measured at fair value with changes in those fair values recognized in net earnings. Financial assets "available-for-sale" are measured at fair value, with changes in those fair values recognized in OCI. Financial assets "held-to-maturity", "loans and receivables" and "other financial liabilities" are measured at amortized cost using the effective interest method of amortization. The methods used by the Company in determining fair value of financial instruments are unchanged as a result of implementing the new standard.

Accounts receivable and accrued revenues are designated as "loans and receivables". Accounts payable and accrued liabilities, and long-term debt are designated as "other liabilities".

The adoption of the financial instruments standard has been made in accordance with its transitional provisions.

In addition to a) and b) above, two new Canadian accounting standards have been issued which will require additional disclosure in the Company's financial statements commencing January 1, 2008 regarding the Company's financial instruments, as well as the Company's capital with a description as to how it's capital is managed. There is also a new standard related to the measurement and disclosure of inventory which will be applied retrospectively effective January 1, 2008. Management is assessing the impact of these changes.

3. 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, valuation of goodwill, valuation of intangible assets, stock-based compensation and valuation of income tax assets. 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.

4. 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 bad 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 also 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.

5. Acquisitions

On June 1, 2007, the Company completed the acquisition of the business assets of Sky-Hook Picker Services Inc. (Sky-Hook) for cash consideration of $375. The results of operations of Sky-Hook have been included since the date of acquisition. The transaction was accounted for using the purchase method and the aggregate purchase price was allocated to the estimated fair values of the net assets acquired as follows:



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

Property and equipment $ 316
Intangible asset:
Customer relationships 59

---------------------------------------------------------------------------
Net assets acquired $ 375
---------------------------------------------------------------------------
---------------------------------------------------------------------------


6. Long-term debt

The Company has a committed, revolving credit facility in the amount of $44,000 with a major Canadian chartered bank. On September 17, 2007, at the Company's request, the bank extended the maturity date of the facility from October 26, 2007 to June 30, 2008 (Revolving Term Date). The Company is entitled to request a one year renewal of the revolving facility by providing notice in writing to the bank at least 60 days prior to June 30, 2008. If the bank does not agree to this renewal, the balance outstanding on the revolving debt facility will be capped and the balance repaid over 36 months by monthly interest plus principal payments commencing one month from the Revolving Term Date.

At September 30, 2007 the Company was not in compliance with one of the debt covenants covering the revolving, committed facility. Subsequent to September 30, 2007, the bank provided the Company with a waiver relating to this covenant breach. The calculation of this particular covenant, which is done on a quarterly basis, has been amended by the bank for calculations which will be done for the quarterly periods ended December 31, 2007 and March 31, 2008.

7. Income taxes

Income tax expense is calculated using the combined federal and provincial statutory income tax rate. Actual income tax expense differs from the "expected" income tax expense that would have been computed by applying the statutory income tax rate as follows:



---------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2007 2006 2007 2006
---------------------------------------------------------------------------

Earnings (loss) before
income taxes $ (869) $ 2,237 $ (5,372) $ 6,083
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Combined federal and provincial
income tax rate 32.42% 32.76% 32.42% 32.76%

Expected income tax provision (282) 733 (1,742) 1,993
Change in deferred credit (270) (634) (804) (2,826)
Non-deductible stock based
compensation 110 113 328 394
Non-deductible expenses 86 14 217 42
Reassessments of prior years 52 - 9 -
Income tax rate change 263 (196) 249 72
Other 2 15 84 272

---------------------------------------------------------------------------
Income tax expense (recovery) $ (39) $ 45 $ (1,659) $ (53)
---------------------------------------------------------------------------
---------------------------------------------------------------------------



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

---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30, December 31,
2007 2006
---------------------------------------------------------------------------

Non capital losses and unclaimed
scientific research and
development expenses $ 8,003 $ 6,747
Investment tax credits ("ITC") 1,903 1,944
Liability arising from ITC
income inclusion (546) (617)
---------------------------------------------------------------------------

Total assets $ 9,360 $ 8,074
---------------------------------------------------------------------------
---------------------------------------------------------------------------



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

---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30, December 31,
2007 2006
---------------------------------------------------------------------------

Property, equipment and capital leases $ 1,897 $ 1,154
Transaction costs (892) (1,141)
Intangible assets 2,015 2,453
Other - 132
---------------------------------------------------------------------------

Total liabilities $ 3,020 $ 2,598
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net future income tax asset $ 6,340 $ 5,476
---------------------------------------------------------------------------
---------------------------------------------------------------------------



The Company has losses of $17,119 available to reduce future taxable
income. These losses expire as follows:

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

2007 $ 804
2008 4,296
2009 3,220
2010 7,159
2011 272
2012 498
2027 870

---------------------------------------------------------------------------
$ 17,119
---------------------------------------------------------------------------
---------------------------------------------------------------------------


In addition, the Company has the following: research and development costs of $9,400 which are available to reduce future taxable income and do not expire; capital losses of $3,500 which are available to reduce future capital gains and do not expire and investment tax credits of 1,903 which can be claimed against federal income taxes payable and expire between 2007 and 2012. The above amounts are subject to review and assessment by taxation authorities.



8. Share capital

Authorized and issued capital stock consists of the following:

(a) Common shares:

(i) Authorized:

Unlimited number of Class A voting common shares

(ii) Issued and outstanding:

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

Balance at December 31, 2006 and
September 30, 2007 19,323,742 $ 47,593
---------------------------------------------------------------------------
---------------------------------------------------------------------------



Diluted average number of shares outstanding is calculated using the
treasury stock method. The amounts outstanding are as follows:

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended September 30
2007 2006
---------------------------------------------------------------------------

Weighted average shares outstanding - basic 19,323,742 18,332,698
Weighted average shares outstanding - diluted 19,323,742 19,889,948

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

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Nine months ended September 30
2007 2006
---------------------------------------------------------------------------

Weighted average shares outstanding - basic 19,323,742 17,326,551
Weighted average shares outstanding - diluted 19,323,742 19,889,948

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


There were no changes to share capital during the nine month period ended September 30, 2007. In the calculation of earnings per share for the three months ended September 30, 2007, 1,676,750 options were excluded as the impact would be anti-dilutive.

(b) Stock options:

On February 20, 2007, the Company's board of directors approved a re-pricing of stock options held by certain employees of the Company (excluding directors, officers and other insiders). The exercise price of 397,000 options (such exercise prices ranging from $4.49 to $7.80) was re-priced at $4.20. Stock-based compensation expense of $217 related to this re-pricing is being recognized over the remaining vesting period of the options.

The following is a summary of the stock option transactions during the respective nine month periods:



---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30,
2007 2006
---------------------- -----------------------
Weighted Weighted
average average
Number of exercise Number of exercise
Options price Options price
---------------------------------------------------------------------------

Class A common shares:
Outstanding at
the beginning
of the period 1,548,750 $ 5.05 366,658 $ 2.21
Exercised as part
of the
February 14, 2006
transaction
with CWC - - (366,658) 2.21
Granted 314,750 4.25 1,597,750 5.10
Forfeited (186,750) 4.60 (40,500) 4.98
Reduction in average
exercise price as a
result of February
20, 2007 re-pricing (0.77)
---------------------------------------------------------------------------
Outstanding at the
end of the period 1,676,750 4.21 1,557,250 5.23
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Exercisable at the
end of the period 442,667 4.21 - -
---------------------------------------------------------------------------
---------------------------------------------------------------------------



(c) Contributed surplus:

---------------------------------------------------------------------------
Balance at December 31, 2006 $ 3,345
Stock-based compensation expense for the nine
months ended September 30, 2007 1,012
---------------------------------------------------------------------------
Balance at September 30, 2007 $ 4,357
---------------------------------------------------------------------------
---------------------------------------------------------------------------



9. Commitments

(a) At September 30, 2007, the Company had the following annual commitments
under equipment operating lease agreements:

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

October 1 - September 30:
2007 - 2008 $ 1,341
2008 - 2009 559
2009 - 2010 85
2010 - 2011 18
2011 - 2012 5
---------------------------------------------------------------------------
---------------------------------------------------------------------------



(b) At September 30, 2007, the Company had the following annual commitments
under office and field facility lease agreements:

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

October 1 - September 30:
2007 - 2008 $ 2,276
2008 - 2009 2,145
2009 - 2010 1,975
2010 - 2011 1,935
2011 - 2012 1,963
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(c) At September 30, 2007, the Company had commitments to purchase approximately $1,000 of wireline, swabbing, production testing and related equipment. Delivery of these items is scheduled to occur prior to December 31, 2007.

10. 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 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 services to the oil and gas industry.

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

The Corporate segment includes the combined selling, general and administrative costs related to the operating divisions.



---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended
September 30, 2007
---------------------------------
Wireline Testing Corporate Total
---------------------------------------------------------------------------

Revenue $ 11,496 $ 6,037 $ - $ 17,533
Operating expenses 8,086 4,663 - 12,749
---------------------------------------------------------------------------
3,410 1,374 - 4,784

Selling, general and
administrative - - 2,094 2,094
Stock based compensation - - 338 338
Depreciation and amortization 1,868 885 - 2,753
---------------------------------------------------------------------------
1,542 489 (2,432) (401)

Goodwill 8,067 6,110 - 14,177
Property and equipment 35,339 15,476 - 50,815
Intangible assets 3,551 4,612 - 8,163
Capital expenditures -
property and equipment 2,661 485 - 3,146
Capital expenditures -
intangible assets - - - -
Total assets 58,664 31,353 6,382 96,399
---------------------------------------------------------------------------
---------------------------------------------------------------------------



---------------------------------------------------------------------------
---------------------------------------------------------------------------
Nine months ended
September 30, 2007
---------------------------------
Wireline Testing Corporate Total
---------------------------------------------------------------------------

Revenue $ 30,975 $ 18,882 $ - $ 49,857
Operating expenses 23,863 14,441 - 38,304
---------------------------------------------------------------------------
7,112 4,441 - 11,553

Selling, general and
administrative - - 6,684 6,684
Stock based compensation - - 1,012 1,012
Depreciation and amortization 5,420 2,598 - 8,018
---------------------------------------------------------------------------
1,692 1,843 (7,696) (4,161)

Goodwill 8,067 6,110 - 14,177
Property and equipment 35,339 15,476 - 50,815
Intangible assets 3,551 4,612 - 8,163
Capital expenditures -
property and equipment 10,495 3,123 - 13,618
Capital expenditures -
intangible assets 59 - - 59
Total assets 58,664 31,353 6,382 96,399
---------------------------------------------------------------------------
---------------------------------------------------------------------------



---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended
September 30, 2006
---------------------------------
Wireline Testing Corporate Total
---------------------------------------------------------------------------

Revenue $ 13,073 $ 7,552 $ - $ 20,625
Operating expenses 8,037 5,165 - 13,202
---------------------------------------------------------------------------
5,036 2,387 - 7,423

Selling, general and
administrative - - 2,195 2,195
Stock based compensation - - 346 346
Depreciation and amortization 1,863 582 - 2,445
---------------------------------------------------------------------------
3,173 1,805 (2,541) 2,437

Goodwill 8,067 6,110 - 14,177
Property and equipment 25,529 13,431 - 38,960
Intangible assets 5,004 5,789 - 10,793
Capital expenditures -
property and equipment 5,994 3,112 - 9,106
Capital expenditures -
intangible assets - - - -
Total assets 72,387 18,107 - 90,494
---------------------------------------------------------------------------
---------------------------------------------------------------------------



---------------------------------------------------------------------------
---------------------------------------------------------------------------
Nine months ended
September 30, 2006
---------------------------------
Wireline Testing Corporate Total
---------------------------------------------------------------------------

Revenue $ 34,216 $ 19,525 $ - $ 53,741
Operating expenses 23,022 12,843 - 35,865
---------------------------------------------------------------------------
11,194 6,682 17,876

Selling, general and
administrative - - 5,790 5,790
Stock based compensation - - 1,204 1,204
Depreciation and amortization 3,189 1,076 - 4,265
---------------------------------------------------------------------------
8,005 5,606 (6,994) 6,617

Goodwill 8,067 6,110 - 14,177
Property and equipment 25,529 13,431 - 38,960
Intangible assets 5,004 5,789 - 10,793
Capital expenditures -
property and equipment 18,526 10,986 - 29,512
Capital expenditures -
intangibles assets 6,340 4,916 - 11,256
Total assets 72,387 18,107 - 90,494
---------------------------------------------------------------------------
---------------------------------------------------------------------------


11. Comparative figures

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

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.

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