Phoenix Technology Income Fund
TSX : PHX.UN

Phoenix Technology Income Fund

November 03, 2009 19:24 ET

Phoenix Reports Financial and Operational Results for the Three-Month & Nine-Month Periods Ended September 30, 2009

CALGARY, ALBERTA--(Marketwire - Nov. 3, 2009) - Phoenix Technology Income Fund ("Phoenix" or the" Fund") (TSX:PHX.UN) is pleased to report on its financial and operating results for the three and nine-month periods ended September 30, 2009. The third quarter continued to represent a challenging operating environment for the Fund. Industry activity levels remain significantly lower than the levels obtained in 2008 due to a slow economy and low oil and natural gas commodity prices. Given these challenges, the Fund is pleased to report for the three-month period ended September 30, 2009 net earnings of $3.1 million (2008 - $9.5 million) and EBITDA of $4.6 million (2008 - $13.4 million). Phoenix's revenue for the three-month period ended September 30, 2009 declined by 47 percent to $27.1 million from $51.3 million in 2008. Consolidated operating days for the three-month period ended September 30, 2009 were 2,847, which represented a decrease of 42 percent from 4,936 days generated in 2008.

Distributable cash for the three-month period ended September 30, 2009 decreased by 76 percent to $2.9 million from $12.1 million in 2008, and cash distributions paid to unitholders decreased 1 percent to $6.1 million for the same 2009 period from $6.2 million in 2008. The resulting cash payout ratio for the 2009 three-month period was 210 percent as compared to 51 percent in 2008. As a result of the lower earnings levels, the Fund previously announced that it was in its best interest to reduce monthly distribution from $0.085 per unit to $0.04 per unit to create additional balance sheet strength and flexibility for future growth strategies. This reduced distribution of $0.04 per unit will be paid on November 13, 2009 to unitholders of record on October 30, 2009.

As mentioned in the Fund's second quarter report, Phoenix has been looking to expand its operations into key areas outside of North America and during the third quarter significant progress was made with respect to this objective. It is anticipated that the Fund will enter one or two new international markets in early 2010.



(Stated in thousands of dollars except per unit amounts, percentages and
units outstanding)
Three-month period ended September 30,
2009 2008 % Change
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Operating Results (unaudited) (unaudited)
Revenue 27,138 51,348 (47)
Net earnings 3,145 9,525 (67)
Earnings per unit - diluted 0.13 0.38 (66)
EBITDA (1) 4,615 13,402 (66)
EBITDA per unit - diluted (1) 0.19 0.54 (65)
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Cash Flow
Cash flows from operating activities (1,635) 1,485 (210)
Distributable cash (1) 2,921 12,129 (76)
Distributable cash per unit - diluted (1) 0.12 0.49 (76)
Cash distributions made 6,144 6,197 (1)
Cash distributions per unit (2) 0.255 0.255 -
Cash payout ratio (1) 210% 51%
Capital expenditures 1,069 8,081 (87)
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Financial Position - (unaudited)
Working capital
Long-term debt (3)
Unitholders' equity
Fund units outstanding

Nine-month period ended September 30,
2009 2008 % Change
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Operating Results (unaudited) (unaudited)
Revenue 79,758 123,873 (36)
Net earnings 7,733 19,116 (60)
Earnings per unit - diluted 0.32 0.80 (60)
EBITDA (1) 12,548 28,601 (56)
EBITDA per unit - diluted (1) 0.51 1.20 (58)
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Cash Flow
Cash flows from operating activities 7,724 17,734 (56)
Distributable cash (1) 12,110 25,276 (52)
Distributable cash per unit - diluted (1) 0.50 1.06 (53)
Cash distributions made 18,575 15,557 19
Cash distributions per unit (2) 0.765 0.665 15
Cash payout ratio (1) 153% 61%
Capital expenditures 8,709 23,228 (63)
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Financial Position - (unaudited) Sept 30/09 Dec 31/08
Working capital 17,418 26,600 (35)
Long-term debt (3) 10,000 5,000 100
Unitholders' equity 76,552 90,198 (15)
Fund units outstanding 24,438,337 24,337,524 -
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(1) Refer to non-GAAP measures section.
(2) Cash distributions on a per unit basis paid in the period.
(3) Includes current portion of long-term debt.


Non-GAAP Measures

The Fund uses certain performance measures throughout this document that are not recognizable under Canadian generally accepted accounting principles ("GAAP"). These performance measures include earnings before interest, taxes, depreciation, and amortization ("EBITDA"), EBITDA per unit, distributable cash, distributable cash per unit, and cash payout ratio. Management believes that these measures provide supplemental financial information that is useful in the evaluation of the Fund's operations. Investors should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with GAAP as an indicator of Phoenix's performance. Phoenix's method of calculating these measures may differ from that of other organizations, and accordingly, these may not be comparable. Please refer to the non-GAAP measures section.

Cautionary Statement Regarding Forward-Looking Information and Statements

Certain statements and information contained in this document and other continuous disclosure documents of the Fund referenced herein, including statements related to the Fund's capital expenditures, projected growth, view and outlook toward future oil and natural gas commodity prices and activity levels, cash distributions, customer pricing, future market opportunities and statements and information that contain the words such as "could", "should", "can", "anticipate", "expect", "believe", "will", "may" and similar expressions relating to matters that are not historical facts constitute "forward-looking information" within the meaning of applicable Canadian securities legislation.

These statements and information involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements and information. The Fund believes the expectations reflected in such forward-looking statements and information are reasonable, but no assurance can be given that these expectations will prove to be correct. Such forward-looking statements and information included in this document should not be unduly relied upon. These forward-looking statements and information speak only as of the date of this document.

In particular, forward-looking information and statements include:

- It is expected that drilling activity within the Canadian and US Bakken regions will increase in the fourth quarter due to the current oil price levels and the Fund is expecting to benefit as an active participant in these regions;

- Although the level of activity in Peru has not accelerated as quickly as originally expected since operations began in late April 2009, future drilling programs from existing and potential customers will likely increase activity levels for Phoenix Cantech in the fourth quarter and into 2010;

- The Fund expects that further increases in activity and profitability will be generated in Albania throughout 2010;

- Phoenix has been looking to expand its operations into key areas outside of North America and it is anticipated that the Fund will enter one or two new international markets in early 2010;

- It is expected that the Fund will maintain its revised monthly distribution level of $0.04 per unit; however, if current economic uncertainty and volatile financial markets persist the distribution levels may be reviewed and reduced;

- It is expected that a total of $10.6 million of total capital expenditures will be incurred in 2009;

- The balance of the unspent capital expenditure budget, $1.9 million, will be financed from cash flow from operations, working capital and by the Fund's unused credit facilities, where required;

- The Fund is optimistic that higher levels of utilization and profitability experienced in the third quarter will continue based on the recovery of commodity prices;

- It is unlikely that the Fund's day rates will increase in the near future. However oil and gas producers have taken opportunities to raise cash that will allow operators to increase their drilling programs and as a result this should prevent further retraction in customer day rates;

- The Fund is positioned with a strong customer base and diversified operations that will help to offset weakness in the sector that will likely continue until commodity prices reach higher levels;

- Phoenix forecasts that the percentage of wells drilled horizontally or directionally will continue to rise and it is the Fund's expectation that there are many formations, both oil and gas, that will emerge as candidates for horizontal applications, and thus contribute to Phoenix's growth;

- The reduction in monthly cash distributions will allow additional balance sheet strength and flexibility for future growth strategies. That is, invest in capital expenditures that will allow Phoenix to continue to establish an international presence and to allocate Funds towards numerous R&D projects that will differentiate and expand Phoenix's services;

- Operators drilling in shale gas plays and horizontal oil wells will in the future demand additional technologies that will make drilling and producing these wells more efficient and cost-effective. For this reason an integral part of Phoenix's 2009 strategy is the drive to provide the most reliable and advance technology in the market. Phoenix believes that the R&D projects it currently has in development will answer future operator demand for efficiency and cost effectiveness.

The above are stated under the headings "Results of Operations", "Cash Flow, Distributions and Payout Ratio", "Cash Requirements for Capital Expenditures", and "Outlook".

In addition to other factors and assumptions which may be identified in this document and other continuous disclosure documents of the Fund referenced herein, assumptions have been made in respect of such forward-looking statements and information regarding, among other things: anticipated financial performance, business prospects, impact of competition, strategies, the general stability of the economic and political environment in which the Fund operates, exchange and interest rates, tax laws, the sufficiency of budgeted capital expenditures in carrying out planned activities, the availability and cost of labour and services, and the ability to obtain financing on acceptable terms, which are subject to change based on commodity prices, market conditions, and future oil and natural gas prices, and potential timing delays. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.

Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other factors that could affect the Fund's operations and financial results are included in reports on file with the Canadian Securities Regulatory Authorities and may be accessed through the SEDAR website (www.sedar.com) or at the Fund's website. The forward-looking statements and information contained in this document are expressly qualified by this cautionary statement. The Fund does not undertake any obligation to publicly update or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

Results of Operations

Phoenix generated consolidated revenue for the three-month period ended September 30, 2009 of $27.1 million as compared to $51.3 million in the 2008 period; a decrease of 47 percent. Consolidated operating days for the same 2009 period were 2,847, which represented a decrease of 42 percent from 4,936 days generated in 2008. US revenue as a percentage of consolidated revenue was 47 percent for the 2009 period as compared to 48 percent in 2008.

Due to the strengthening of oil and natural gas commodity prices, drilling activity within the Canadian and US industries showed modest increases from second quarter levels; however, activity remains well below 2008 levels. It is expected that drilling activity within the Canadian and US Bakken regions will increase in the fourth quarter due to the current oil price levels, and the Fund is expecting to benefit as an active participant in these regions. Customer day rates realized by Phoenix have for the most part stabilized in the current quarter.

The trend towards the utilization of new well completion techniques requiring horizontal drilling services was maintained, and in the third quarter of 2009 horizontal and directional drilling activity represented approximately 65 percent and 62 percent of the total drilling activity in Canada and the US, respectively. This compared to 44 percent in Canada and 50 percent in the US for the corresponding 2008 period. (Sources: Daily Oil Bulletin and Baker Hughes)

During the three-month period ended September 30, 2009, Phoenix generated revenue of $0.5 million (2008 - $nil) from South America through its Peruvian subsidiary, Phoenix Cantech S.A.C. ("Phoenix Cantech") and $0.9 million (2008 - $0.9 million) from Albania through its Albanian branch, Phoenix Technology Services Albania ("Phoenix Albania"). Today, Phoenix Cantech has a concurrent job capacity of three full service MWD jobs, and although the level of activity in this region has not accelerated as quickly as originally expected since operations began in late April 2009, future drilling programs from existing and potential customers will likely increase activity levels for Phoenix Cantech in the fourth quarter and into 2010.

Phoenix Albania currently has a two job capacity, and as expected, due to the rise in oil prices drilling activity re-commenced in the third quarter of 2009. The Fund expects that further increases in activity and profitability will be generated in this region throughout 2010.

For the nine-month period ended September 30, 2009, Phoenix's consolidated revenue decreased by 36 percent to $79.8 million compared to $123.9 million in the 2008 period. US revenue for the nine-month period ended September 30, 2009 accounted for 54 percent of the Fund's consolidated revenue as compared to 50 percent in 2008. Consolidated operating days decreased by 36 percent to 7,877 days in the 2009 period as compared to 12,317 days in 2008.

For the three-month period ended September 30, 2009, cash flows from operating activities, after net changes in non-cash working capital balances, decreased by 210 percent to negative $1.6 million from $1.5 million in the 2008 period. Cash flows from operating activities for the nine-month period ended September 30, 2009 decreased by 56 percent to $7.7 million from $17.7 million in the 2008 period. The decrease in cash flows from operating activities for the three and nine-month periods ended September 30, 2009 resulted from lower profitability in 2009 compared to 2008 as well as from timing differences on the net change in certain non-cash working capital items.

As a direct result of lower activity levels and earnings, distributable cash for the three-month period ended September 30, 2009 decreased by 76 percent over the 2008 period to $2.9 million from $12.1 million in 2008. Distributable cash for the nine-month period ended September 30, 2009 decreased by 52 percent over the nine-month period in 2008 to $12.1 million from $25.3 million.

Distributions to unitholders for the three-month period ended September 30, 2009 were $6.1 million, or $0.255 per unit, as compared to $6.2 million, or $0.255 per unit, in the 2008 period. The resulting cash payout ratio in the three-month period ended September 30, 2009 was 210 percent compared to 51 percent in the 2008 period. For the nine-month period ended September 30, 2009 distributions were $18.6 million, or $0.765 per unit, compared to $15.6 million, or $0.665 per unit in 2008. The resulting cash payout ratio for the nine-month period ended September 30, 2009 was 153 percent compared to 61 percent in the corresponding 2008 period.

The board of directors of the Fund determined that it was in Phoenix's best interest to reduce its monthly distribution from $0.085 per unit to $0.04 per unit to create additional balance sheet strength and flexibility for future growth strategies. This reduced distribution of $0.04 per unit will be paid on November 13, 2009 to unitholders of record on October 30, 2009.

For the three-month period ended September 30, 2009, EBITDA decreased by 66 percent to $4.6 million, $0.19 per unit diluted, from $13.4 million, $0.54 per unit diluted, in 2008. Net income for the nine-month period ended September 30, 2009 decreased to $3.1 million, $0.13 per unit diluted or by 67 percent, from $9.5 million, $0.38 per unit diluted in 2008.

For the nine-month period ended September 30, 2009, EBITDA was $12.5 million, $0.51 per unit diluted, compared to $28.6 million, $1.20 per unit diluted, in 2008; a decrease of 56 percent. Net earnings for the nine-month period ended September 30, 2009 decreased by 60 percent to $7.7 million, $0.32 per unit diluted, as compared to $19.1 million, $0.80 per unit diluted, in the 2008 period.

The Fund's concurrent job capacity remains unchanged from June 30, 2009 at 113 jobs. At the end of the third quarter 64 MWD systems were located in Canada, 44 MWD systems were in the US, three MWD systems were in Peru and two MWD systems were in Albania. One Current Loop Telemetry ("CLT") electromagnetic ("EM") measurement while drilling ("MWD") system was expected to be put into service during the third quarter of 2009, but the assembly of this system did not occur and it is likely that it will be placed into service in the fourth quarter. Phoenix expects to exit the 2009-year with a MWD fleet of 60 CLT-EM MWD systems and 54 positive pulse MWD systems, for a total concurrent job capacity of 114.

Revenue

The Fund reports its operations through two geographical areas, namely, the Canadian provinces of Alberta, Saskatchewan, British Columbia, Manitoba, Ontario and Nova Scotia, and the Gulf Coast, Northeast and Rocky Mountain regions of the United States.

Canadian Revenue

During the third quarter of 2009, Phoenix posted strong activity levels in both the Montney region of northeastern British Columbia and in the Bakken region in southeastern Saskatchewan. For the three-month period ended September 30, 2009 the Fund's Canadian operating days decreased by 43 percent from 2,458 days in the 2008 period to 1,399 days in 2009. Revenue was $14.4 million for the three-month period ended September 30, 2009 as compared to $26.6 million in 2008. Included in Canadian revenue for 2009 was approximately $1.4 million (2008 - $0.9 million) that related to Phoenix's international operations in Peru and Albania. Excluding international operations, revenue in Canada decreased by 49 percent in 2009 as compared to 2008. As an industry comparison, during the third quarter of 2009 the number of industry horizontal and directional drilling days in Canada decreased by 51 percent to 12,726 days from 25,891 days in the 2008 period. (Source: Daily Oil Bulletin)

In the three-month period ended September 30, 2009, horizontal oil well drilling, as measured by the number of operating days, represented approximately 51 percent of Phoenix's overall Canadian drilling activity, a decrease from 56 percent obtained in the 2008 period. The majority of oil well activity for the Fund centers on the Bakken area of southeast Saskatchewan.

For the nine-month period ended September 30, 2009, the Fund's Canadian revenue declined by 40 percent to $36.9 million from $61.5 million in the comparable 2008 period. Included in the Canadian segment is international revenue of $1.0 million generated from Peru (2008- $nil) and $0.9 million from Albania (2008 - $0.9 million).

The number of horizontal and directional drilling days in the Canadian industry during the nine-month period ended September 30, 2009 decreased by 31 percent to 42,993 days from 62,166 days in the 2008 period. (Source: Daily Oil Bulletin) Phoenix's Canadian drilling days decreased by 39 percent to 3,593 days in the nine-month period ended September 30, 2009 from 5,916 days in 2008. Oil well drilling activity, as measured by operating days, represented approximately 44 percent of the Fund's Canadian activity for the nine-month period ended September 30, 2009 as compared to 49 percent in 2008.

United States Revenue

Although historically Nevis has predominantly operated in the natural gas drilling markets across the US, operations in 2009 started to diversify into oil well drilling partially due to penetration into the US Bakken area. For the three-month period ended September 30, 2009 oil well drilling represented approximately 18 percent of Nevis' activity, as measured by operating days, as compared to only 4 percent in the corresponding 2008 period.

However, as within Canada, activity rates in the industry are still well below 2008 levels. US industry activity for the three-month period ended September 30, 2009 as measured by the average number of horizontal and directional rigs running on a daily basis, decreased by 39 percent to 597 rigs from 985 rigs in the corresponding 2008 period. (Source: Baker Hughes) In comparison, Nevis' operating days declined by 45 percent to 1,334 days in the three-month 2009 period as compared to 2,412 in 2008. Revenue for the three-month period ended September 30, 2009 was $12.7 million as compared to $24.8 million in 2008; a decrease of 49 percent. The US revenue decline was higher in the 2009 period in dollars due to less favorable exchange rates that prevailed in 2009, namely a weaker US dollar relative to the Canadian dollar. An offsetting factor to this was the presence of no "rental only" jobs performed by Nevis in the 2009 period as compared numerous rentals in 2008.

Some of Nevis' key clients have significantly cut back on drilling projects and activities due to natural gas price levels; however, several new clients have been added to help counter this. In addition, in order to further penetrate the market in the Gulf Coast, Nevis opened a new sales office in Corpus Christi, Texas during the third quarter of 2009. This strategic move is already proving to be successful for Nevis and the Fund with the addition of several clients.

US revenue for the nine-month period ended September 30, 2009 decreased by 31 percent to $42.9 million from $62.3 million in the comparable 2008 period. US industry activity, as measured by the average number of horizontal and directional rigs running on a daily basis, decreased by 29 percent for the nine-month period ended September 30, 2009 to 639 rigs as compared to 901 rigs in the comparable 2008 period. (Source: Baker Hughes) The Fund's US operating days decreased by approximately 35 percent to 4,138 days in the nine-month period ended September 30, 2009 from 6,329 days in 2008.

For the first nine-months of 2009, horizontal and directional drilling activity represented approximately 57 percent and 59 percent of the total drilling activity in Canada and the US, respectively. (Sources: Daily Oil Bulletin and Baker Hughes.)

Operating Costs and Expenses

Direct costs are comprised of field and shop expenses and include current period research and development ("R&D") expenditures. Gross profit as a percentage of revenue for the three-month period ended September 30, 2009 was 28 percent as compared to 34 percent in the comparable 2008 period. The key areas that adversely affected the Fund's margins in the 2009 three-month period as compared to 2008 include:

- field and shop labour costs which have still not declined to the same extent as customer day rates in 2009, due in part to competitive labour markets and despite staff and rate cutbacks;

- increases in servicing costs for the repair of downhole performance drilling motors and MWD guidance equipment, due in part to programs that are geared at optimizing equipment performance; and

- the realization of lower customer day rates in the 2009 period as compared to 2008. However, there were a greater proportion of higher rate four-man horizontal drilling days which offset this revenue decline. Since the added labour cost required to perform this work is charged out at little or no markup, the overall margin percentages of the Fund have been reduced.

R&D expenditures for the three-month period ended September 30, 2009 were $0.7 million, of which $0.2 million were capitalized as development costs. In the 2008 period no development costs were capitalized and $0.5 million in R&D costs were expensed.

For the nine-month period ended September 30, 2009, gross profit as a percentage of revenue was 28 percent compared to 33 percent in the corresponding 2008 period. The key areas that adversely affected the Fund's margins in the nine-month 2009 period, as compared to 2008, were lower customer day rates, proportionally higher labour costs and higher service costs related to downhole performance drilling motors and MWD guidance equipment.

R&D expenditures increased by 92 percent for the nine-month period ended September 30, 2009 to $2.3 million as compared to $1.2 million in 2008. Included in the 2009 expenditure total is $1.0 million that was capitalized as deferred development costs.

Included in direct costs in the first quarter of 2009 was a favorable adjustment of $3.6 million that related to revised cost accrual estimates relating to the 2008-year. If the impact of this is excluded from the 2009 nine-month results, gross profit as a percentage of revenue would have been 24 percent.

Selling, general and administrative ("SG&A") costs for the three-month period ended September 30, 2009 decreased by 15 percent to $3.7 million, 14 percent of revenue, as compared to $4.3 million, 8 percent of revenue, in the 2008 period. For the nine-month period ended September 30, 2009, SG&A costs decreased by 6 percent to $11.9 million, 15 percent of revenue, as compared to $12.7 million, 10 percent of revenue, in the 2008 period. SG&A costs did not decline in both 2009 periods to the same extent as revenue, due to fixed staff and facility related expenses as well as additional costs that were incurred for the Peruvian operations and the development of international markets.

As a direct result of record level capital expenditures in the 2008 financial year and the expenditures made to date for the Fund's 2009 capital program, depreciation and amortization for the three-month period ended September 30, 2009 increased to $2.7 million from $2.3 million in the 2008 period. For the nine-month period ended September 30, 2009 depreciation and amortization increased by 31 percent to $8.4 million from $6.4 million in 2008.

Stock-based compensation costs for the three-month period ended September 30, 2009 increased by 34 percent to $481,000 from $359,000 in 2008 due primarily to a change in assumptions used in the lattice-binominal option-pricing model. For the nine-month period ended September 30, 2009 stock-based compensation costs deceased by 25 percent to $799,000 from $1.1 million in 2008.

A foreign exchange gain of $200,000 was reported for the three-month period ended September 30, 2009 as compared to a foreign exchange loss of $167,000 in 2008. For the nine-month period ended September 30, 2009 the foreign exchange gain was $318,000 versus a foreign exchange loss of $338,000 in 2008. Foreign exchange losses are shown net of any gains and result primarily from the movements in US and Canadian dollar exchange rates and from the translation of US and Canadian denominated trade receivables and payable balances, and the translation of the Peruvian subsidiary accounts.

The Fund realized a gain on disposition of drilling equipment of $1.0 million in the three-month period ended September 30, 2009, compared to $0.6 million in 2008. For the nine-month period ended September 30, 2009, a gain of $2.5 million was reported as compared to a gain of $1.6 million in 2008. The disposals relate to insured equipment lost in well bores and are uncontrollable in nature. The gain reported is net of any asset retirements that are made on capital assets before the end of their useful lives.

Income Taxes

The Fund reported a net recovery of income taxes of $1.3 million in the three-month period ended September 30, 2009 as compared to a net income tax provision of $1.6 million in 2008. For the nine-month period ended September 30, 2009, Phoenix reported a net recovery of income taxes of $3.7 million as compared to a net income tax provision of $3.1 million in the comparable 2008 period. The net recoveries result from the decreased profitability of the Fund in the 2009 period, a favourable adjustment related to prior period tax provisions, and the deductibility of cash distributions that are allowed to calculate the taxable income of the Fund. Under the Income Tax Act (Canada), as an investment trust, the Fund is subject to income taxes only on income not distributed to its unitholders.

Investment

Capital expenditures were $1.1 million for the three-month period ended September 30, 2009 as compared to $8.1 million in 2008. The Fund invested a further $0.3 million in its Peruvian operations, capitalized $0.2 million in development costs and spent $0.6 million on other downhole equipment to support operations in the period. The capital expenditures undertaken in the 2009 period were financed from proceeds received on equipment lost downhole. For the three-month period ended September 30, 2009, the Fund realized proceeds from the involuntary disposal of drilling equipment in well bores of $1.9 million compared to $1.7 million in the 2008 period. These losses are uncontrollable in nature.

Phoenix's investment in drilling and other equipment for the nine-month period ended September 30, 2009 was $8.7 million compared to $23.2 million in the 2008 period. The lower level of investment in the 2009 period was in line with the reduced activity levels. The Fund realized proceeds from the involuntary disposal of drilling equipment in well bores of $6.5 million in the 2009 nine-month period compared to $4.0 million in 2008.

Financing

The Fund had cash flows from financing activities of $161,000 in the three-month period ended September 30, 2009 as compared to a net cash outflow of $5.9 million in the 2008 period. In the 2009 three-month period:

- the Fund made distributions of $6.1 million to unitholders;

- through its unit option program, the Fund received cash proceeds of $110,000 from exercised options and the Fund's Distribution Reinvestment Plan to acquire an aggregate of 15,847 Fund units;

- the Fund received proceeds from long-term debt of $5.0 million; and

- the Fund received proceeds on its bank overdraft facility for $1.2 million.

Cash Flow, Distributions and Payout Ratio

The Fund considers its maintenance capital expenditures to be minimal. Maintenance capital would only be relevant to the Fund's retirement of tubular equipment that is subsequently replaced. Typically, lost-in-hole equipment is replaced but these losses are funded by the proceeds from insurance or customers. In addition, due to the nature of the industry, downhole MWD and performance drilling motor equipment is frequently re-conditioned to an "as new" state with the associated costs expensed and included in the Fund's operating expenses.

The Fund reviews its distribution levels on a regular basis and sets its rates taking into consideration its own financial performance, forecasted activity levels and industry outlook. Activity levels in the industry are seasonal, and as a result cash flow will fluctuate. Despite these fluctuations, Phoenix's policy is to pay a consistent level of distributions throughout the year, whenever possible.

For the three-month period ended September 30, 2009, cash distributions of $6.1 million were financed from the Fund's cash flows from operating activities, working capital and long-term debt. Under Phoenix's current level of forecasted activity, it is anticipated that sufficient cash flow from operations and working capital will be available to allow the Fund to maintain its new cash distribution rate to unitholders.

Sustained current market uncertainty and financial market volatility may arise for a prolonged period that could adversely affect the Fund's cash flow from operations, such as reduced capital spending by producer companies and decreasing world oil and natural gas commodity prices. If a sustained downturn in activity occurs as a result of low commodity prices and the persistence of the current economic uncertainty and volatile financial markets, the Fund would review its distribution levels accordingly.

Cash Requirements for Capital Expenditures

Historically, the Fund has financed its capital expenditures and acquisitions through cash flows from operating activities, debt and equity. The 2009 capital budget remains at $10.6 million. The balance of the unspent capital expenditure budget, $1.9 million, will be financed from cash flow from operations, working capital and by the Fund's unused credit facilities, where required.

Outlook

Phoenix is pleased to have remained profitable and to have continued its growth strategy thus far in 2009, despite the depressed economic and industry environments that have lead to relatively weak quarterly results for the Fund. The Fund's third quarter financial results can be attributed to the commitment of Phoenix's personnel, the company-wide initiatives to reduce costs and the expansion into new international markets. The Fund is optimistic that higher levels of utilization and profitability experienced near the end of the third quarter will continue based on the current recovery of commodity prices.

Phoenix believes it is unlikely that its day rates will increase in the near future. However; capital markets for oil and gas producers have improved, and numerous companies have taken this opportunity to raise cash to fund drilling programs and strengthen balance sheets. Phoenix views these activities in a positive light as it will allow operators to increase their drilling programs and as a result this should prevent further retraction in customer day rates. The Fund is positioned with a strong customer base and diversified operations that will help to offset weakness in the sector that will likely continue until commodity prices reach higher levels.

Despite the recession and decreased drilling activity in the industry, a positive trend that has been discussed in previous quarters is the increasing proportion of wells in North America that are drilled either horizontally or directionally. This is partially a result of the industry movement towards drilling horizontal wells in unconventional gas formations. Currently, directional and horizontal wells represent over 60 percent of all wells drilled, and Phoenix forecasts that this percentage will continue to rise. It is the Fund's expectation that going forward, there are many formations, both oil and gas, that will emerge as candidates for horizontal applications, and thus contribute to Phoenix's growth.

The Fund plans to act upon many additional opportunities in the near and distant future; therefore, during the third quarter Phoenix lowered its distribution rate to unitholders for the first time in its history. This reduction will allow additional balance sheet strength and flexibility for future growth strategies. That is, invest in capital expenditures that will allow Phoenix to continue to establish an international presence and to allocate Funds towards numerous R&D projects that will differentiate and expand Phoenix's services.

Operators drilling in shale gas plays and horizontal oil wells will in the future demand additional technologies that will make drilling and producing these wells more efficient and cost-effective. For this reason an integral part of Phoenix's 2009 strategy is the drive to provide reliable and advance technology to the market. Phoenix believes that the R&D projects it currently has in development will answer this demand and Phoenix has dedicated more resources to these projects.

Due to the intensified R&D efforts, Phoenix is pleased to announce two technologies that are currently underway. First, the Fund would like to introduce the MWD integral sub, which contains a complete CLT-EM MWD system in the wall of a drilling collar. The design of this system is focused on creating unsurpassed reliability; when commercial it will be able to withstand extremely harsh drilling environments. Second, Phoenix plans to enter the Rotary Steerable market, and is working on technology that may enable a commercial tool in the future. Resources have been dedicated to this objective; however, at this time no confirmation can be given that a commercial technology will result.

Phoenix is on-track with its goal to emerge from a difficult year in 2009 as a stronger company, and will continue with these strategies in the last quarter of the year and into 2010.

John Hooks, Chairman of the Board, President and Chief Executive Officer

November 3, 2009

Non-GAAP Measures

1) EBITDA

EBITDA, defined as earnings before interest, taxes, depreciation and amortization, is not a financial measure that is recognized under GAAP. However, management believes that EBITDA provides supplemental information to net earnings that is useful in evaluating the Fund's operations before considering how it was financed or taxed in various countries. Investors should be cautioned; however, that EBITDA should not be construed as an alternative measure to net earnings determined in accordance with GAAP. Phoenix's method of calculating EBITDA may differ from that of other organizations and, accordingly, its EBITDA may not be comparable to that of other companies.

The following is a reconciliation of net earnings to EBITDA:



Three-month period Nine-month period
ended September 30, ended September 30,
(Stated in thousands of dollars) 2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings 3,145 9,525 7,733 19,116
Add (deduct):
Depreciation and amortization 2,743 2,330 8,381 6,422
Provision for (recovery of) income
taxes (1,325) 1,602 (3,701) 3,066
Interest on long-term debt 42 - 122 39
Other interest (income) 10 (55) 13 (42)
----------------------------------------------------------------------------
EBITDA as reported 4,615 13,402 12,548 28,601
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Diluted EBITDA per unit is calculated using the treasury stock method whereby deemed proceeds on the exercise of the unit options are used to reacquire fund units at an average unit price. The calculation of EBITDA on a dilutive basis does not include anti-dilutive options.

2) Distributable Cash

Distributable cash is defined as cash flows generated from operating activities before net changes in non-cash working capital, excluding bad debt provisions, and is not a measure recognized under GAAP. However, management believes that distributable cash provides supplemental information to cash flows from operating activities that is useful in evaluating the Fund's operating cash flow before considering changes in working capital balances. Management uses this measure to calculate its cash payout ratio to show what percentage of its distributable cash is paid out to its unitholders. Investors should be cautioned; however, that distributable cash should not be construed as an alternative measure to cash flows from operating activities determined in accordance with GAAP. Phoenix's method of calculating distributable cash may differ from that of other organizations and, accordingly, its distributable cash may not be comparable to that of other companies.

The Fund considers its maintenance capital expenditures to be minimal. Maintenance capital would only be relevant to the Fund's retirement of tubular equipment that is subsequently replaced. Typically, lost-in-hole equipment is replaced, but these losses are funded by the proceeds from insurance or customers. In addition, due to the nature of the industry, the Fund's drilling equipment is frequently re-conditioned to an "as new" state with the associated costs expensed and included in the Fund's direct costs. Consequently, the Fund will not make an adjustment to distributable cash for capital maintenance expenditures. The Fund's assumptions used with respect to maintenance capital are believed to be reasonable at the time of preparation; however, no assurance can be given that these assumptions will prove to be correct and, consequently, the Fund's distributable cash could differ materially in the future.

The following is a reconciliation of net earnings to distributable cash:



Three-month period Nine-month period
ended September 30, ended September 30,
(Stated in thousands of dollars) 2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings 3,145 9,525 7,733 19,116
Add (deduct) items not affecting cash:
Depreciation and amortization 2,743 2,330 8,381 6,422
Future income taxes (2,352) 369 (2,067) 10
Unrealized foreign exchange loss (gain) (159) 91 (297) 215
Gain on disposition of drilling
equipment (1,025) (615) (2,500) (1,561)
Stock-based compensation 481 359 799 1,065
Provision for bad debts 88 70 61 9
----------------------------------------------------------------------------
Distributable cash 2,921 12,129 12,110 25,276
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Diluted distributable cash per unit is calculated using the treasury stock method whereby deemed proceeds on the exercise of the unit options are used to reacquire fund units at an average unit price. The calculation of distributable cash per unit on a dilutive basis does not include anti-dilutive options.

3) Cash Payout Ratio

The cash payout ratio is defined as cash distributions made by the Fund in the period divided by its distributable cash for the same period. The cash payout ratio is not a measure recognized under GAAP. However, management believes the cash payout ratio provides supplemental information that is useful in evaluating the level of cash distributions in relation to the Fund's distributable cash. Investors should be cautioned, however, that the cash payout ratio should not be construed as an alternative measure to other GAAP measures. Phoenix's method of calculating its cash payout ratio may differ from other organizations, and accordingly, the cash payout ratio may not be comparable to other companies.

Overview of Business

Phoenix is in the business of providing horizontal and directional technology and drilling services in Canada, the United States, Peru and Albania. Phoenix manufactures its CLT-EM MWD tool, which was developed by its research and development department, for use in the Fund's internal operations .The Fund maintains its corporate head office, research and development, Canadian sales, service and operational centers in Calgary, Alberta. The Fund's US operations, conducted through the Fund's wholly-owned subsidiary, Nevis Energy Services Inc. ("Nevis"), is headquartered in Houston, Texas. Nevis has sales and service facilities in Houston, Texas; Traverse City, Michigan; and Casper, Wyoming. In addition, sales offices are located in Denver, Colorado, Fort Worth, Texas and just recently in Corpus Christi, Texas.



Consolidated Balance Sheets
(unaudited)
30-Sep-09 31-Dec-08
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ASSETS

Current assets:
Cash and cash equivalents $ 1,101,227 $ 12,621,811
Accounts receivable 21,686,732 40,773,509
Inventory 7,271,781 6,680,448
Prepaid expenses 2,406,888 1,088,468
Income tax receivable 1,968,611 322,958
----------------------------------------------------------------------------
34,435,239 61,487,194

Drilling and other equipment 59,848,660 63,570,964
Goodwill 8,876,351 8,876,351
----------------------------------------------------------------------------
$ 103,160,250 $ 133,934,509
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ 2,717,776 $ -
Accounts payable and accrued liabilities 11,056,324 32,818,149
Distributions payable 2,043,118 2,068,690
Current portion of long-term debt 1,200,000 -
----------------------------------------------------------------------------
17,017,218 34,886,839
Long-term debt 8,800,000 5,000,000
Future income taxes 790,759 3,849,398
----------------------------------------------------------------------------
26,607,977 43,736,237

Unitholders' equity:
Unitholders' capital 68,009,686 67,236,158
Contributed surplus 3,493,926 2,908,568

Retained earnings 8,003,568 18,901,636
Accumulated other comprehensive income (2,954,907) 1,151,910
----------------------------------------------------------------------------
5,048,661 20,053,546
----------------------------------------------------------------------------
76,552,273 90,198,272

----------------------------------------------------------------------------
$ 103,160,250 $ 133,934,509
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Consolidated Statements of Earnings
Three & nine-month period ended September 30, 2009 and 2008 (unaudited)

Three month-period Nine-month period
ended September 30, ended September 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue $27,138,498 $51,347,645 $79,757,921 $123,873,357
Direct costs 19,600,219 33,743,443 57,334,307 82,712,314
----------------------------------------------------------------------------
Gross profit 7,538,279 17,604,202 22,423,614 41,161,043
----------------------------------------------------------------------------

Expenses:
Selling, general and
administrative 3,668,055 4,292,119 11,895,243 12,718,432
Depreciation and
amortization 2,743,306 2,329,700 8,381,387 6,421,774
Stock-based
compensation 481,018 358,609 798,600 1,065,292
Foreign exchange loss
(gain) (200,455) 167,117 (317,992) 338,039
Interest on long-term debt 41,963 - 122,320 39,249
Other interest (income) 10,310 (55,619) 13,300 (41,898)
Gain on disposition of
drilling equipment (1,025,835) (615,219) (2,499,890) (1,561,883)
----------------------------------------------------------------------------
5,718,362 6,476,707 18,392,968 18,979,005

----------------------------------------------------------------------------
Earnings before income
taxes 1,819,917 11,127,495 4,030,646 22,182,038
----------------------------------------------------------------------------

Provision for (recovery of)
income taxes
Current 1,026,967 1,233,610 (1,635,136) 3,055,248
Future (2,351,852) 368,509 (2,066,810) 10,394
----------------------------------------------------------------------------
(1,324,885) 1,602,119 (3,701,946) 3,065,642
----------------------------------------------------------------------------

Net earnings $ 3,144,802 9,525,376 $ 7,732,592 $ 19,116,396
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per unit
- basic $ 0.13 $ 0.39 $ 0.32 $ 0.82
Earnings per unit
- diluted $ 0.13 $ 0.38 $ 0.32 $ 0.80
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Consolidated Statements of Comprehensive Income
Three & nine-month period ended September 30, 2009 and 2008 (unaudited)

Three month-period Nine-month period
ended September 30, ended September 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings $ 3,144,802 $ 9,525,376 $ 7,732,592 $ 19,116,396
Foreign currency
adjustment (2,317,341) 930,642 (4,106,817) 1,464,106
----------------------------------------------------------------------------
Comprehensive income $ 827,461 $10,456,018 $ 3,625,775 $ 20,580,502
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Consolidated Statements of Cash Flows
Three & nine-month period ended September 30, 2009 and 2008 (unaudited)

Three month-period Nine-month period
ended September 30, ended September 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flows from
operating activities:
Net earnings $ 3,144,802 $ 9,525,376 $ 7,732,592 $ 19,116,396
Add (deduct) items
not affecting cash
Depreciation and
amortization 2,743,306 2,329,700 8,381,387 6,421,774
Future income taxes (2,351,852) 368,509 (2,066,810) 10,394
Unrealized foreign
exchange loss (gain) (158,550) 91,291 (296,916) 215,439
Gain on disposition
of drilling equipment (1,025,835) (615,219) (2,499,890) (1,561,883)
Stock-based compensation 481,018 358,609 798,600 1,065,292
Recovery of bad debts 88,392 70,937 61,349 8,494

Change in non-cash
working capital (4,556,712) (10,644,397) (4,386,412) (7,542,164)
----------------------------------------------------------------------------
(1,635,431) 1,484,806 7,723,900 17,733,742
----------------------------------------------------------------------------

Cash flows from
investing activities:
Proceeds on
disposition of
drilling equipment 1,920,677 1,676,797 6,528,556 3,953,336
Acquisition of
drilling and other
equipment (1,069,030) (8,081,151) (8,709,092) (23,227,598)
Change in non-cash
working capital 19,358 1,102,740 (6,775,623) 2,632,107
----------------------------------------------------------------------------
871,005 (5,301,614) (8,956,159) (16,642,155)
----------------------------------------------------------------------------

Cash flows from
financing activities:
Issuance of units
from unit option plan 110,105 256,265 569,372 3,976,703
Issuance of units
from equity financing - - - 16,792,650
Distributions to
unitholders (6,144,120) (6,196,998) (18,575,472) (15,556,911)
Proceeds on/
(repayment of)
long-term debt 5,000,000 - 5,000,000 (1,775,000)
Proceeds on/
(repayment of )bank
overdraft facility 1,194,688 - 2,717,775 (2,827,355)
----------------------------------------------------------------------------
160,673 (5,940,733) (10,288,325) - 610,087
----------------------------------------------------------------------------

(Decrease)/ increase
in cash and cash
equivalents (603,753) (9,757,541) (11,520,584) 1,701,674
Cash and cash
equivalents, beginning
of period 1,704,980 14,468,012 12,621,811 3,008,797
----------------------------------------------------------------------------
Cash and cash
equivalents, end of
period $ 1,101,227 $ 4,710,471 $ 1,101,227 $ 4,710,471
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Contact Information

  • Phoenix Technology Services Inc.
    John Hooks
    President and CEO
    (403) 543-4466
    (403) 543-6025 (FAX)
    or
    Phoenix Technology Services Inc.
    Cameron Ritchie
    Senior Vice President Finance and CFO
    (403) 543-4466
    (403) 543-6025 (FAX)
    or
    Phoenix Technology Services Inc.
    Suite 630, 435 4th Avenue SW
    Calgary, Alberta T2P 3A8
    www.phoenixcan.com