Phoenix Technology Income Fund
TSX : PHX.UN

Phoenix Technology Income Fund

August 04, 2009 19:40 ET

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

CALGARY, ALBERTA--(Marketwire - Aug. 4, 2009) - Phoenix Technology Income Fund (TSX:PHX.UN) is pleased to report on its financial and operating results for the three and six-month periods ended June 30, 2009. The depressed global economy, low oil and natural gas commodity prices and some customers' limited access to financial markets, continue to decrease the level of industry activity in Canada and the US to decade lows. Phoenix saw its revenue for the three-month period ended June 30, 2009 decline by 44 percent to $17.1 million from $30.5 million in 2008. Consolidated operating days for the three-month period ended June 30, 2009 were 1,699, which represented a decrease of 45 percent from 3,106 days generated in 2008.

Distributable cash for the six-month period ended June 30, 2009 decreased by 30 percent to $9.2 million from $13.1 million in 2008, and cash distributions paid to unitholders increased 33 percent to $12.4 million for the same 2009 period from $9.4 million in 2008. The resulting cash payout ratio for the 2009 six-month period was 135 percent as compared to 71 percent in 2008.



(Stated in thousands of dollars except per unit amounts, percentages and
units outstanding)

Three-month period ended June 30,
2009 2008 %Change
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Operating Results (unaudited) (unaudited)
Revenue 17,085 30,514 (44)
Net earnings (loss) (887) 2,280 (139)
Earnings (loss) per unit - diluted (0.04) 0.09 (144)
EBITDA (1) (1,101) 4,584 (124)
EBITDA per unit - diluted (1) (0.05) 0.19 (126)
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Cash Flow
Cash flows from operating activities 9,906 10,386 (5)
Distributable cash (1) (26) 3,132 (101)
Distributable cash per unit - diluted(1) - 0.13 -
Cash distributions made 6,222 4,984 25
Cash distributions per unit (2) 0.255 0.215 19
Cash payout ratio(1) n.m. 159%
Capital expenditures 2,217 9,745 (77)
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Financial Position - (unaudited)
Working capital
Long-term debt (3)
Unitholders' equity
Fund units outstanding
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Six-month period ended June 30,
2009 2008 %Change
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Operating Results (unaudited) (unaudited)
Revenue 52,619 72,526 (27)
Net earnings (loss) 4,588 9,591 (52)
Earnings (loss) per unit - diluted 0.19 0.41 (54)
EBITDA (1) 7,932 15,200 (48)
EBITDA per unit - diluted (1) 0.32 0.65 (51)
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Cash Flow
Cash flows from operating activities 9,359 16,249 (42)
Distributable cash (1) 9,189 13,147 (30)
Distributable cash per unit - diluted(1) 0.38 0.57 (33)
Cash distributions made 12,431 9,360 33
Cash distributions per unit (2) 0.510 0.410 24
Cash payout ratio(1) 135% 71%
Capital expenditures 7,640 15,146 (50)
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Financial Position - (unaudited) June 30/09 Dec 31/08
Working capital 16,912 26,600 (36)
Long-term debt (3) 5,000 5,000 -
Unitholders' equity 81,335 90,198 (10)
Fund units outstanding 24,422,490 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.
n.m. - not meaningful


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:
- estimates that $10.6 million of total capital expenditures will be incurred in 2009;

- there are no planned additions in job capacity for the balance of the 2009-year other than the addition of one MWD system that was carried forward from 2008;

- future capital expenditures and cash distributions will be financed by existing debt facilities, cash flow and working capital;

- it is expected that the Fund will maintain current distribution levels; however, if current economic uncertainty and volatile financial markets persist the distribution levels may be reviewed and reduced;

- lower oil and natural gas commodity prices in 2009 are expected to continue to adversely impact customer cash flows and their drilling activity, and as a result their demand for Phoenix's drilling services will continue to be weak;

- lower commodity prices will continue to put pressures on customer pricing levels;

- the Peruvian and Albanian markets are expected to present the Fund with future revenue growth and profitability;

- the Fund expects that the trend towards horizontal and directional drilling being a high percentage of total drilling within North America will continue;

- customers will use and demand new technologies that will promote operational efficiencies in horizontal and directional drilling and Phoenix with its current R&D projects are well placed to participate in this;

- the Fund is looking to further expand its operations in certain international markets that are politically stable and have forecasted growth in the energy sectors; and

- Phoenix will continue to review its operations for further opportunities to realize cost efficiencies.

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

For the three-month period ended June 30, 2009, consolidated revenue was $17.1 million as compared to $30.5 million in the 2008 period, a decrease of 44 percent. For the same 2009 period, consolidated operating days were 1,699, which represented a decrease of 45 percent from 3,106 days generated in 2008. Due to the traditional Canadian spring break-up period that occurs in the second quarter, US operations represent a large component of consolidated revenue; 64 percent in the 2009 quarter compared to 68 percent in 2008.

The depressed global economy, low oil and natural gas commodity prices and some customers' limited access to financial markets, continue to decrease the level of industry activity in Canada and the US to decade lows. Due to excess industry capacity, Phoenix has continued to experience downward pressures on its customer day rates throughout the second quarter of 2009.

One positive trend remains. In part due to new well completion techniques that require horizontal drilling services, horizontal and directional drilling continues to represent an increasing level of overall industry activity. In the second quarter of 2009, horizontal and directional drilling activity represented approximately 67 percent and 60 percent of the total drilling activity in Canada and the US, respectively. This compares to 51 percent in Canada and 48 percent in the US for the corresponding 2008 period. (Sources: Daily Oil Bulletin and Baker Hughes).

During the second quarter of 2009, Phoenix generated revenue of $0.5 million from South America through its Peruvian subsidiary, Phoenix Cantech S.A.C. ("Phoenix Cantech"). Phoenix Cantech has a concurrent job capacity of four full service MWD jobs. Phoenix will commit additional resources to the Peruvian market as demand dictates. It is expected that Peru will add important geographical diversification to the Fund, contributing significantly to the Fund's revenue and profitability in 2009 and beyond.

Phoenix had very limited operations in Albania during the second quarter of 2009; however, due to the strengthening of world oil prices over the past few months, drilling activity has re-commenced early in the third quarter of 2009. It is expected that further increases in activity and profitability will continue in 2009 and 2010.

Phoenix's consolidated revenue decreased by 27 percent to $52.6 million for the six-month period ended June 30, 2009 compared to $72.5 million in the 2008 period. US revenue for the six-month period ended June 30, 2009 accounted for 57 percent of the Fund's consolidated revenue, which was an increase of 5 percentage points from the corresponding 2008 period. Consolidated operating days decreased by 32 percent to 4,998 days in the 2009 six-month period as compared to 7,380 days in 2008.

For the three-month period ended June 30, 2009, cash flows from operating activities, after net changes in non-cash working capital balances, decreased by 5 percent to $9.9 million from $10.4 million in the 2008 period. Cash flows from operating activities for the six-month period ended June 30, 2009 decreased by 42 percent to $9.4 million from $16.2 million in the 2008 period. The decrease in cash flow for the six-month period ended June 30, 2009 resulted from lower profitability in 2009 compared to 2008. In addition, the 2008 period's net change in accounts receivable, accounts payable and inventory balances was $3.0 million higher than 2009, due to collection and payment timing differences.

As a direct result of lower activity levels and earnings, distributable cash for the three-month period ended June 30, 2009 decreased by 101 percent over the 2008 period to a negative $26,000 from $3.1 million. Distributable cash for the six-month period ended June 30, 2009 decreased by 30 percent over the six-month period in 2008 to $9.2 million from $13.1 million.

Distributions to unitholders for the three-month period ended June 30, 2009 increased by 25 percent to $6.2 million, or $0.255 per unit, from $5.0 million, or $0.215 per unit, in the 2008 period. For the six-month period ended June 30, 2009 distributions were $12.4 million, or $0.51 per unit, compared to $9.4 million, or $0.41 per unit in 2008. The resulting cash payout ratio for the six-month period ended June 30, 2009 was 135 percent compared to 71 percent in the corresponding 2008 period.

During the three-month period ended June 30, 2009, EBITDA decreased by 124 percent to a negative $1.1 million, negative $0.05 per unit diluted, compared to $4.6 million, $0.19 per unit diluted, in 2008. For the three-month period ended June 30, 2009 net earnings decreased by 139 percent to a negative $0.9 million, negative $0.04 per unit diluted, as compared to $2.3 million, $0.09 per unit diluted, in the 2008 period. Lower activity and gross profit margins contributed to these results.

For the six-month period ended June 30, 2009, EBITDA was $7.9 million, $0.32 per unit diluted, compared to $15.2 million, $0.65 per unit diluted, in 2008, a decrease of 48 percent. Net earnings for the six-month period ended June 30, 2009, decreased by 52 percent to $4.6 million, $0.19 per unit diluted, as compared to $9.6 million, $0.41 per unit diluted, in the 2008 period.

The Fund's concurrent job capacity remains unchanged from March 31, 2009 at 113 jobs. At the end of the second quarter 63 MWD systems were located in Canada, 44 MWD systems in the US, four MWD systems in Peru and two MWD systems in Albania. One CLT-EM MWD system was expected to be put into service during the second quarter of 2009, but the assembly of this system will occur in the third quarter. It is expected that the Fund will not add any further systems to its fleet in 2009. As a result, 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

Phoenix continued to experience lower activity levels in most of its key operating areas, including the oil regions in the Bakken and the shallow gas regions in Alberta. For the three-month period ended June 30, 2009 the Fund's Canadian operating days decreased by 40 percent from 1,004 days in the 2008 period to 600 days in 2009. Revenue was $6.1 million for the three-month period ended June 30, 2009 as compared to $9.7 million in 2008. Included in Canadian revenue for 2009 was approximately $0.6 million that related to Phoenix's international operations in Peru and Albania. Excluding international operations, revenue in Canada decreased by 43 percent in 2009 as compared to 2008. As an industry comparison, during the second quarter of 2009 the number of industry horizontal and directional drilling days in Canada decreased by 30 percent to 7,877 days from 11,177 days in the 2008 period. (Source: Daily Oil Bulletin).

The Fund's day rates further weakened in the quarter due to continued contraction of industry activity; however, the full impact of these price declines was partially offset by a significant proportion of four-man horizontal drilling days, which command a higher day rate.

Horizontal oil well drilling, as measured by the number operating days, represented approximately 40 percent of Phoenix's overall Canadian drilling activity in the three-month period ended June 30, 2009, a decrease from the 60 percent obtained in 2008.

For the six-month period ended June 30, 2009, the Fund's Canadian revenue declined by 36 percent to $22.5 million from $35.0 million in the comparable 2008 period. The number of horizontal and directional drilling days in the Canadian industry during the six-month period ended June 30, 2009 decreased by 21 percent to 28,720 days from 36,275 days in the 2008 period. (Source: Daily Oil Bulletin) Phoenix's Canadian drilling days decreased by 37 percent to 2,194 days in the 2009 six-month period from 3,463 days in 2008. Oil well drilling activity, as measured by operating days, represented approximately 38 percent of the Fund's Canadian activity for the six-month period ended June 30, 2009 as compared to 45 percent in 2008.

United States Revenue

Nevis operates predominantly in the natural gas drilling markets across the US through its operation centers in Houston, Texas, Traverse City, Michigan and Casper, Wyoming. In the second quarter of 2009 Nevis realized a decline in activity in all of these regions as compared to 2008. Reported revenue was $11.0 million for the three month-period ended June 30, 2009 as compared to $20.8 million in 2008, a decrease of 47 percent. Nevis' operating days declined by 48 percent to 1,099 days in the 2009 quarter as compared to 2,102 in 2008. The US revenue decline was diluted somewhat because of more favorable exchange rates in 2009, namely a strong US dollar relative to the Canadian dollar. In addition, substantially less "rental only" jobs were performed by Nevis in the 2009 period as compared to 2008.

Average day rates in the US decreased by approximately 12 percent in the three-month period ended June 30, 2009 as compared to the corresponding period in 2008. The most significant declines were experienced in the Northeast and Rocky Mountain regions where the markets were more competitive.

Prior to 2009, the US horizontal and directional drilling market had experienced many years of continuous growth; however, in the current year the industry is experiencing activity contraction. US industry activity in the three-month period ended June 30, 2009, as measured by the average number of horizontal and directional rigs running on a daily basis, decreased by 38 percent to 561 rigs from 898 rigs in the 2008 period. (Source: Baker Hughes).

US revenue for the six-month period ended June 30, 2009 decreased by 20 percent to $30.2 million from $37.6 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 23 percent for the six-month period ended June 30, 2009 to 660 rigs as compared to 859 rigs in the comparable 2008 period. (Source: Baker Hughes) The Fund's US operating days decreased by approximately 28 percent to 2,804 days in the six-month period ended June 30, 2009 from 3,917 days in 2008.

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 June 30, 2009 was 13 percent as compared to 28 percent in the 2008 comparable period. The key areas that adversely affected the Fund's margins in the 2009 three-month period as compared to 2008 were:

- increased labour costs. As a direct result of tight labour markets and record activity levels achieved by the Fund in 2008, Canadian and US field labour rates and field and shop personnel levels increased substantially. Despite recent field and shop layoffs of 24 percent since January of this year, labour costs for the 2009 period are only 4 percent below second quarter levels in 2008. Current customer demand has not increased to levels that the Fund forecasted in the first quarter of 2009;

- increased costs for the parts required to repair downhole performance drilling motors and guidance equipment; and

- declining day rates due to competitive market pressures. Although the overall impact on Canadian revenue was offset by a greater quantity of four-man horizontal drilling days; the added labour cost required to perform this work is charged out at little or no markup, thus, the overall margin percentages are reduced for these type of jobs.

For the six-month period ended June 30, 2009, gross profit as a percentage of revenue was 28 percent as compared to 32 percent in 2008. Included in the Fund's gross profit 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 six-month results, gross profit as a percentage of revenue would have been 21 percent.

Due to an increase in the number of R&D initiatives and projects undertaken by Phoenix, R&D expenditures in the 2009 three-month period represented a total of $1.0 million, of which $0.9 million were capitalized as development costs. In the corresponding 2008 period no development costs were capitalized and $0.4 million in R&D costs were expensed. For the six-month period ended June 30, 2009, R&D expenditures increased by 143 percent $1.7 million as compared to $0.7 million in 2008. Of the 2009 six-month period R&D expenditures, $0.9 million was capitalized as deferred development costs.

SG&A costs for the three-month period ended June 30, 2009 decreased by 13 percent to $3.5 million, 20 percent of revenue, as compared to $4.0 million, 13 percent of revenue, in the 2008 period. For the six-month period ended June 30, 2009 SG&A costs decreased by 2 percent to $8.2 million, 16 percent of revenue, as compared to $8.4 million, 12 percent of revenue, in the 2008 period. The decreases in SG&A costs in the 2009 periods were not in line with the decrease in revenue due to proportionally higher staff related costs, including costs related to the Peruvian operations.

Cost Reduction Initiatives:

Due to the low level of activities experienced in the first half of 2009 and the Fund's outlook for the remainder of the year, Phoenix has undertaken several cost cutting initiatives both during the current and previous 2009 quarters which included:

- cuts in field day rates of 12 to 15 percent, effective mid-February, which were followed by further cuts in field day rates and field salaries of 10 and 5 percent respectively, effective June 1, 2009.

- staff layoffs of approximately 18 percent of the Fund's work force in late February and early March. A further 6 percent of the remaining staff were laid off in April 2009;

- Company-wide salary and incentive plan cuts of 10 percent, effective April 1, 2009;

Phoenix will continue to monitor customer prices and activity levels and initiate further cost cutting measures where necessary.

As a result of past period capital expenditures, depreciation and amortization for the three-month period ended June 30, 2009 increased to $2.8 million from $2.1 million in the 2008 period, or by 31 percent. For the six-month period ended June 30, 2009 depreciation and amortization increased by 38 percent to $5.6 million from $4.1 million in 2008.

Stock-based compensation costs decreased by 55 percent for the three-month period ended June 30, 2009 to $168,000 from $376,000 in the corresponding 2008 period. For the six-month period ended June 30, 2009 stock-based compensation costs were $0.3 million, a decrease of 55 percent from $0.7 million in 2008. The period charges relate to the amortization of the fair values of issued Fund options.

A foreign exchange loss of $62,000 was reported for the three-month periods ended June 30, 2008 and 2009. For the six-month period ended June 30, 2009 the foreign exchange gain was $118,000 versus a foreign exchange loss of $171,000 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 $359,000 in the three-month period ended June 30, 2009, compared to $531,000 in 2008. For the six-month period ended June 30, 2009, a gain of $1.5 million was reported as compared to a gain of $0.9 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 $3.0 million in the three-month period ended June 30, 2009 as compared to a net income tax expense of $0.2 million in 2008. For the six-month period ended June 30, 2009 Phoenix reported a net recovery of income taxes of $2.4 million as compared to a net income tax provision of $1.5 million in the comparable 2008 period. The net recoveries in the 2009 periods result from the decreased profitability of the Fund in 2009 coupled with the deductibility of cash distributions 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 $2.2 million for the three-month period ended June 30, 2009 as compared to $9.7 million in 2008. The Fund invested a further $0.7 million in its Peruvian operations, capitalized $0.9 million in development costs and spent a negligible $0.6 million on other downhole equipment to support operations in the period. The capital expenditures undertaken in the 2009 three-month period were financed from cash flow from operations and working capital. For the three-month period ended June 30, 2009, the Fund realized proceeds from the involuntary disposal of drilling equipment in well bores of $1.4 million compared to $1.1 million in the 2008 period. These losses are uncontrollable in nature.

The change in non-cash working capital balances of $2.8 million for the three-month period ended June 30, 2009 and $0.6 million for the 2008 period relates to the net change in the Fund's trade payables that are associated with the acquisition of capital assets. The 2009 amount represented a net use of cash for the Fund whereby the 2008 amount represented a net source of cash.

Phoenix's investment in drilling and other equipment for the six-month period ended June 30, 2009 was $7.6 million compared to $15.1 million in the 2008 period. The Fund realized proceeds from the involuntary disposal of drilling equipment in well bores of $4.6 million in the 2009 six-month period compared to $2.3 million in 2008.

Cash Flow, Distributions and Payout Ratio

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. Currently, the Fund sets its cash distributions at levels that still allow the Fund to have sufficient funding for capital expenditures. 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 June 30, 2009, cash distributions of $6.2 million were financed from the Fund's cash flows from operating activities and working capital. Under Phoenix's current level of forecasted activity, it is anticipated that sufficient cash flow from operations and working capital, and long-term debt will be available to allow the Fund to maintain its current 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 has been revised to $10.6 million. The balance of the unspent capital expenditure budget of $3.0 million will be financed from cash flow from operations, working capital and by the Fund's unused credit facilities, where required.

Outlook

The second quarter's industry activity levels re-affirmed Phoenix's view as to how the recovery of the drilling industry will take shape. Amidst the industry slowdown, a record percentage of wells drilled are utilizing horizontal and directional technology. It is the Fund's belief that this trend is firmly established and will become the norm once operators resume active drilling programs.

Typically, the second quarter represents a slow activity period due to the spring break-up that exists in western Canada and the northeastern United States; however, this year the quarter was also greatly affected by the global recession and the abundance of natural gas in storage that has resulted from increases in production during past years. In addition, the increase in drilling activity that is normally expected to begin in June and carry through the summer months was non-existent this year. For the oil and natural gas service sector to recover from this depressed environment, unfortunately, activity needs to remain at low levels to allow for the depletion of natural gas in storage. Once this happens, prices should strengthen making drilling profitable once again.

When this resurgence occurs, the Fund believes that operators will demand greater efficiencies from the service sector, and therefore, will expect new innovative technologies to be provided. With an industry focused on the emerging shale gas plays and oil wells that utilize multi-staged fracturing, it will be Companies, like Phoenix, that are committed to research and development that will prevail; those who only are capable of providing standard services will be pushed aside.

For this reason, Phoenix has undertaken a large number of R&D projects that will create advantages for operators drilling in the emerging areas. It is Phoenix's belief that technically advanced equipment will create an opportunity for oil and natural gas wells to be drilled in a fashion far different than before, and Phoenix's goal is to actively participate in and contribute to this change through hard work, experienced personnel and an intense technology development process.

Unfortunately, forecasted activity has recently been downgraded for Canada and the United States. The Fund's activity level is presently at modest levels, with current projects ongoing in the Bakken oil region and the Appalachian shale; however, day rates in all regions have been adversely affected by strong competitive forces and are at levels not forecasted by the Fund. Phoenix's international endeavors in Peru and Albania are progressing as planned and it is expected that these will provide important diversification for the Fund in the future. A continuing strategic objective for the Fund is to expand further abroad into areas that fit Phoenix's international expansion model, namely, areas that are politically stable and that have forecasted growth in the energy sector.

The Fund's goal to reward shareholders with stable distributions can continue, albeit subject to certain conditions. First, Phoenix's forecast for the remainder of 2009 must be realized. Second, day rates, which are believed to have currently bottomed out, also must stabilize or increase. And third, a recovery in natural gas commodity prices and drilling needs to be visible in the future quarters.

The Fund is committed to providing superior performance and to continuing wherever possible to realize cost efficiencies all of which will lay a platform for a strong future.

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 Six-month period
ended June 30, ended June 30,
(Stated in thousands of dollars) 2009 2008 2009 2008
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Net earnings (loss) (887) 2,280 4,588 9,591
Add (deduct):
Depreciation and amortization 2,765 2,103 5,638 4,092
Provision for (recovery of) income
taxes (3,017) 221 (2,377) 1,464
Interest on long-term debt 32 14 80 39
Other interest (income) 6 (34) 3 14
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EBITDA as reported (1,101) 4,584 7,932 15,200
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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 Six-month period
ended June 30, ended June 30,
(Stated in thousands of dollars) 2009 2008 2009 2008
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Net earnings (loss) (887) 2,280 4,588 9,591
Add (deduct) items not affecting cash:
Depreciation and amortization 2,765 2,103 5,638 4,092
Future income taxes (1,778) (1,051) 285 (358)
Unrealized foreign exchange loss (gain) 92 22 (138) 124
Gain on disposition of drilling
equipment (359) (531) (1,474) (947)
Stock-based compensation 168 376 317 707
Provision for bad debts (27) (67) (27) (62)
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Distributable cash (26) 3,132 9,189 13,147
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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 Current Loop Telemetry ("CLT") electromagnetic ("EM") measurement while drilling ("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 and Fort Worth, Texas.



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

Current assets:
Cash and cash equivalents $ 1,704,980 $ 12,621,811
Accounts receivable 12,963,927 40,773,509
Inventory 8,355,810 6,680,448
Prepaid expenses 2,069,373 1,088,468
Income tax receivable 3,209,600 322,958
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28,303,690 61,487,194

Drilling and other equipment 63,640,792 63,570,964
Goodwill 8,876,351 8,876,351
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$ 100,820,833 $ 133,934,509
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LIABILITIES AND UNITHOLDERS' EQUITY

Current liabilities:
Bank indebtedness $ 1,523,088 $ -
Accounts payable and accrued liabilities 7,392,214 32,818,149
Distributions payable 2,075,913 2,068,690
Current portion of long-term debt 400,000 -
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11,391,215 34,886,839

Long-term debt 4,600,000 5,000,000
Future income taxes 3,494,731 3,849,398
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19,485,946 43,736,237

Unitholders' equity:
Unitholders' capital 67,899,449 67,236,158
Contributed surplus 3,022,126 2,908,568

Retained earnings 11,050,878 18,901,636
Accumulated other comprehensive income (loss) (637,566) 1,151,910
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10,413,312 20,053,546
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81,334,887 90,198,272

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$ 100,820,833 $ 133,934,509
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Consolidated Statements of Earnings
Three & six-month periods ended June 30, 2009 and 2008 (unaudited)

Three-month period Six-month period
ended June 30, ended June 30,
2009 2008 2009 2008
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Revenue $ 17,085,494 $30,514,393 $ 52,619,423 $ 72,525,712
Direct costs 14,861,479 22,059,345 37,734,088 48,968,871
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Gross profit 2,224,015 8,455,048 14,885,335 23,556,841
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Expenses:
Selling, general
and administrative 3,454,011 3,963,801 8,227,188 8,426,313
Depreciation and
amortization 2,765,026 2,102,723 5,638,081 4,092,074
Stock-based
compensation 168,203 375,727 317,582 706,683
Foreign exchange
loss (gain) 62,180 62,235 (117,537) 170,922
Interest on
long-term debt 32,092 14,197 80,357 39,249
Other interest
(income) 5,671 (33,597) 2,990 13,721
Gain on
disposition of
drilling
equipment (359,040) (530,813) (1,474,055) (946,664)
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6,128,143 5,954,273 12,674,606 12,502,298

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Earnings (loss)
before income
taxes (3,904,128) 2,500,775 2,210,729 11,054,543
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Provision for
(recovery of)
income taxes
Current (1,238,844) 1,271,451 (2,662,103) 1,821,638
Future (1,778,217) (1,050,928) 285,042 (358,115)
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(3,017,061) 220,523 (2,377,061) 1,463,523
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Net earnings
(loss) $ (887,067) 2,280,252 $ 4,587,790 $ 9,591,020
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Earnings (loss)
per unit-basic $ (0.04) $ 0.10 $ 0.19 $ 0.42
Earnings (loss)
per unit-diluted $ (0.04) $ 0.09 $ 0.19 $ 0.41
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Consolidated Statements of Comprehensive Income
Three & six-month periods ended June 30, 2009 and 2008 (unaudited)

Three-month period Six-month period
ended June 30, ended June 30,
2009 2008 2009 2008
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Net earnings (loss)$ (887,067) $ 2,280,252 $ 4,587,790 $ 9,591,020
Foreign currency
adjustment (2,592,941) (98,390) (1,789,476) 533,464
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Comprehensive
income (loss) $(3,480,008) $ 2,181,862 $ 2,798,314 $ 10,124,484
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Consolidated Statements of Cash Flows
Three & six-month periods ended June 30, 2009 and 2008 (unaudited)

Three-month period Six-month period
ended June 30, ended June 30,
2009 2008 2009 2008
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Cash flows from
operating
activities:
Net earnings
(loss) $ (887,067) $ 2,280,252 $ 4,587,790 $ 9,591,020
Add (deduct)
items not
affecting cash
Depreciation and
amortization 2,765,026 2,102,723 5,638,081 4,092,074
Future income
taxes (1,778,217) (1,050,928) 285,042 (358,115)
Unrealized
foreign exchange
loss (gain) 92,247 22,224 (138,366) 124,148
Gain on
disposition of
drilling
equipment (359,040) (530,813) (1,474,055) (946,664)
Stock-based
compensation 168,203 375,727 317,582 706,683
Recovery of bad debts (27,043) (67,296) (27,043) (62,443)

Change in
non-cash working
capital 9,932,047 7,254,333 170,300 3,102,233
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9,906,156 10,386,222 9,359,331 16,248,936
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Cash flows from
investing
activities:
Proceeds on
disposition of
drilling equipment 1,353,103 1,107,260 4,607,879 2,276,539
Acquisition of
drilling and
other equipment (2,216,786) (9,744,795) (7,640,062) (15,146,447)
Change in non-cash
working capital (2,829,338) 643,476 (6,794,981) 1,529,367
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(3,693,021) (7,994,059) (9,827,164) (11,340,541)
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Cash flows from
financing
activities:
Issuance of units
from unit option
plan 328,704 3,354,789 459,267 3,678,444
Issuance of units
from equity
financing - 16,834,644 - 16,834,644
Distributions to
unitholders (6,222,258) (4,983,801) (12,431,352) (9,359,913)
Repayment of
long-term debt - (1,775,000) - (1,775,000)
Proceeds on
/(Repayment of)
bank overdraft
facility (528,796) (2,581,102) 1,523,087 (2,827,355)
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(6,422,350) 10,849,530 (10,448,998) 6,550,820
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(Decrease)/
increase in cash
and cash
equivalents (209,215) 13,241,693 (10,916,831) 11,459,215
Cash and cash
equivalents,
beginning of
period 1,914,195 1,226,319 12,621,811 3,008,797
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Cash and cash
equivalents, end
of period $ 1,704,980 $14,468,012 $ 1,704,980 $ 14,468,012
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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
    Website: www.phoenixcan.com