Pure Energy Services Ltd.
TSX : PSV

Pure Energy Services Ltd.

November 14, 2008 08:49 ET

Pure Energy Services Ltd. Announces Fiscal and Operating Results for the Third Quarter Ended September 30, 2008

CALGARY, ALBERTA--(Marketwire - Nov. 14, 2008) - Pure Energy Services Ltd. (TSX:PSV)



Summary of Third Quarter Financial Results

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Three months ended Nine months ended
September 30, September 30,
($ thousands, except per share
amounts)(unaudited) 2008 2007 2008 2007
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Revenue $ 53,191 $ 31,457 $ 131,972 $ 94,072
Gross margin $ 12,437 $ 7,946 $ 28,850 $ 21,140
Gross margin % 23% 25% 22% 22%
General and administrative expenses $ 5,863 $ 5,508 $ 16,007 $ 15,988
EBITDA (1) $ 6,521 $ 4,200 $ 12,795 $ 3,109
EBITDAS (1) $ 6,734 $ 4,413 $ 13,870 $ 4,027
Net income (loss) $ 1,406 $ 850 $ (415) $ (4,589)
Income (loss) per share:
Basic $ 0.09 $ 0.05 $ (0.03) $ (0.29)
Diluted $ 0.09 $ 0.05 $ (0.03) $ (0.29)
Funds flow from operations (2) $ 6,905 $ 4,336 $ 11,687 $ 4,440
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September 30, December 31,
2008 2007
----------------------------------------
Total assets $217,121 $193,254
Total long-term debt $ 44,510 $ 40,833
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(1) EBITDA and EBITDAS do not have standardized meanings prescribed by GAAP.
Management believes that, in addition to net income, EBITDA and EBITDAS
are useful supplemental measures. EBITDA and EBITDAS are provided as
measures of operating performance without reference to financing
decisions, amortization or income tax impacts, which are not controlled
at the operating management level. EBITDAS also excludes stock based
compensation expense as it is also not controlled at the operating
management level. Investors should be cautioned that EBITDA and EBITDAS
should not be construed as alternatives to net income determined in
accordance with GAAP as an indicator of the Corporation's performance.
The Corporation's method of calculating EBITDA and EBITDAS may differ
from that of other corporations and accordingly may not be comparable
to measures used by other corporations. The Corporation calculates
EBITDA and EBITDAS as follows:


Three months ended Nine months ended
September 30, September 30,
($ thousands) 2008 2007 2008 2007
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Net income (loss) before income tax $ 2,036 $ 421 $ (646) $ (7,762)
Add: Depreciation expense 3,769 3,162 11,381 9,188
Interest expense 716 617 2,060 1,683
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EBITDA $ 6,521 $ 4,200 $ 12,795 $ 3,109
Add: Stock based compensation expense 213 213 1,075 918
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EBITDAS $ 6,734 $ 4,413 $ 13,870 $ 4,027
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(2) Funds flow from operations is defined as cash from operating activities
before changes in non-cash working capital, as presented on the
Corporation's statement of cash flows. Funds flow from operations is a
measure that provides investors with additional information regarding
the Corporation's liquidity and its ability to generate funds to finance
its operations. Funds from operations does not have a standardized
meaning prescribed by GAAP and may not be comparable to similar measures
provided by other corporations.


Highlights

The third quarter of 2008 has marked a transition point for Pure which saw the Corporation's United States ("US") fracturing operations move from the "build" stage to an "operate" stage. As a result of the investment and time spent in building Pure's US operations over the last three years, the Corporation achieved the following highlights during the quarter:

- Generated record quarterly revenue through a 69% increase in consolidated revenue to $53.2 million from the $31.5 million generated in the third quarter of 2007;

- Achieved 71% utilization of the Corporation's two operational fracturing spreads during the quarter, with operations for the third spread commencing on October 17th;

- Deliveries of fracturing sand from Pure's contract supplier continued to increase during the quarter. Deliveries are now sufficient to support fracturing operations for Pure's three fracturing spreads. Pure now has a competitive advantage in the Piceance Basin through its contracted supply of fracturing sand and a rail infrastructure to support delivery and storage of sand in the Piceance Basin;

- Continued to move wireline and production testing equipment from Canada to the US resulting in improved utilization and strong financial contribution from equipment previously underutilized in the slower Canadian market;

These positive results are due to management's steadfast focus on diversifying and growing Pure's complement of services and geographic operations. The value of these diversification and growth initiatives is evidenced by the achievement of record revenue in the quarter. The increase in revenue quarter over quarter was largely due to the increased utilization of Pure's fracturing assets in the US which saw an 513% increase in fracturing revenue to $14.5 million in the quarter versus $2.4 million in the third quarter of 2007. The Corporation also benefited from moving wireline and testing equipment from Canada into the US over the last 12 months to take advantage of higher activity levels in the US. Consolidated revenue also benefited from higher utilization for Pure's drilling rigs resulting in a 190% increase in drilling services revenue in the quarter versus the third quarter of 2007.

The increase in consolidated revenue during the quarter resulted in a 57% increase in gross margin to $12.4 million during the quarter from $7.9 million in the third quarter of 2007. The proportionate increase in gross margin was less than the proportionate increase in revenue due to a change in revenue mix combined with competitive pricing pressures in Canada and fracturing margins in the US which were lower than the average margins on Pure's other services during the quarter. While fracturing operations improved significantly in the quarter versus previous quarters, margin contribution from the fracturing operations was negatively impacted by higher operating costs related to sand transportation and higher overhead and staffing costs associated with preparation of start up of the division's third fracturing spread.

Consistent with the increase in gross margin, EBITDA also increased during the quarter to $6.5 million from the $4.2 million generated in the third quarter of 2007. This improved result was achieved even though the third quarter of 2007 benefited from a $1.8 million gain from the sale of equipment. Partially offsetting the impact of increased operating margins on EBITDA during the quarter was a $0.4 million increase in general and administrative expenses. The majority of the increase was due to additional costs being incurred for the final settlement of the Corporation's outstanding employment litigation with a group of former employees.

The improved operating performance during the quarter allowed Pure to generate $1.4 million in net income, $0.09 per share, during the quarter versus $0.9 million, $0.05 per share, in the third quarter of 2007.

On a year to date basis Pure has also benefited from the increase in activity levels from its US and drilling operations as consolidated revenue has increased by 40% to $132.0 million from the $94.1 million generated in the first nine months of 2007. The increase in activity from Pure's US fracturing operations has contributed $25.0 million to this increase in revenue with higher activity from the Corporation's drilling operations contributing $10.6 million.

Gross margin as a percentage of year to date revenue was consistent with the 22% generated in the first nine months of 2007. Similar to the comparative period in 2007, margins continue to be hampered in Pure's Canadian operations due to low industry activity levels which have increased the competitive pricing environment without a corresponding decrease in operating costs. Consolidated margins have also been hampered year to date due to the delayed ramp up of the Corporation's fracturing operations. While gross margin as a percentage of revenue remained consistent, the increase in revenue generated year to date resulted in a 36% increase in gross margin to $28.9 million versus $21.1 million in the first nine months of 2007.

The improved operating results contributed to a fourfold increase in EBITDA to $12.8 million in the first nine months of 2008 versus $3.1 million in the comparative period in 2007. EBITDA in the first nine months of 2007 was negatively impacted by a $4.2 million impairment loss on a note receivable owing to the Corporation from the original owner of the fracturing sand facility. Operations of this facility were subsequently sold and the new owner repaid a portion of the note owing to the Corporation in the fourth quarter of 2007 at which time the loan impairment provision was reduced. The impact of this note impairment in the first nine months of 2007 was partially offset by a $1.8 million gain on sale of equipment.

The improved operating results and lower general and administrative costs from cost saving initiatives implemented in the fourth quarter of 2007 allowed the Corporation to reduce its net loss to $0.4 million, ($0.03) per share, from a net loss of $4.6 million, ($0.29) per share, generated in the first nine months of 2007. Along with lower equipment utilization, net income for the first nine months of 2007 was negatively impacted by the note impairment net of the gain on sale of equipment discussed above.

Management also announces that Michael Baldwin has decided to leave Pure to pursue other opportunities. Management and the board of directors thank Michael for his contributions over the past three years and wish him success in his future endeavours.



Results of Operations

Canadian Completion Services

----------------------------------------------------------------------------
Three months ended September 30
($ thousands)(unaudited) 2008 2007 Variance % Change
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Revenue $ 13,947 $ 15,502 $ (1,555) (10%)
Operating expenses 11,221 11,058 163 1%
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Gross margin $ 2,726 $ 4,444 $ (1,718) (39%)
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Gross margin % 20% 29% (9%) (31%)
Average units available during the
period:
Production testing 33.0 43.7 (10.7) (24%)
Logging and perforating 20.7 21.0 (0.3) (1%)
Multiline 16.0 16.0 - -
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Total 69.7 80.7 (11.0) (14%)
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Number of jobs completed:
Production testing 1,376 1,485 (109) (7%)
Logging and perforating 962 1,208 (246) (20%)
Multiline 495 550 (55) (10%)
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Total 2,833 3,243 (410) (13%)
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Nine months ended September 30
($ thousands)(unaudited) 2008 2007 Variance % Change
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Revenue $ 39,410 $ 45,977 $ (6,567) (14%)
Operating expenses 31,781 36,011 (4,230) (12%)
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Gross margin $ 7,629 $ 9,966 $ (2,337) (23%)
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Gross margin % 19% 22% (3%) (14%)

Average units available during the
period:
Production testing 36.5 45.5 (9.0) (20%)
Logging and perforating 20.9 20.8 0.1 -
Multiline 16.0 16.0 - -
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Total 73.4 82.3 (8.9) (11%)
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Number of jobs completed:
Production testing 4,272 4,791 (519) (11%)
Logging and perforating 2,515 2,973 (458) (15%)
Multiline 1,275 1,484 (209) (14%)
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Total 8,062 9,248 (1,186) (13%)
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As a result of a 13% decline in jobs completed during the quarter, revenue for the Canadian Completions Segment ("CCS") declined by 10% to $13.9 million from $15.5 million in the third quarter of 2007. The decline in activity levels in the segment is consistent with the overall decline in activity levels experienced year to date. A significant portion of CCS's revenue has traditionally been generated from shallow natural gas activities and was therefore negatively impacted by a 17% decrease in the number of shallow natural gas wells completed by the industry in the western Canadian sedimentary basin ("WCSB") during the quarter (source: Daily Oil Bulletin).

Partially offsetting the impact of the lower activity levels on revenue was a slight increase in average pricing during the quarter. The CCS segment received higher pricing in its production testing and logging and perforating divisions which was partially offset by a 14% decline in pricing in the segment's multiline division. The increase in pricing in these divisions is due to additional work being performed in north eastern British Columbia which is more technical and thus has higher charge-out rates. The amount of pass-through revenue items is also higher for these jobs, which increases total revenue but has no impact on margins as the revenue equals the cost of the pass-through items. The logging and perforating division also continues to benefit from increased work from its specialty logging group related to various regulatory well logging requirements.

As a result of the decline in shallow natural gas activity levels, the Corporation has undertaken a number of initiatives to help mitigate the segment's exposure to shallow natural gas activities in the WCSB. These initiatives include the following:

- Transferred seven low pressure production testing units and two logging and perforating units to Pure's busier US operations year to date. Additional transfers will be considered as customer demand warrants;

- Purchased three high pressure testing units during the quarter for $1.2 million which will be utilized in the expanding non-conventional natural gas exploration areas such as the Montney resource play in north eastern British Columbia; and

- Utilized the expertise learned by the Corporation's US operations personnel in the US Rockies to assist in the successful completion of multi-stage perforating operations in the technical Montney resource play during the quarter.

These initiatives will help balance the segment's operating activities throughout the WCSB which should help mitigate the impact of lower activity levels currently being experienced in conventional and shallow natural gas exploration and development areas in the WCSB.

While activity levels and the resulting revenue generated in the segment have declined quarter over quarter, a similar decline in operating costs did not occur during the quarter. Higher pass-through cost items such as equipment rentals associated with the segment's activities in north eastern British Columbia combined with inflationary increases in regular operating expense items such as fuel and maintenance have negatively impacted margins in the CCS division. These variable cost increases combined with the segment's higher proportion of fixed operating costs caused gross margin as a percentage of revenue to decline to 20% during the quarter from 29% in the third quarter of 2007. The resulting gross margin declined to $2.7 million in the quarter from $4.4 million in the third quarter of 2007.

In response to the weaker than expected operating results in the CCS segment, management will be aggressively working to improve the division's operating efficiencies and eliminate excess costs where possible, while maintaining the segment's ability to respond to increased activity levels when they return. Management's continued initiatives to reposition operating assets into higher revenue and activity areas are also expected to improve margins for the segment.

On a year to date basis, CCS has generated $39.4 million in revenue versus $46.0 million in the first nine months of 2007. Consistent with the discussion above, lower activity levels have negatively impacted operating results for the segment. Year to date activity in the segment decreased 13% which is slightly above the 8% decline in total number of wells completed in the WCSB, but compares favourably to the 24% decline in number of shallow gas wells completed in the WCSB year to date (source: Daily Oil Bulletin). This favourable result relative to the industry decline in shallow gas wells is due to the segment's success in increasing the proportion of revenue generated from other sources beyond shallow natural gas.

Consistent with the third quarter discussion, the lower activity combined with increases in variable operating costs have resulted in gross margin as a percentage of revenue to decline to 19% from 22% for the first nine months of 2007. The resulting gross margin declined to $7.6 million year to date versus $10.0 million in the comparative period in 2007.



US Completion Services

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Three months ended September 30
($ thousands)(unaudited) 2008 2007 Variance % Change
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Revenue $ 27,168 $ 11,798 $ 15,370 130%
Operating expenses 20,377 9,135 11,242 123%
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Gross margin $ 6,791 $ 2,663 $ 4,128 155%
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Gross margin % 25% 23% 2% 9%

Average units available during the
period:
Production testing 33.0 24.0 9.0 38%
Logging and perforating 3.3 2.0 1.3 65%
Fracturing 3.0 2.0 1.0 50%
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Total 39.3 28.0 11.3 40%
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Number of jobs completed:
Production testing 2,165 1,789 376 21%
Logging and perforating 275 89 186 209%
Fracturing 392 46 346 752%
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Total 2,832 1,924 908 47%
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Nine months ended September 30
($ thousands)(unaudited) 2008 2007 Variance % Change
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Revenue $ 62,971 $ 29,119 $ 33,852 116%
Operating expenses 49,891 23,713 26,178 110%
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Gross margin $ 13,080 $ 5,406 $ 7,674 142%
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Gross margin % 21% 19% 2% 11%

Average units available during the
period:
Production testing 30.6 22.4 8.2 37%
Logging and perforating 3.1 2.0 1.1 55%
Fracturing 3.0 1.7 1.3 76%
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Total 36.7 26.1 10.6 41%
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Number of jobs completed:
Production testing 6,014 4,392 1,622 37%
Logging and perforating 634 220 414 188%
Fracturing 865 92 773 840%
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Total 7,513 4,704 2,809 60%
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Activity in Pure's US Completions Services ("USCS") segment continues to increase, with record revenue of $27.2 million being generated during the quarter, a 130% increase over the $11.8 million in revenue generated in the third quarter of 2007. The strong results during the quarter are a result of the significant increase in fracturing activity experienced during the year. The fracturing division completed 752% more jobs quarter over quarter although only two of the division's three fracturing spreads were operating. Unscheduled maintenance on two pumpers and a lack of sufficient crew staff did not allow the third spread to operate during the quarter. Operation of the third spread commenced on October 17th following completion of maintenance on the pumpers.

Activity in the segment's logging and perforating division also experienced a significant increase during the quarter. This increase was due to a combination of the division's successful expansion into the Wyoming market in the second quarter of 2008 and cross selling efforts that resulted in some of the segment's logging and perforating units being used in conjunction with its fracturing services. Taking advantage of increased activity levels in Wyoming and Colorado, Pure transferred one logging and perforating unit from its Canadian operations into the US during the quarter. Additional transfers are likely to occur in response to the continued growth in activity for this division.

Consistent with the strong activity levels seen for the segment's logging and perforating division, Pure took advantage of the higher US activity levels and relocated seven production testing units from Canada year to date. As a result of this increased capacity in the US, the number of jobs completed by the division increased 21% during the quarter.

The increase in activity during the quarter allowed gross margin as a percentage of revenue to increase to 25% from 23% in the third quarter of 2007. The higher activity levels reduced fixed overhead costs as a percentage of the segment's costs. While margins did increase during the quarter, higher transportation costs for the fracturing operations were incurred during the quarter. The higher transportation costs were associated with the transportation of alternative sand sources required for certain jobs to meet customer requirements during the quarter. With the increase in production from the Corporation's sand supplier, use of these alternative sources is expected to decline in future quarters. The commencement of operations for the division's third fracturing spread should also improve margins as fixed overhead costs will further decrease as a proportion of the division's operations.

Similar to the positive results generated in the third quarter, revenue has increased 116% year to date to $63.0 million from $29.1 million in the first nine months of 2007. The increase in fracturing activity has been the main driver of the segment's increased revenue with the fracturing division completing 840% more jobs year to date versus the comparative period in 2007. The segment's expansion into Wyoming and increased fracturing activity has also benefited the logging and perforating division which has experienced a 188% increase in activity year to date.

Finally, activity for the segment's production testing division has also increased in conjunction with the increase in production testing units transferred from Pure's Canadian operations. The primary driver of increased activity for this division has been the Bakken oil play in North Dakota.

The overall increase in activity for all divisions in the USCS segment resulted in gross margin increasing to $13.1 million from the $5.4 million generated in the first nine months of 2007. Consistent with the discussion for the third quarter, gross margin as a percentage of revenue increased due to improved activity to absorb the division's fixed operating costs.



Drilling Services

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Three months ended September 30
($ thousands)(unaudited) 2008 2007 Variance % Change
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Revenue $ 12,076 $ 4,157 $ 7,919 190%
Operating expenses 9,156 3,319 5,837 176%
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Gross margin $ 2,920 $ 838 $ 2,082 248%
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Gross margin % 24% 20% 4% 20%

Average units available during the
period:
Drilling rigs 10.0 9.3 0.7 8%
Mud motors 59.0 60.0 (1.0) (2%)
Utilization(1):
Drilling rigs 44% 20% 24% 120%
Mud motors 53% 40% 13% 33%
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Nine months ended September 30
($ thousands)(unaudited) 2008 2007 Variance % Change
----------------------------------------------------------------------------
Revenue $ 29,591 $ 18,976 $ 10,615 56%
Operating expenses 21,450 13,209 8,241 62%
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Gross margin $ 8,141 $ 5,767 $ 2,374 41%
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Gross margin % 28% 30% (2%) (7%)

Average units available during the
period:
Drilling rigs 10.0 9.6 0.4 4%
Mud motors 59.0 59.2 (0.2) 0%
Utilization(1):
Drilling rigs 44% 28% 16% 57%
Mud motors 46% 52% (6%) (12%)
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(1) Utilization % for the Corporation's drilling rigs is defined as the
number of spud to rig release days for the period divided by the number
of rig days for the period. Utilization % for the Corporation's mud
motors is defined as the number of operating days divided by 50% of the
available fleet, as on average two motors are used per operating day.


Revenue for Pure's drilling segment increased by 190% during the quarter to $12.1 million from the $4.2 million reported in the third quarter of 2007. This significant improvement is due primarily to a 120% increase in utilization for the Corporation's drilling rigs and a 214% increase in revenue contribution from the segment's Motorworks mud motor and directional drilling operations.

The 120% increase in utilization for Pure's drilling rigs compares favourably to the 18% increase in industry activity levels in the WCSB over the same period (source: CAODC). The improved utilization for the Corporation's drilling rigs is due to marketing efforts to contract Pure's drilling rigs with new customers that have been more active in 2008 than Pure's previous customers in 2007.

Revenue from the segment's drilling rigs was also positively impacted by an increase in average charge-out rates for Pure's drilling rigs during the quarter to $17,120/day from the $15,633/day generated in the third quarter of 2007. The improved industry utilization allowed Pure to marginally increase base charge-out rates for its drilling rigs, however, the greatest impact on charge-out rates was caused by increases in pass-through items such as fuel and mobilization charges.

The significant increase in revenue contribution from the segment's Motorworks division was due to an increase in directional drilling services provided by the division. The Corporation has been actively expanding the amount of directional drilling services provided, which is resulting in the Motorworks business operations moving from predominantly a mud motor rental business to a full service directional drilling business. This expansion of services will have the benefit of improved equipment utilization as well as higher average job revenue rates from the increased level of services being provided.

As a result of the increased utilization, gross margin as a percentage of revenue for the segment increased to 24% in the quarter versus 20% in the third quarter of 2007. The higher utilization provides for greater economies of scale resulting in fixed operating costs being spread over a larger revenue base. In addition, due to the lower activity levels experienced in the third quarter of 2007, additional overhead and operating costs were incurred due to efforts by the drilling division to retain field staff during the slower activity levels leading into the traditionally busy winter drilling season. The higher activity levels experienced in the third quarter of 2008 allowed the Corporation to operate its drilling rigs more efficiently, thus improving the division's margins.

Partially offsetting the improved margin contribution from the segment's drilling rigs were increased costs associated with rental costs for Measurement While Drilling ("MWD") tools which are used for directional drilling services. Management expects margins for its directional drilling operations to improve as greater operating efficiencies are attained from the growth of the business operations.

Consistent with the improved operating results reported in the third quarter, higher utilization for the segment's drilling rigs year to date has resulted in a 56% increase in drilling services nine month revenue to $29.6 million from the $19.0 million generated in the comparative period in 2007. The increase in revenue is consistent with the 57% increase in utilization for Pure's drilling rigs, which compares favourably to the 8% increase in industry rig utilization in the WCSB (source: CAODC). As discussed above, a transition in the Corporation's customer base has resulted in improved utilization of Pure's drilling rigs in 2008.

Partially offsetting the impact of the higher activity levels was a 5% decline in average charge-out rates for the Corporation's drilling rigs year to date. The average rates generated in 2007 benefited from high pricing in the first quarter of 2007, which has declined in subsequent quarters.

In contrast, average job pricing for the segment's mud motor operations has increased 96% year to date due to an increase in the amount of directional drilling work provided in 2008 versus the comparative period in 2007. Partially offsetting the increased pricing for the mud motor operations, was a slight decrease in overall utilization of the motors to 46% from the 52% generated in the first nine months of 2007.

As a result of the higher activity levels from the drilling rigs and increased revenue contribution from the mud motor operations, the drilling segment's gross margin increased to $8.1 million from the $5.8 million generated in the first nine months of 2007. While gross margin dollars increased, gross margin as a percentage of revenue declined slightly to 28% from the 30% generated in the comparative period in 2007. The primary cause of the decline is due to the higher operating costs associated with the segment's directional drilling operations.

General and Administrative Expenses

General and administrative expenses increased in the quarter to $5.9 million versus $5.5 million in the third quarter of 2007. The primary reason for the increase during the quarter was the Corporation incurring approximately $0.7 million in additional expenses for the final settlement and legal fees related to the Corporation's outstanding employment litigation with a group of former employees. Subsequent to quarter end, Pure initiated a malpractice claim against its former US legal counsel seeking compensation for the settlement paid by Pure as a consequence of the legal advice initially provided by the firm. It is unknown at this time whether Pure's claim against its former counsel will be successful and if so, what portion of the $1.2 million total settlement costs incurred to date by Pure will be recovered.

Partially offsetting the impact of the legal settlement during the quarter was a decrease in base general and administrative expenses resulting from cost cutting initiatives that were implemented in the fourth quarter of 2007. The impact of these cost savings initiatives is also evidenced through the reduced year to date general and administrative costs. Year to date Pure has incurred $16.0 million in general and administrative costs which is consistent with the first nine months of 2007. However, if the impact of the legal settlement is removed from Pure's 2008 year to date results, Pure's normalized general and administrative costs would have been approximately $15.3 million. This normalized general and administrative cost is 12% of the Corporation's consolidated revenue versus 17% of consolidated revenue in the first nine months of 2007. Management expects general and administrative costs as a percentage of revenue to further decline with the increased revenue contribution from the Corporation's US fracturing operations as the majority of the overhead structure already exists to support these operations.

Depreciation and Amortization Expense

As a result of the $22.4 million in capital asset additions made subsequent to the third quarter of 2007, depreciation expense increased to $3.8 million from the $3.2 million recorded in the third quarter of 2007. In addition, depreciation of the third fracturing spread commenced in 2008.

Year to date, depreciation expense has increased to $11.4 million versus $9.2 million in the first nine months of 2007. Consistent with the increase experienced in the third quarter, the increase in depreciation expense year to date is due to capital asset additions made subsequent to the third quarter of 2007 and the amortization of the third fracturing spread.

Interest Expense

Total interest expense increased to $0.7 million in the quarter from $0.6 million in the third quarter of 2007. The marginal increase in interest expense is due to an $8.8 million increase in average outstanding debt during the quarter. This increase in debt was used to finance the Corporation's $5.7 million in capital expenditures made during the quarter and the timing of cash receipts versus cash payments for operating activities.

Higher average debt balances year to date have also resulted in total interest expense increasing to $2.1 million from $1.7 million in the first nine months of 2007.

Other Expenses (Revenue)

Other expenses during the quarter are comprised of a nominal foreign exchange loss. In comparison, a $1.8 million gain on sale of equipment was recognized in other income in the third quarter of 2007 from the sale of the Corporation's oldest drilling rig. The $5.1 million in cash proceeds received from this sale was subsequently reinvested into a new drilling rig which entered the field in January 2008.

Income Tax Expense

Pure recorded income tax expense of $0.6 million during the quarter representing a 30.9% effective tax rate versus the 29.5% statutory rate for the Corporation's Canadian operations and 36.6% for its US operations. On a year to date basis, the Corporation has recorded a $0.2 million tax recovery, representing a 35.7% effective rate. The increase is consistent with the higher contribution of US generated income year to date.

Liquidity and Capital Resources

Pure exited the third quarter of 2008 with $6.2 million in cash and $57.4 million outstanding on the Corporation's operating and long-term debt facilities compared to $2.0 million in cash and $42.4 million outstanding on these facilities as at December 31, 2007. On a net debt basis, long-term debt less positive working capital, the Corporation's debt increased to $31.0 million from $27.6 million as at December 31, 2007. This nominal increase in net debt arose from the Corporation investing $15.8 million in property and equipment expenditures year to date. The majority of the Corporation's investment in property and equipment during the year was financed from the $11.7 million in positive funds flow from operations generated year to date.

With the increase in activity levels and improved performance for the Corporation's US and drilling operations, Pure has been able to increase its funds flow from operations for the quarter and year to date. During the quarter, Pure generated $6.9 million in funds flow from operations versus $4.3 million in the comparative period. Year to date, funds flow from operations has increased to $11.7 million from $4.4 million in the first nine months of 2007.

In response to the increased activity levels in the US and to improve the Corporation's ability to provide services to the expanding development of North America's non-conventional gas reserves, the board of directors approved a $19.1 million increase in Pure's 2008 capital budget during the quarter. Of these additions, $9.2 million relates to the USCS segment, $3.3 million relates to its CCS segment and $6.5 million relates to its Drilling Services segment. This increase brings the Corporation's total capital budget for 2008 to $40.0 million of which $15.8 million has been spent year to date.

In light of the increased market uncertainty over the last few months, management is reevaluating the timing of these approved expenditures. As a result, some expenditures may be canceled or delayed further into 2009. At this time, management expects the Corporation's capital expenditures to be approximately $31.0 million for 2008, with the remaining capital budget of $9.0 million to be delayed until 2009 or cancelled. A full review of these projects will be completed in conjunction with the Corporation's upcoming budget review for 2009.

In addition to the capital expenditures discussed above, the Corporation has the following operating and debt commitments over the next five years:



Payments Due by Period
----------------------------------------------------------------------------
Contractual Obligations Less than 1 - 3 4 - 5 After
($ thousands) Total 1 Year Years Years 5 Years
----------------------------------------------------------------------------
Long-term debt
obligations (1) $ 44,510 $ 3,010 $ 19,747 $ 17,354 $ 4,399
Purchase obligations 41,711 7,638 15,468 16,533 2,072
Operating leases 14,534 4,868 6,505 2,508 653
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Total Contractual
Obligations $100,755 $ 15,516 $ 41,720 $ 36,395 $ 7,124
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(1) Long-term debt obligations represent balances outstanding under the
extendible revolving loan facility and the non-revolving loan facility
and the obligations in the table above assumes the revolving facility
is not renewed in 2009.


At this time Pure has $88.8 million in available debt facilities to fund its operating growth initiatives, of which $57.4 was drawn upon as at September 31, 2008. Of this $88.0 million in facilities, $60.0 million is an extendible revolving loan facility that is renewable annually at the option of the lender. This facility was last renewed in the second quarter of 2008 and extends until June 30, 2009. If this facility is not renewed, it converts into a four year term loan, repayable monthly. The remaining $28.0 million in available facilities consist of $20.0 million in a demand operating line of credit and $8.0 million in term loans to finance the Corporation's various operating facilities.

Included in the $8.0 million term loan facilities is a US $3.5 million term loan that was obtained during the quarter to finance the purchase of an operating facility for Corporation's US operations. This loan is being repaid monthly over 10 years at an interest rate of US prime less 1%.

Management believes these debt facilities combined with Pure's ability to generate positive funds flow from operations will be sufficient to finance the Corporation's current business operations and announced capital expenditure plans. The Corporation's ability to generate positive funds flow from operations will be key to allowing Pure to not only prosper during the current slowdown in industry activity but also allow Pure to be in a position to take advantage of growth opportunities that may present themselves over the next few quarters.

As at November 13, 2008, the Corporation had 15,905,431 common shares issued and outstanding and 1,486,457 stock options issued and outstanding, of which 1,050,227 were vested.

Outlook

The current environment in which Pure operates is one of contrasts. While record consolidated revenues and strong operating results are being generated as a result of higher levels of activity in Pure's US and drilling operations, the slow down in industry activity levels in the WCSB is creating challenges for the CCS segment and many of Pure's competitors. It is periods such as this that demonstrate the value of diversification, which has benefited Pure's operations year to date and management expects will help the Corporation manage though the current economic uncertainty that is being experienced in North America and the world.

The well documented worldwide credit crisis, recession fears and lower commodity prices are expected to impact the markets in which Pure operates; however, management expects the impacts in its markets to be individually unique. Activity in the Corporation's US operations continues to be strong, with this segment benefiting from the growth in development of the Bakken oil play in North Dakota as well as competitive advantages of the Corporation's contracted sand supply and rail distribution infrastructure to support Pure's fracturing operations in the Piceance basin of Colorado. Pure's fracturing customers indicate that activity should remain strong for Pure's three fracturing spreads into the first quarter of 2009. Management believes the financial strength of its large fracturing customers combined with the production profile of the Piceance basin should provide for a reasonable level of activity for the Corporation's fracturing equipment throughout 2009.

The recent strengthening of the US dollar relative to the Canadian dollar will further magnify the benefit of Pure's strengthening US operations as revenues and income generated in US dollars will increase when converted into Canadian dollars in Pure's consolidated financial results. Over half of the Corporation's operations are located in the US. The positive cash generated from its US operations can be repatriated to repay the Corporation's Canadian dollar denominated debt.

Current conversations with Pure's drilling customers indicate that activity for the Corporation's drilling services should remain busy until the end of the 2009 winter drilling season in the first quarter of 2009. Management has obtained no guidance from its customers beyond this period. Industry forecasts for well count activity in the WCSB in 2009 are generally down from the activity levels experienced in 2008, with Petroleum Services Association of Canada ("PSAC") forecasting 16,600 wells to be drilled in 2009 (source: PSAC 2009 well count forecast) with the CAODC forecasting 14,325 wells to be drilled in 2009 (source: Daily Oil Bulletin).

Management expects activity for Pure's CCS segment to remain slower than recent years. Activity is expected to increase in the fourth quarter of 2008 and first quarter of 2009 to coincide with the traditional seasonal increase in activity for this segment, however, following the first quarter of 2009 management expects activity levels to decline.

Further compounding the challenges of lower commodity prices and the current uncertainty in the credit markets are the pending royalty rate changes scheduled to be implemented in Alberta in 2009. In general the proposed changes to the Alberta royalty rates will increase the costs incurred by oil and gas producers. However, one area that may benefit from the proposed royalty rate changes is shallow natural gas developments which will see lower royalty rates under the proposed changes. Any increase in shallow natural gas development activities would be beneficial to Pure's CCS and drilling operations.

Overall the primary driver for activity levels in the markets in which Pure operates is the available cash resources Pure's customers have to invest in their drilling and completions activities. The amount of available cash resources is directly dependent upon commodity prices and financing availability. The recent decline in commodity prices and the tightening of debt and equity markets will have a negative impact on spending in the industry and will likely impact Pure's customers. Management is currently evaluating the potential impact of possible activity declines and will be taking appropriate measures to put Pure in the best position possible to mitigate potential activity declines. These measures include reallocation of operating assets to busier locations and cost reductions where possible.

With the continuation of lower activity levels that the industry has faced over the last two years, management believes there will be opportunities for consolidation in the markets in which Pure operates. Through the strength of Pure's diversified operations, management believes Pure will be in a position to evaluate some of these consolidation opportunities and possibly emerge from this current ebb in the industry cycle as a larger and stronger entity.

Forward-looking Statements

This press release contains forward-looking statements within the meaning of securities laws. Forward-looking statements or information are often, but not always, identified by the use of words such as "anticipate", "expect", "plan", "forecast", "target", "project", "seek", "may", "intend", "will", "should", "could", "believe", "estimate", "predict" or similar expressions, statements that are based on current expectations and estimates about the markets in which the Corporation operates and statements of the Corporation's belief, intentions and expectations about development, results and events which will, or may occur in the future. Such forward-looking statements are based on certain assumptions and include, but are not limited to: statements with respect to future capital expenditures, including the amount and nature thereof; oil and gas prices and demand; other development trends of the oil and gas industry; business strategy; expansion and growth of the Corporation's business and operations, including the Corporation's market share and position in the oilfield service markets; and other such matters. In addition, other written or oral statements which constitute forward-looking statements may be made from time to time by and on behalf of the Corporation.

By their very nature, such forward-looking statements are subject to important risks and uncertainties that predictions, projections, forecasts and other forward-looking statements will not be achieved. Readers are cautioned not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, without limitation: the impact of general economic conditions; industry conditions, including the adoption of new environmental, tax, royalty and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and gas prices; oil and gas product supply and demand; inadequate insurance coverage; risks inherent in the Corporation's ability to generate sufficient cash flow from operations to meet its current and future obligations; increases in debt service charges; the Corporation's ability to access external sources of debt and equity capital; increased competition; the lack of availability of qualified personnel or management; labor unrest; fluctuations in foreign exchange or interest rates; stock market volatility; opportunities available to, or pursued by, the Corporation and other factors, many of which are beyond the control of the Corporation.

Further information regarding these factors may be found under the heading "Business Risks" in the MD&A of the audited December 31, 2007 financial statements and the Corporation's most recent Annual Information Form, Information Circular, quarterly reports, material change reports and news releases. The Corporation's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefits, including the amount of proceeds, the Corporation will derive there from. The Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Any forward-looking information contained herein is expressly qualified by this cautionary statement. The forward-looking statements in this document are provided for the limited purpose of enabling current and potential investors to evaluate an investment in the Corporation. Readers are cautioned that such statements may not be appropriate, and should not be used for other purposes.



PURE ENERGY SERVICES LTD.
Consolidated Balance Sheets
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Unaudited, stated in thousands of Canadian Dollars)

As At September 30, December 31,
2008 2007
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Assets

Current assets
Cash $ 6,205 $ 2,043
Accounts receivable 33,886 22,176
Inventory 3,876 2,915
Deposits and prepaid expenses 2,745 1,514
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46,712 28,648

Property and equipment 168,404 162,291
Intangible assets 2,005 2,315
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$ 217,121 $ 193,254
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Liabilities and Shareholders' Equity

Current liabilities
Operating loan $ 12,907 $ 1,568
Accounts payable and accrued liabilities 19,843 13,539
Income taxes payable 183 274
Deferred government grant 247 -
Current portion of long-term debt 3,010 333
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36,190 15,714

Long-term debt 41,500 40,500
Future income taxes 6,263 6,973
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83,953 63,187
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Shareholders' equity
Share capital 106,510 106,002
Contributed surplus 3,470 2,853
Accumulated other comprehensive loss (1,707) (4,098)
Retained earnings 24,895 25,310
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133,168 130,067
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$ 217,121 $ 193,254
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PURE ENERGY SERVICES LTD.
Consolidated Statements of Income (Loss) and Retained Earnings
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Unaudited, stated in thousands of Canadian Dollars, except per share
amounts)


----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
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2008 2007 2008 2007
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Revenue $ 53,191 $ 31,457 $ 131,972 $ 94,072
Cost of goods sold 40,754 23,511 103,122 72,932
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Gross margin 12,437 7,946 28,850 21,140
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Expenses
Selling, general and administrative 5,863 5,508 16,007 15,988
Depreciation and amortization 3,769 3,162 11,381 9,188
Interest on long-term debt 598 408 1,853 1,179
Other interest 118 209 207 504
Foreign exchange loss 53 56 61 85
Other (income) expense - (1,818) (13) 1,958
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10,401 7,525 29,496 28,902

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Income (loss) before income taxes 2,036 421 (646) (7,762)
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Income taxes
Current expense (reduction) (884) (2,338) 118 -
Future expense (reduction) 1,514 1,909 (349) (3,173)
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630 (429) (231) (3,173)

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Net income (loss) 1,406 850 (415) (4,589)

Retained earnings, beginning of
period, as previously reported 23,489 23,400 25,310 29,556

Adjustment relating to fair value
accounting of financial instruments - - - (717)
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Retained earnings, beginning of
period, as re-stated 23,489 23,400 25,310 28,839
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Retained earnings, end of period $ 24,895 $ 24,250 $ 24,895 $ 24,250
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Earnings (loss) per share
Basic $ 0.09 $ 0.05 $ (0.03) $ (0.29)
Diluted $ 0.09 $ 0.05 $ (0.03) $ (0.29)
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PURE ENERGY SERVICES LTD.
Consolidated Statements of Cash Flows
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----------------------------------------------------------------------------
(Unaudited, stated in thousands of Canadian Dollars, except per share
amounts)


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Three Months Ended Nine Months Ended
September 30 September 30
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2008 2007 2008 2007
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Cash provided by (used in)
Operating activities
Net income (loss) $ 1,406 $ 850 $ (415) $ (4,589)
Items not involving cash:
Depreciation and amortization 3,769 3,162 11,381 9,188
Future income tax expense
(reduction) 1,514 1,909 (349) (3,173)
Impairment of note receivable - - - 4,246
Stock-based compensation 213 213 1,075 918
Gain on sale of equipment - (1,816) (13) (2,175)
Unrealized foreign exchange loss 3 18 8 25
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6,905 4,336 11,687 4,440
Changes in non-cash working capital
balances (8,508) (9,646) (6,120) 8,156
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(1,603) (5,310) 5,567 12,596
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Investing activities
Purchases of property and equipment (5,727) (7,327) (15,795) (29,235)
Note receivable - - - 473
Proceeds from the sale of equipment - 5,065 76 6,125
Changes in non-cash working capital
balances 362 756 (1,030) (3,590)
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(5,365) (1,506) (16,749) (26,227)
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Financing activities
Operating loan 8,702 (2,645) 11,338 (12,027)
Issuance of long-term debt 270 10,000 3,829 27,500
Repayment of long-term debt (178) (83) (317) (250)
Government grant received 245 - 245 -
Issue of share capital - - 50 -
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9,039 7,272 15,145 15,223

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Increase in cash 2,071 456 3,963 1,592
Effect of translation on foreign
currency cash
and cash equivalents 103 (133) 199 (517)
Cash, beginning of period 4,031 3,110 2,043 2,358
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Cash, end of period $ 6,205 $ 3,433 $ 6,205 $ 3,433
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Contact Information

  • Pure Energy Services Ltd.
    Kevin Delaney
    President and CEO
    (403) 262-4000
    Email: kdelaney@pure-energy.ca
    or
    Pure Energy Services Ltd.
    Brian Peters
    Chief Financial Officer
    (403) 262-4000
    (403) 262-4005 (FAX)
    Email: bpeters@pure-energy.ca
    or
    Pure Energy Services Ltd.
    Address: #300, 1010 - 1st Street S.W.
    Calgary, Alberta T2R 1K4
    Website: www.pure-energy.ca