Pure Energy Services Ltd.
TSX : PSV

Pure Energy Services Ltd.

March 18, 2010 08:00 ET

Pure Energy Services Ltd. Announces Q4 and Year End 2009 Results

CALGARY, ALBERTA--(Marketwire - March 18, 2010) - Pure Energy Services Ltd. (TSX:PSV)



Selected Consolidated Financial Information
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($Cdn thousands, Three months ended December 31
except per share amounts) 2009 2008 Change
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Continuing Operations
Revenue $ 37,072 $ 40,394 (8%)
Gross margin $ 4,963 $ 10,000 (50%)
Gross margin % 13% 25% (48%)
General and administrative expenses $ 4,865 $ 5,074 (4%)
EBITDA (1) $ (220) $ 4,885 (105%)
EBITDAS (1) $ 98 $ 4,926 (98%)
Net earnings (loss) $ (2,984) $ 428 (797%)
Earnings (loss) per share:
Basic $ (0.13) $ 0.03
Diluted $ (0.13) $ 0.03
Funds flow from operations (2) $ (526) $ 2,001 (126%)
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Discontinued operations
Net earnings (loss) $ (161) $ 1,080 (115%)
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Total operations
Net earnings (loss) $ (3,145) $ 1,508 (308%)
Earnings (loss) per share:
Basic $ (0.13) $ 0.09
Diluted $ (0.13) $ 0.09
Total assets $ 183,227 $ 227,810 (20%)
Total long-term debt $ 48,051 $ 65,314 (26%)
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($Cdn thousands, Year ended December 31
except per share amounts) 2009 2008 Change
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Continuing Operations
Revenue $ 114,694 $ 142,474 (19%)
Gross margin $ 15,215 $ 35,673 (57%)
Gross margin % 13% 25% (48%)
General and administrative expenses $ 18,054 $ 19,174 (6%)
EBITDA (1) $ (3,564) $ 15,383 (123%)
EBITDAS (1) $ (2,839) $ 16,499 (117%)
Net earnings (loss) $ (13,258) $ 427 (greater
than 1,000%)
Earnings (loss) per share:
Basic $ (0.66) $ 0.03
Diluted $ (0.66) $ 0.03
Funds flow from operations (2) $ (5,384) $ 11,341 (147%)
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Discontinued operations
Net earnings (loss) $ (14,886) $ 865 (greater
than 1,000%)
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Total operations
Net earnings (loss) $ (28,144) $ 1,292 (greater
than 1,000%)
Earnings (loss) per share:
Basic $ (1.40) $ 0.08
Diluted $ (1.40) $ 0.08
Total assets $ 183,227 $ 227,810 (20%)
Total long-term debt $ 48,051 $ 65,314 (26%)
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(1) EBITDA and EBITDAS do not have standardized meanings prescribed by
Canadian generally accepted accounting principles ("GAAP"). Management
believes that, in addition to net earnings (loss), EBITDA and EBITDAS
are useful supplemental measures. EBITDA and EBITDAS are provided as
measures of operating performance without reference to financing
decisions, depreciation 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 earnings
(loss) 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. See section titled "Reconciliation of EBITDA and EBITDAS
to Net Earnings (Loss)".

(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 flow from operations does not have a
standardized meaning prescribed by GAAP and may not be comparable to
similar measures provided by other corporations.


Business Overview

The Corporation provides drilling and completion related oilfield services to oil and natural gas exploration and development companies in the Western Canadian Sedimentary Basin ("WCSB") and in the United States ("US") in the Rocky Mountain, North Dakota and the Appalachian Basin regions. Up to December 31, 2009, the Canadian operations were conducted through the Corporation's wholly-owned subsidiary Canadian Sub-Surface Energy Services Corp. ("CanSub") and the wholly-owned Partnership (Pure Energy Services Partnership or the "Partnership"). The partners in the Partnership were Pure Energy Services Ltd., Ross Wireline Services (2005) Ltd. and Motorworks Drilling Solutions Inc. On December 31, 2009, the Partnership was dissolved and the related assets and liabilities were distributed to the respective partners on a prorata basis. On January 1, 2010, all of the wholly-owned Canadian subsidiaries were amalgamated with the Corporation and the amalgamated entity continued under the name of Pure Energy Services Ltd. ("Pure"). The Corporation's US operations are conducted through Pure's wholly-owned subsidiary Pure Energy Services (USA) Inc. References to "Pure" or the "Corporation" in this MD&A refer to the Corporation, its subsidiaries, and for 2009 and prior periods, the Partnership.

The Corporation's operations are divided into four separate reporting segments: Canadian Completions Services ("CCS"), US Completions Services ("USCS"), Drilling Services ("Drilling") and Corporate Administration ("Corporate"). The CCS segment conducts operations in the WCSB, through its two operating divisions: well testing and wireline. The USCS segment conducts operations in the Rocky Mountain, North Dakota and Appalachian Basin regions of the US through its two operating divisions: well testing and wireline. The Drilling segment conducts its operations in the WCSB through its two operating divisions: drilling rigs (which are operated through "Quintera Drilling") and rental and servicing of drilling equipment (which are operated through "Motorworks"). The Corporate segment primarily includes corporate administration costs and other costs not specifically allocated to the operating segments.

Q4 and Year ended 2009 Highlights from Continuing Operations

During 2009, Pure's management focused on the following business objectives:

- Building critical mass in Canada and the US in the Corporation's traditional core competencies of well testing and wireline;

- Increasing the Corporation's exposure to the emerging resource plays in western Canada and the US where technological advances in multi stage fracturing and horizontal drilling have significantly enhanced the recovery of oil and natural gas;

- Strengthening the Corporation's financial position by streamlining operations, decreasing operating costs and reducing debt; and

- Moving equipment between Canada and the US to areas of higher demand.

To meet these objectives, Pure completed the following transactions/activities during 2009:

- At the end of Q2 2009, Pure acquired CanSub and merged the Canadian Completions operations of both companies. As a result, the combined well testing and wireline equipment fleet is now one of the largest operating in the WCSB. In addition, the combined businesses have increased Pure's operational infrastructure, enhanced the Corporation's safety programs and expanded its geographical reach, which has enabled Pure to attract and retain more of the large customers operating in the WCSB. Subsequent to the acquisition, significant reductions in combined operating and administration costs have been realized. The general and administrative expenses have decreased from a combined annual rate of $28.5 million in 2008 to an approximate current annualized rate of $20.0 million.

- During Q3 2009, Pure sold its well fracturing operations for net proceeds of $38.8 million, substantially all of which was used to pay down debt and to fund the acquisition of other operating assets. This sale has enabled Pure to focus more of its efforts on the core well testing and wireline businesses.

- During Q4 2009, as a result of identifying redundant assets from the Pure/CanSub businesses, Pure sold a redundant operating facility and nine older wireline units for aggregate proceeds of $4.0 million. These proceeds were used to further pay down debt and to fund the acquisition of other operating assets. An additional three operating facilities have been identified as redundant and are now for sale with aggregate list prices of approximately $10.0 million.

- During Q4 2009, the Corporation continued to acquire and retrofit additional well testing equipment in both Canada and the US to meet the increased work from the emerging resource plays in these regions. As a result of advances in fracturing and horizontal drilling technologies, certain oil, shale gas and deeper tight gas plays in both Canada and the US have recently seen significant increases in drilling activity. The Corporation now has a significant amount of equipment capable of operating in these plays, including well testing and wireline equipment capable of operating in high pressure environments. In Canada, 29 of the 79 well testing units and 25 of the 71 wireline units can handle high pressure work. In the US, 22 of the 39 well testing units and 5 of the 8 wireline units are capable of performing high pressure work.

These positive events during 2009 enabled Pure to respond to the challenging industry environment and better positioned the Corporation going into 2010.

During Q4 2009, drilling and completion activity levels continued to be depressed in both the WCSB and the US due primarily to continuing low natural gas prices and reduced access to debt and equity capital for Pure's customers. This resulted in low equipment utilization rates and continued lower pricing for services which lead to reduced revenues, margins and earnings in comparison to Q4 2008.

As a result of the lower activity, consolidated revenue from continuing operations declined from $40.4 million recognized in Q4 2008 to $37.1 million recognized in Q4 2009. Although the addition of the CanSub operations allowed revenue in the CCS segment to increase in Q4 2009 versus Q4 2008, this increase was not sufficient enough to offset the quarter over quarter revenue declines experienced in the USCS and Drilling segments.

As a result of the erosion in pricing and lower equipment utilization, consolidated gross margin percentages declined from 25% (or $10.0 million) in Q4 2008 to 13% (or $5.0 million) in Q4 2009. Consistent with the decline in gross margin, consolidated EBITDA decreased quarter over quarter from $4.9 million in Q4 2008 to negative $0.2 million in Q4 2009. Pure continues to evaluate the operating cost structures and pricing for services of all segments with an emphasis on improving gross margins.

The lower operating results lead to a net loss from continuing operations during Q4 2009 of $3.0 million (0.13 per share), versus the $0.4 million in net earnings (0.03 per share) generated in Q4 2008.

The lower activity experienced in Q4 2009 is consistent with the reduced activity experienced in the first three quarters of the year. As a result, consolidated revenue from continuing operations declined to $114.7 million for the 2009 year compared to the $142.5 million in consolidated revenue recognized for calendar 2008. While the addition of the CanSub operations has positively impacted revenues generated by the Corporation's CCS segment during the second half of 2009, this additional revenue has not been sufficient to offset the revenue declines experienced by the Corporation's other segments through 2009.

The reduced equipment utilization rates and reduced pricing for services for the 2009 year resulted in a $20.5 million decline in gross margin to $15.2 million (or 13% of revenue) for the 2009 year compared to $35.7 million (25% of revenue) for calendar 2008. The decline in gross margin was reflected in the lower EBITDA of negative $3.6 million for calendar 2009 versus a positive EBITDA of $15.4 million in 2008. A $1.1 million reduction in general and administrative expenses in 2009 has helped to mitigate the impact of lower operating results on EBITDA.

The lower operating results in the 2009 year resulted in a net loss from continuing operations of $13.3 million ($0.66 per share) versus the net earnings of $0.4 million ($0.03 per share) realized in calendar 2008.

As a result of the disposition of the Corporation's well fracturing operations during Q3 2009, the financial results for this division have been separately disclosed as discontinued operations and excluded from the financial results presented from continuing operations.

Discontinued Operations - Disposition of Well Fracturing Division

On August 14, 2009 the Corporation sold its well fracturing assets and associated inventory to a competitor in the fracturing business for net proceeds of $38.8 million. Approximately $1.3 million of the proceeds were deferred and are guaranteed to be received by August 13, 2010 in reimbursement of prepaid inventories used by the purchaser from August 14, 2009 to August 13, 2010. At December 31, 2009, $0.9 million of these deferred proceeds had been received. In addition, depending on the level of inventory purchases by the acquiring company from Pure's former fracturing sand supplier, the Corporation could receive up to an additional US $2.5 million in volume rebates from the purchaser. Given the uncertainty of the amounts to be received for these rebates, no amount has been accrued in the Corporation's financial results to date.

The net loss generated during Q4 2009 of $0.2 million from the well fracturing division reflected final costs related to the wrap-up of business operations. For the 2009 year, the well fracturing operations generated a net loss of $14.9 million compared to net earnings of $0.9 million for calendar 2008. The current year net loss reflects a $16.9 million impairment charge and a $0.8 million loss on sale related to the difference between the carrying value of the fracturing assets and the sales price.

A significant amount of capital resources and management time have been invested over the last four years developing Pure's well fracturing operations. However, due to the significant capital and staff resources required to further grow and support this business and the limited return achieved on this investment, management determined that a more defined focus on the Corporation's CCS and USCS segments would provide Pure and its shareholders with a greater long-term return on capital invested.



Results of Continuing Operations - Q4 and Year End 2009

Canadian Completion Services (1)
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Three months ended
December 31 Year ended December 31
($Cdn thousands) 2009 2008 Change 2009 2008 Change
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Revenue $20,466 $15,896 29% $56,708 $55,306 3%
Operating expenses 18,504 12,262 51% 53,097 44,036 21%
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Gross margin $ 1,962 $ 3,634 (46%) $ 3,611 $11,270 (68%)
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Gross margin % 10% 23% (56%) 6% 20% (70%)

Average units available
during the period:
Well testing 79.0 35.0 126% 63.3 35.6 78%
Wireline(2) 73.3 29.0 153% 56.4 30.4 85%
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Total 152.3 64.0 138% 119.7 66.0 81%
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Number of jobs
completed:
Well testing 1,962 1,685 16% 5,396 5,957 (9%)
Wireline(2) 1,853 1,055 76% 4,745 4,195 13%
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Total 3,815 2,740 39% 10,141 10,152 (0%)
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1) The CCS segment includes the financial results of CanSub since the June
22, 2009 acquisition date.
2) Wireline units consist of electric line and slick line units. Wireline
jobs are from these units only and exclude jobs from the other service
lines in the wireline division.


As a result of low oil and natural gas prices and a reduced access to capital for oil and natural gas exploration and development companies, drilling and completion levels were extremely low in the WSCB in the 2009 year. Activity levels in the WCSB were further negatively impacted by the uncertainty surrounding a number of changes in the Alberta provincial royalty rates that came into effect January 1, 2009. As a result of these factors, only 8,270 wells were drilled (rig released) in calendar 2009 as compared to the 16,868 wells drilled in calendar 2008, or a 51% decrease (source: Nickles Energy Group). This significant decline in drilling activity, and resulting increased competition for the reduced amount of work, lead to highly discounted pricing and reduced margin percentages for all quarters in 2009.

In response to the lower activity levels and reduced margins, the CCS segment implemented a number of cost reduction measures commencing in Q1 2009, including staffing reductions, wage rollbacks, reduction in support costs, and the reduction of discretionary spending. The CCS segment chose to temporarily park excess wireline and low pressure well testing units to eliminate all variable costs related to these units. Some of these parked units were sold in Q4 2009 and management will consider bringing the remaining units back into service once industry conditions improve.

As a result of the acquisition of CanSub (which occurred at the end of Q2 2009), revenue for Pure's CCS segment increased from $15.9 million in Q4 2008 to $20.5 million recognized during Q4 2009. While revenue has been positively impacted by the addition of CanSub, continued weak industry activity has curtailed the full impact that the combined Pure and CanSub operations could generate in a more robust industry environment.

As a result of the lower equipment utilization, reduced pricing and initial inefficiencies in operations from the CanSub acquisition, gross margins for the CCS segment declined to $2.0 million (or 10% of revenue) in Q4 2009 from $3.6 million (or 23% of revenue) in Q4 2008. During Q4 2009, integration of the CanSub operations was substantially completed and redundant facilities and equipment were identified. Four redundant operating facilities have been listed for sale in Alberta, with one of those being sold in Q4 2009 for gross proceeds of $2.0 million. The remaining three facilities for sale have aggregate list prices of $10 million. In addition, nine older wireline units were sold during Q4 2009 for proceeds of $2.0 million. Proceeds from the sale of these redundant assets were used to reduce debt and invest in other operating assets.

For the 2009 year, the CCS segment generated $56.7 million in revenue versus $55.3 million generated in calendar 2008. Although industry activity levels were significantly lower in 2009, the revenue increase was attributed to the addition of the CanSub business in the second half of the year.

The lower equipment utilization, reduced pricing and operating inefficiencies from the CanSub acquisition resulted in a significant gross margin erosion as margin percentages decreased from 20% in calendar 2008 to only 6% in 2009. Pure management continues to focus on margins, including reviewing pricing for services and optimization of the combined business operations.

The CCS segment has seen improved equipment utilization rates for January and February 2010, especially for its high pressure well testing and wireline equipment, due in part to the increasing activity levels in the emerging oil and natural gas resource plays in the WCSB.



US Completion Services (1)
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Three months ended
December 31 Year ended December 31
($Cdn thousands) 2009 2008 Change 2009 2008 Change
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Revenue $ 9,469 $15,816 (40%) $38,261 $48,773 (22%)
Operating expenses 7,692 11,262 (32%) 29,443 34,901 (16%)
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Gross margin $ 1,777 $ 4,554 (61%) $ 8,818 $13,872 (36%)
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Gross margin % 19% 29% (34%) 23% 28% (18%)

Average units available
during the period:
Well testing 36.7 34.0 8% 35.3 31.4 12%
Wireline 6.0 5.0 20% 6.0 5.0 20%
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Total 42.7 39.0 9% 41.3 36.4 13%
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Number of jobs
completed:
Well testing 2,082 1,852 12% 6,314 7,866 (20%)
Wireline 283 463 (39%) 1,411 1,195 18%
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Total 2,365 2,315 2% 7,725 9,061 (15%)
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1) The above financial results exclude the well fracturing division as this
division was sold on August 14, 2009. The well fracturing division
results are discussed under the "Discontinued Operations" section.


Low industry activity combined with competitive pricing pressure for Pure's services caused revenue in the USCS segment to decline from $15.8 million in Q4 2008 to $9.5 million in Q4 2009, or a $6.3 million decrease. The largest activity and revenue decline was experienced in the segment's well testing division which experienced a quarter over quarter revenue decline of $4.8 million. Although the testing job count in Q4 2009 increased by 12% over Q4 2008, this was more than offset by pricing decreases as this division had to significantly discount prices to retain work in their core testing areas of Colorado, Wyoming and North Dakota. During Q4 2009, the testing division received a small revenue contribution from the newly established operating hub in Pennsylvania which is servicing the emerging, unconventional Marcellus shale play. There are now seven testing units available for operation in this area.

The job count for the USCS segment's wireline division was down 39% quarter over quarter, reflecting the generally lower activity levels and delays from a major client who was experimenting with new well completion techniques. As a result of the reduced job count and reduced pricing, wireline division revenue was $1.5 million lower in Q4 2009 versus Q4 2008. In early 2010, the USCS segment established a new wireline station in North Dakota leveraging off of the existing client base of the well testing operations in the area. Two wireline units have been moved into this station, with initial work anticipated to begin prior to the end of Q1 2010.

Blended gross margins realized in Q4 2009 for the USCS segment were 19% compared to 29% in Q4 2008. Due to the high variable cost component in the well testing business, and the adjustments made to these costs to compensate for lower pricing, the USCS well testing division was able to maintain margins in the 24% range compared to the Q4 2008 margins in the 29% range. The largest contributor to the overall margin erosion reported in Q4 2009 was the wireline division which saw its margins decrease from the 32% margins recorded in Q4 2008 to negative 5% in Q4 2009. This reflected the reduction in job count, reduced pricing and the large fixed cost component of this business.

For the 2009 year, the USCS segment generated revenue of $38.3 million, which was $10.5 million lower than the $48.8 million generated in calendar 2008. Revenue from the well testing division was $12.8 million lower on a year over year basis, which was offset by a year over year increase of $2.3 million from the wireline division. The decrease in well testing revenue reflects the 20% decline in job counts combined with reduced pricing. The increased wireline revenue primarily reflects an 18% increase in year over year job counts and was primarily due to the Wyoming region where new project work in the area from a large client positively impacted revenues in 2009.

Blended gross margins realized by the USCS segment in calendar 2009 were 23% compared to the 28% margins realized in 2008. Well testing and wireline division margins were 23% and 22% respectively for calendar 2009 as compared to 30% and 28% for the 2008 year. Margin percentages for both divisions were negatively impacted in 2009 by more competitive pricing, reflecting the slow-down in natural gas and oil related completion activities in the US. Well testing division margins were further impacted by decreased equipment utilization rates. To respond to the more competitive landscape in 2009, the USCS segment reduced wages and operating costs and streamlined operations in order to preserve margins.

Going into 2010, the USCS segment has seen increased drilling rig counts in two of its operating areas (North Dakota and the Marcellus shale play in Pennsylvania) and flat rig counts in Colorado and Wyoming. In response to the increased activity in North Dakota and Pennsylvania, well testing equipment has been transferred in to these areas from both Canada and other parts of the US. The newly established wireline station in North Dakota will add geographic diversity to the wireline division and allows Pure to bundle the wireline and testing services for customers in that area. At the end of February 2010, the USCS segment had 8 wireline units and 39 well testing packages available for operation in the US.



Drilling
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Three months ended
December 31 Year ended December 31
($Cdn thousands) 2009 2008 Change 2009 2008 Change
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Revenue $ 7,136 $ 8,682 (18%) $19,725 $38,395 (48%)
Operating expenses 5,968 6,867 (13%) 17,043 27,854 (39%)
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Gross margin $ 1,168 $ 1,815 (36%) $ 2,682 $10,541 (75%)
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Gross margin % 16% 21% (24%) 14% 27% (48%)

Average drilling
rigs available 10.0 10.0 -% 10.0 10.0 -%

Drilling rig
utilization % (1) 47% 34% 38% 28% 43% (35%)
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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 available rig days for the period.


Pure's Drilling segment revenue in Q4 2009 of $7.1 million was $1.6 million lower than the $8.7 million of revenue recognized in Q4 2008. This decrease reflected a $2.2 million reduction in revenue from the Motorworks division ("Motorworks") offset by a $0.6 million increase in the Quintera Drilling division ("Quintera"). During Q3 2009, Motorworks exited the directional drilling business and is now focused solely on the rental and servicing of mud motors and related drilling equipment. This restructuring has significantly reduced Motorworks' revenue stream but more importantly, has significantly reduced operating costs, and enabled this division to start generating positive funds flow from operations.

Quintera generated $6.5 million of the $7.1 million of Drilling segment revenue in Q4 2009 and generated $5.9 million of the $8.7 million of segment revenue in Q4 2008. Rig utilization for Quintera in the fourth quarter of 47% was significantly better than the 32% utilization achieved by the industry in the WCSB in Q4 2009 (source: CAODC) and better than the 34% utilization realized by Quintera in Q4 2008. The high utilization rate in the current quarter was attributed to improved marketing efforts and several clients who contracted rigs for oil drilling projects in southern and west central Alberta. Although the rigs were busier in Q4 2009, day rates continued to be depressed, with average revenue per operating day of $14,929 recognized in Q4 2009 compared to $19,518 per operating day in Q4 2008.

The drop in gross margin percentage from 21% in Q4 2008 to 16% in Q4 2009, primarily reflects the reduced rig pricing from Quintera. However, overall segment margin percentages were positively impacted in the current quarter from the elimination of the directional drilling business which had been running at break-even margins in Q4 2008.

The Drilling segment recorded revenue of $19.7 million for the 2009 year, comprised of $16.2 million from Quintera and $3.5 million from Motorworks. This compared to total revenue for calendar 2008 of $38.4 million, which was comprised of $26.3 million from Quintera and $12.1 million from Motorworks. The lower revenue for Quintera in 2009 reflected lower rig utilization rates combined with lower average day rates. In calendar 2008, rig utilization was 43% and average revenue per day was $17,017 compared to utilization of 28% and average revenue per day of $15,805 in 2009. Industry utilization rates were only 25% in calendar 2009 as compared to 41% in the 2008 year (source: CAODC).

Year over year gross margin percentages fell significantly in the Drilling segment from 27% realized in 2008 to the 14% realized in 2009. Quintera margins decreased from 29% to 18% reflecting the drop in utilization and the reduced day rates. Motorworks' margins decreased from 20% to just below break-even reflecting the low activity levels in 2009 combined with the restructuring costs as this division exited the directional drilling business.

This segment commenced 2010 with a positive outlook as Quintera had strong rig utilization rates of 87% for the two-month period from January 1 through February 28. In addition, the restructured Motorworks had robust equipment rental and servicing revenues for these two months leading to positive fund flows.



Other Expenses

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($Cdn thousands, from Three months ended December 31
continuing operations) 2009 2008 Change
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Selling, general and administrative $ 4,865 $ 5,074 (4%)
Stock-based compensation 318 41 676%
Depreciation and amortization 3,414 2,337 46%
Impairment of intangible assets - 376 (100%)
Impairment of property held for sale 1,012 - -
Interest on long-term debt 567 451 26%
Other interest 6 118 (95%)
Gain on sale of property and equipment (981) (100) 881%
Foreign exchange (gain) loss (712) 97 834%
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($Cdn thousands, from Year ended December 31
continuing operations) 2009 2008 Change
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Selling, general and administrative $ 18,054 $ 19,174 (6%)
Stock-based compensation 725 1,116 (35%)
Depreciation and amortization 12,143 10,711 13%
Impairment of intangible assets 247 376 (34%)
Impairment of property held for sale 1,012 - -
Interest on long-term debt 2,134 2,304 (7%)
Other interest 21 326 (94%)
Gain on sale of property and equipment (1,455) (113) greater
than 1,000%
Foreign exchange (gain) loss (470) 158 397%
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Selling, General and Administrative Expenses

Selling, General and Administrative ("SG&A") expenses were consistent on a quarter over quarter and year over year basis. The reduced SG&A costs that resulted from staff reductions, wage cuts and other expense reductions during 2009 were offset by additional SG&A costs from the CanSub acquisition. On a combined basis, Pure and CanSub reported SG&A of $28.5 million in calendar 2008. The annualized rate for the combined businesses has now been reduced to approximately $20 million.

Depreciation and Amortization Expense

Depreciation and amortization expense increased both on a quarter over a quarter basis (from $2.3 million during Q4 2008 to $3.4 million in Q4 2009) and a year over year basis (from $10.7 million in calendar 2008 to $12.1 million in calendar 2009). The increase in both periods primarily reflects the addition of $18.9 million of property and equipment from the CanSub acquisition that closed in Q2 2009.

Impairment of Property Held for Sale

As discussed in the CCS segment section, Pure had three redundant operating facilities for sale in Canada at December 31, 2009. These facilities have been reclassified from "Property and Equipment" to "Property Held for Sale" on the December 31, 2009 balance sheet. As part of the year end asset impairment tests performed by management, it was determined that the estimated fair value of one of these facilities was below the related carrying value. As such, a $1.0 million impairment charge was recorded in Q4 2009.

Total Interest

Total interest of $0.6 million in Q4 2009 was consistent with total interest recorded in Q4 2008. Although the average drawn debt balances were higher in the prior period, this was offset by a lower interest rate charged in the prior period. Although the prime interest rates were higher in the prior period, the rate spread charged by the Corporation's Canadian lender was prime plus 0.5%. In May 2009, the rate spread was increased by the lender to prime plus 2.5% for the majority of Pure's debt.

Total interest expense for the 2009 year of $2.2 million was lower than the $2.6 million recognized in calendar 2008. This reflected lower charged interest rates in 2009 (i.e. prime interest rate plus bank spread), offset by higher average debt balances in 2009.

Gain on Sale of Property and Equipment

The gain on sale of property and equipment of $1.0 million recognized during Q4 2009, related to the disposal of nine wireline units and one redundant operating facility. The calendar 2009 gain on sale amount of $1.5 million reflected additional sales of redundant equipment during previous quarters.

Foreign Exchange (Gain) Loss

The Q4 2009 and calendar 2009 foreign exchange gains of $0.7 million and $0.5 million respectively, reflect the release into income of a portion of the cumulative gains from the foreign currency translation of the net investment of the Corporation's US operations. The release into income was triggered by reductions in the net investment that occurred during 2009.

Income Tax Expense

Due to the net loss from continuing operations incurred in calendar 2009, Pure recorded an income tax recovery of $3.9 million during the year.

As at December 31, 2009 the Corporation had non-capital losses and deferred expense pools that can be used to reduce future taxable income in Canada and the US of approximately $72 million and $33 million, respectively. Based on management's estimate, these losses and deferred expense pools are more likely than not to be realized in future periods and as such, a future income tax asset has been recorded on the balance sheet.



Results of Discontinued Operations

Well Fracturing Services
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Three months ended
December 31 Year ended December 31
($Cdn thousands) 2009 2008 Change 2009 2008 Change
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Revenue $ - $20,139 (100%) $21,233 $50,032 (58%)
Operating expenses 255 16,105 (98%) 21,478 42,819 (50%)
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Gross margin $ (255) $ 4,034 (106%) $ (245) $ 7,213 (103%)
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Gross margin % - 20% (100%) (1%) 14% (107%)

Average units available
during the period:
Fracturing spreads - 3.0 (100%) 2.1 3.0 (30%)

Number of jobs completed:
Fracturing - 417 (100%) 499 1,335 (63%)
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On August 14, 2009 the Corporation sold its well fracturing assets. As a result, the Q4 2009 financial results reflect nil revenue for the division but operating expenses of $0.3 million related to final costs for leased facilities, vehicles and other items formerly used in the fracturing operations.

For the 2009 year, the well fracturing division generated $21.2 million in revenue (for the period from January 1, 2009 to the sale date of August 14, 2009) versus the $50.0 million in revenue generated in calendar 2008. While the well fracturing division generated stronger financial results in the first quarter of 2009 versus the first quarter of 2008, a sharp decline in industry activity and services pricing resulted in lower financial results for the division in the second and third quarters of 2009 versus the comparable periods in 2008. The lower activity and services pricing, combined with the continued fixed costs of the division subsequent to the sale resulted in gross margin declining to break-even for the 2009 year versus a positive gross margin of $7.2 million in 2008.

In addition to the operating results discussed above, the Corporation recognized a $16.9 million impairment charge and an $0.8 million loss on sale related to the difference between the carrying value of the fracturing assets and the sales price.

Liquidity and Capital Resources

Pure exited 2009 with $2.0 million in cash and $48.1 million outstanding on the Corporation's debt facilities compared to $4.2 million in cash and $65.3 million outstanding on these facilities as at December 31, 2008. Net Debt (ie long-term debt less working capital), decreased to $32.3 million at December 31, 2009 from $35.1 million as at December 31, 2008 and $63.9 million as at June 30, 2009 (the peak level in 2009 following the acquisition of CanSub).

The decrease in Net Debt of $2.8 million during 2009 (ie $35.1 million at December 31, 2008 compared to $32.3 million at December 31, 2009) primarily reflected the net proceeds of $38.8 million from the sale of the well fracturing assets offset by: a) the addition of $18.8 million in Net Debt added through the CanSub acquisition plus the incurrence of $3.7 million in related transaction costs; b) negative funds flow from operations of $5.9 million (including discontinued operations) recorded by Pure for calendar 2009; and c) property and equipment acquisitions (net of proceeds from disposals) for the 2009 year of $3.2 million (including discontinued operations).

As discussed in the results of operations for the CCS segment, the acquisition of CanSub has allowed the Corporation to begin to rationalize its investment in real estate and redundant operating assets. As a result, in Q4 2009, Pure sold one redundant operating facility and 9 older wireline units for net proceeds of $4.0 million. In addition, three additional redundant operating facilities are listed for sale with aggregate list prices of approximately $10.0 million. The proceeds from these sales will be used to further reduce the Corporation's outstanding debt or reinvest into other growth areas of the Corporation's business.

The Corporation's board of directors has approved a capital expenditure budget for 2009 of approximately $6.0 million. These expenditures, which are spread amongst the Corporation's operating segments, are primarily for maintenance of the Corporation's existing operating capacity and equipment required to meet customer demand.

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



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Payments Due by Period
Contractual Obligations After
($Cdn thousands) Total 2010 2011 2012 2013 2013
----------------------------------------------------------------------------
Long-term debt
obligations (1) $ 48,051 $ 103 $ 6,034 $41,914 $ - $ -
Operating leases 38,072 8,297 6,355 5,408 5,154 12,858
----------------------------------------------------------------------------
Total contractual
obligations $ 86,123 $ 8,400 $12,389 $47,322 $ 5,154 $12,858
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Long-term debt obligations represent balances outstanding under the
extendible revolving loan facility and the capital lease liability.


In conjunction with the CanSub acquisition, the Corporation renewed and expanded its existing credit facilities to provide a secured $18 million demand revolving operating credit facility ("Operating Facility") and a secured $80 million one year extendible revolving credit facility ("Revolving Facility"). The Revolving Facility was subject to renewal on March 31, 2010, and if not extended would have been termed out with 25% of the outstanding balance being repaid over one year and the remaining balance due upon expiry of the one year amortization period. Borrowings under the Operating Facility bear interest at either: (i) the lender's prime rate plus 1.50%, or (ii) bankers acceptance rates plus 2.75%. Borrowings under the Revolving Facility bear interest at either: (i) the lender's prime rate plus 2.50%, or (ii) bankers acceptance rates plus 4.00%. The other terms of these facilities, including financial covenants and borrowing limits, were similar to those contained in Pure's previous credit facilities.

At the request of the Corporation, the Revolving Facility was reduced to $60,000 in November 2009. Effective March 9, 2010, as part of the annual review of the credit facilities, the senior lender further reduced the Revolving Facility to $50,000 and reduced the Operating Facility to $15,000 (for an aggregate limit of $65,000). Effective September 30, 2010 the aggregate limit will be reduced to $60,000 (Revolving Facility of $45,000 and Operating Facility of $15,000) and then reduced to $50,000 (Revolving Facility of $35,000 and Operating Facility of $15,000) at March 31, 2011. The new maturity date of the Revolving Facility is June 30, 2011. If the lender does not extend the facility at that date, then the drawn amounts under the facility will convert to a 12 month term loan with 25% of the outstanding balance repayable in equal quarterly installments over the one year period and the remaining balance due on June 30, 2012.

Borrowings under the Corporation's Revolving Facility are limited to 50% of the net book value of property and equipment and property held for sale, excluding any assets subject to other encumbrances, up to the maximum limit of the Revolving Facility. Borrowings under the Corporation's Operating Facility are limited to 75% of marginable accounts receivable less certain priority claims up to the limit of the Operating Facility. Based on the calculated margin for these facilities at December 31, 2009, the Corporation had aggregate available (but undrawn) facilities of $26,895. Under the aggregate limit of the revised facilities that became effective on March 9, 2010, the total available, but undrawn amount at December 31, 2009 would have been $16,895. Drawn amounts under the credit facilities are subject to compliance with the related debt covenants.

In November 2009, the Corporation's lender amended one of the debt covenants which related to trailing 12-month EBITDAS. The covenant was amended so that the calendar 2010 quarterly covenant calculations will be based on the 2010 year to date EBITDAS figures with no inclusion of trailing 2009 EBITDAS amounts. Due to the challenging industry conditions during 2009, Pure reported negative EBITDAS for the year and was therefore in breach of this covenant at December 31, 2009. However, Pure's banker has provided forbearance for this covenant breach. The Corporation was in compliance with all other covenants at December 31, 2009. The previous loan covenants continue to apply to the Corporation's credit facilities subsequent to the March 9, 2010 renewal by the senior lender with an additional covenant now in place related to minimum required EBITDAS amounts.

Pure's financial position has improved significantly with the disposition of the Corporation's well fracturing assets and disposition of the redundant operating facility and equipment. The Corporation believes that its available credit facilities and funds flow from operations will provide sufficient capital resources to fund near term capital expenditures and ongoing operations. Pure's management continues to evaluate its capital and operational spending programs in response to industry conditions.

Share capital

As at March 16, 2010, the Corporation had 23,740,647 common shares issued and outstanding and 1,482,500 stock options issued and outstanding, of which 4,000 were vested.

Outlook

As the Corporation enters 2010, there is cautious optimism about an improvement in industry conditions. Some of the initial signs for this year have been positive, including the improved equipment utilization rates that Pure has recognized in the first two months of 2010 in Canada for both the CCS and Drilling segments, stronger commodity prices (particularly for oil) and improved access to capital for Pure's customers experienced since the fall of 2009.

Although equipment utilization rates have been more robust in early 2010, the Corporation is still challenged by competitive pricing carried over from 2009 which continues to impact Pure's gross margins and earnings. Pure's management continues to focus on pricing for services and operating costs in an effort to maximize margins and profitability for all operating segments.

Pure exited 2009 with a renewed focus on its core businesses of wireline and well testing in the US and Canada complemented by the Corporation's contract drilling services. The acquisition of CanSub has enabled the Corporation to build the operating infrastructure and critical mass to attract and retain additional large customers in both of these regions. The geographic reach in both countries gives Pure the ability to quickly move equipment into high activity areas to maintain utilization rates and revenue streams.

Both Canada and the US have seen significant increases in activity levels in emerging resource plays involving shale gas, tight gas and conventional oil and natural gas due to technology improvements in multi stage fracturing and horizontal drilling. Pure has benefited from the increased work in these areas, given the locations of the Corporation's operating facilities and the significant amount of wireline and testing equipment capable of working in high pressure environments. Pure's management is optimistic that the activity levels in these emerging plays will continue to be strong throughout 2010.

As a result of the sale of the fracturing assets during Q3 2009, combined with the sale of redundant assets during Q3 and Q4 2009, Pure has been able to significantly reduce its Net Debt from the 2009 high of $63.9 million at June 30, 2009 to $32.3 million at December 31, 2009. In addition, Pure has three redundant facilities currently for sale (with aggregate list prices of approximately $10 million) which, when sold, will further reduce the debt load. During March 2010, Pure's senior lender extended the maturity date of the Revolving Facility to June 30, 2011, thereby providing Pure with more financial flexibility. The improved financial position and improved financial flexibility will allow the Corporation to continue to build strategic critical mass in its core wireline and well testing businesses.



Reconciliation of EBITDA and EBITDAS to Net Earnings (Loss)

----------------------------------------------------------------------------
Three months Year ended
($Cdn thousands, from ended December 31 December 31
continuing operations) 2009 2008 2009 2008
----------------------------------------------------------------------------
Net earnings (loss)
before income tax $ (3,526) $ 1,606 $ (17,196) $ 1,621
Add: Depreciation and amortization 3,414 2,337 12,143 10,711
Interest expense (total) 573 569 2,155 2,630
Impairment of intangible assets - 376 247 376
Impairment of property held
for sale 1,012 - 1,012 -
Gain on sale of property and
equipment (981) (100) (1,455) (113)
Foreign exchange (gain) loss (712) 97 (470) 158
----------------------------------------------------------------------------
EBITDA (220) 4,885 (3,564) 15,383
Add: Stock-based compensation
expense 318 41 725 1,116
----------------------------------------------------------------------------
EBITDAS $ 98 $ 4,926 $ (2,839) $ 16,499
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Forward-looking Statements

This document contains certain forward-looking statements and other information that are based on the Corporation's current expectations, estimates, projections and assumptions made by management in light of its experience and perception of historical trends, current conditions, anticipated future developments and other factors believed by management to be relevant.

All statements and other information contained in this document that address expectations or projections about the future are forward-looking statements. Some of the forward-looking statements may be identified by words such as "may", "would", "could", "will", "intends", "expects", "believes", "plans", "anticipates", "estimates", "continues", "maintains", "projects", "indicates", "outlook", "proposed", "objective" and other similar expressions. These statements speak only as of the date of this document. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed in the "Risks Factors" section of the most recent Annual Information Form, Information Circular, quarterly reports, material change reports and news releases. The Corporation cannot assure investors that actual results will be consistent with the forward-looking statements and readers are cautioned not to place undue reliance on them. The forward-looking statements are provided as of the date of this document and, except as required pursuant to applicable securities laws and regulations, the Corporation assumes no obligation to update or revise such statements to reflect new events or circumstances.

The forward-looking statements and information contained in this document reflect several major factors, expectations and assumptions of the Corporation, including without limitation, that the Corporation will continue to conduct its operations in a manner substantially consistent with past operations, other than its well fracturing operations; the general continuance of current or, if applicable, assumed industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) taxation, royalty and regulatory regimes; certain commodity prices and other cost assumptions; certain conditions regarding oil and natural gas supply, demand and storage in North America; and the continued availability of adequate debt and/or equity financing and cash flow from the Corporation's operations to fund its capital and operating requirements as needed; and the extent of its liabilities. Many of these factors, expectations and assumptions are based on management's knowledge and experience in the industry and on public disclosure of industry participants and analysts relating to anticipated exploration and development programs of oil and natural gas producers, the effect of changes to regulatory, taxation and royalty regimes, expected active rig counts and industry equipment utilization in the WCSB and the US Rocky Mountain, North Dakota and Appalachian Basin regions and other matters. The Corporation believes that the material factors, expectations and assumptions reflected in the forward-looking statements and information are reasonable; however, no assurances can be given that these factors, expectations and assumptions will prove to be correct.

In particular, this document contains forward-looking information pertaining to the following: ability to reduce costs in response to lower industry activity levels; success of marketing programs; capital expenditure programs; ability to move equipment within operating locations; availability of debt financing and ability to renew the Corporation's existing credit facilities, at acceptable terms; supply and demand for oilfield services and industry activity levels; oil and natural gas prices; oil and natural gas drilling activity; treatment under governmental royalty, collection of accounts receivable; operating risk liability; expectations regarding market prices and costs; ability to sell certain properties in Canada listed for sale; expansion of services and operations in Canada and the United States; the anticipated synergies, operating efficiencies and cost savings resulting from the merger of the Corporation and CanSub; and competitive conditions.



Pure Energy Services Ltd.

Consolidated Balance Sheets
As at December 31

----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Stated in thousands of Cdn dollars) 2009 2008
----------------------------------------------------------------------------
Assets

Current assets
Cash and cash equivalents $ 1,986 $ 4,201
Accounts receivable 23,297 37,304
Inventory 2,887 5,041
Deposits and prepaid expenses 2,002 1,996
Current assets of discontinued operations 446 -
----------------------------------------------------------------------------
30,618 48,542
Property and equipment 123,119 179,002
Property held for sale 6,266 -
Future income taxes 23,224 -
Intangible assets - 266
----------------------------------------------------------------------------
$ 183,227 $ 227,810
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 14,359 $ 16,868
Income taxes payable 384 1,455
Current portion of long-term debt 103 7,909
Current liabilities of discontinued
operations 110 -
----------------------------------------------------------------------------
14,956 26,232
Long-term debt 47,948 57,405
Future income taxes - 4,366
----------------------------------------------------------------------------
62,904 88,003
----------------------------------------------------------------------------
Shareholders' Equity
Share capital 120,913 106,510
Contributed surplus 4,236 3,511
Accumulated other comprehensive income (loss) (2,296) 4,172
Retained earnings (deficit) (2,530) 25,614
----------------------------------------------------------------------------
120,323 139,807
----------------------------------------------------------------------------
$ 183,227 $ 227,810
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Pure Energy Services Ltd.

Consolidated Statements of Earnings (Loss) and Retained Earnings (Deficit)
For the years ended December 31,

----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Stated in thousands of Cdn dollars, except
per share amounts) 2009 2008
----------------------------------------------------------------------------
Revenue $ 114,694 $ 142,474
Operating expenses 99,479 106,801
----------------------------------------------------------------------------
Gross margin 15,215 35,673
Other expenses
Selling, general and administrative 18,054 19,174
Stock-based compensation 725 1,116
Depreciation and amortization 12,143 10,711
Impairment of property held for sale 1,012 -
Impairment of intangible assets 247 376
Interest on long-term debt 2,134 2,304
Other Interest 21 326
Gain on sale of property and equipment (1,455) (113)
Foreign exchange (gain) loss (470) 158
----------------------------------------------------------------------------
Earnings (loss) before income taxes (17,196) 1,621
----------------------------------------------------------------------------
Income taxes
Current expense 255 2,375
Future (reduction) (4,193) (1,181)
----------------------------------------------------------------------------
(3,938) 1,194
----------------------------------------------------------------------------
Net earnings (loss) from continuing operations (13,258) 427
Net earnings (loss) from discontinued
operations (14,886) 865
----------------------------------------------------------------------------
Net earnings (loss) (28,144) 1,292
Retained earnings, beginning of year, as
restated 25,614 24,322
----------------------------------------------------------------------------
Retained earnings (deficit), end of year $ (2,530) $ 25,614
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per share from continuing
operations
Basic and diluted $ (0.66) $ 0.03
Earnings (loss) per share from discontinued
operations
Basic and diluted $ (0.74) $ 0.05
Earnings (loss) per common share
Basic and diluted $ (1.40) $ 0.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Pure Energy Services Ltd.

Consolidated Statements of Comprehensive Income (Loss)
and Accumulated Other Comprehensive Income (Loss)
For the years ended December 31,

----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Stated in thousands of Cdn dollars) 2009 2008
----------------------------------------------------------------------------
Comprehensive income (loss)

Net earnings (loss) $ (28,144) $ 1,292
Add/deduct other comprehensive income (loss)
items:
Foreign currency translation adjustment (5,863) 8,263
Unrealized portion of foreign exchange (gain)
loss (605) -
----------------------------------------------------------------------------
(6,468) 8,263
----------------------------------------------------------------------------
Comprehensive income (loss) $ (34,612) $ 9,555
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated other comprehensive income (loss) 2009 2008
----------------------------------------------------------------------------

Balance, beginning of year $ 4,172 $ (4,091)
Unrealized gain (loss) on translation of
foreign operations during the year (6,468) 8,263
----------------------------------------------------------------------------
Balance, end of year $ (2,296) $ 4,172
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Pure Energy Services Ltd.

Consolidated Statements of Cash Flows
For the years ended December 31,

----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Stated in thousands of Cdn dollars) 2009 2008
----------------------------------------------------------------------------
Cash provided by (used in):
Operating activities
Net earnings (loss) from continuing
operations $ (13,258) $ 427
Items not involving cash from continuing
operations:
Depreciation and amortization 12,143 10,711
Stock-based compensation 725 1,116
Impairment of property held for sale 1,012 -
Impairment of intangible assets 247 376
Future income tax reduction (4,193) (1,181)
Gain on sale of property and equipment (1,455) (113)
Unrealized portion of foreign exchange (gain)
loss (605) 5
----------------------------------------------------------------------------
(5,384) 11,341
Changes in non-cash working capital balances
from continuing operations 8,722 (7,372)
----------------------------------------------------------------------------
Continuing operations 3,338 3,969
Discontinued operations 5,716 889
----------------------------------------------------------------------------
9,054 4,858
----------------------------------------------------------------------------
Investing Activities
Purchases of property and equipment (6,334) (14,252)
Proceeds from sale of property and equipment 6,402 547
Business acquisition (5,518) -
Changes in non-cash working capital balances 197 676
Discontinued operations 32,000 (13,180)
----------------------------------------------------------------------------
26,747 (26,209)
----------------------------------------------------------------------------
Financing Activities
Repayment of operating loan - (1,568)
Net proceeds from (repayment of) revolving
term loans (29,698) 20,489
Proceeds from fixed term loans - 3,840
Repayment of fixed term loans (4,317) (4,001)
Government grant received - 245
Issue of share capital, net of share issuance
costs (19) 50
Discontinued operations (3,675) 3,460
----------------------------------------------------------------------------
(37,709) 22,515
----------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (1,908) 1,164
Effect of translation on foreign currency cash
and cash equivalents (307) 994
Cash and cash equivalents, beginning of year 4,201 2,043
----------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,986 $ 4,201
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Contact Information

  • Pure Energy Services Ltd.
    Kevin Delaney
    CEO
    (403) 262-4000
    (403) 262-4005 (FAX)
    kdelaney@pure-energy.ca
    or
    Pure Energy Services Ltd.
    Chris Martin
    Chief Financial Officer
    (403) 262-4000
    (403) 262-4005 (FAX)
    cmartin@pure-energy.ca
    or
    Pure Energy Services Ltd.
    10th Floor, 333 - 11th Avenue S.W.
    Calgary, AB T2R 1L9