Canadian Sub-Surface Energy Services Corp.
TSX : CSE

Canadian Sub-Surface Energy Services Corp.

May 12, 2008 08:30 ET

Canadian Sub-Surface Energy Services Announces Q1 2008 Financial Results

CALGARY, ALBERTA--(Marketwire - May 12, 2008) - Canadian Sub-Surface Energy Services Corp. (TSX:CSE) ("CanSub" or "the Company") announced today its financial and operating results for the three-month period ended March 31, 2008.



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

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

(Unaudited) Three-month Three-month
period ended period ended
Mar 31, 2008 Mar 31, 2007 % Change
----------------------------------------------------------------------------

Revenue 23,391 25,042 -6.6%
----------------------------------------------------------------------------
Gross Margin 7,910 7,794 +1.5%
----------------------------------------------------------------------------
Gross Margin % 33.8% 31.1% +8.7%
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Cash Flow (1) 5,307 4,867 +9.0%
----------------------------------------------------------------------------
EBITDAS (1) (2) 5,800 5,189 +11.8%
----------------------------------------------------------------------------
EBITDAS as a % of revenue 24.8% 20.7% +19.8%
----------------------------------------------------------------------------
Net Earnings 3,068 1,714 +79.0%
----------------------------------------------------------------------------
Net Earnings per share
- basic and diluted $0.16 $0.09 +77.8%
----------------------------------------------------------------------------
Average number of Class A
common shares outstanding
(in thousands) 19,324 19,324 n/a
----------------------------------------------------------------------------
(1) Refer to the "Non-GAAP measures" section below for details.

(2) EBITDAS refers to earnings before interest, taxes, depreciation,
amortization and stock-based compensation expense. See section below
titled "Reconciliation of Cash Flow and EBITDAS to Net Earnings".


Operational Highlights

Revenue during Q1 2008 was $23.4 million as compared to revenue of $25.0 million recognized during Q1 2007. Despite the drop in revenue, EBITDAS improved from $5.2 million in Q1 2007 to $5.8 million in Q1 2008, reflecting increased operating margins and reductions in selling, general and administrative expenses ("SG&A"). The increased margins and reduced SG&A expenses reflect the previously announced cost cutting and optimization initiatives implemented by the Company during Q4 2007.

Although CanSub had a larger overall equipment fleet in Q1 2008, lower utilization rates were experienced in the current quarter due to the continued slowdown in drilling activity in the Western Canadian Sedimentary Basin ("WCSB"). Many oil and gas producers continued to defer drilling and completion programs, primarily in response to the weakness in natural gas prices. Based on drilling statistics published by the Petroleum Services Association of Canada ("PSAC"), the number of wells drilled (rig released) during Q1 2008 was 5,147 as compared to the 6,013 wells drilled during Q1 2007 (a 14% decrease).

After a challenging year in 2007, there are signs of a potential recovery in industry activity levels. Current natural gas prices are at their highest levels in over two years, largely as a result of lower natural gas storage levels in North America. In addition, oil prices continue to be robust. The combination of improved pricing for these two commodities has resulted in increased cash flow for the oil and gas producers and potential for increased drilling activities in the WCSB in the near term.

During the current quarter, CanSub benefited from its geographic diversity by taking advantage of its presence in northeast British Columbia and southeast Saskatchewan, two of the busier areas in the basin. Due to the increased production royalties that will take effect in Alberta in 2009, affected conventional oil and natural gas producers have shifted investment dollars into the neighboring provinces of British Columbia and Saskatchewan. CanSub is well positioned to continue to take advantage of this change as approximately 50% of CanSub's equipment fleet resides in, or can service, northeast B.C. as well as southeast and other parts of Saskatchewan.

On May 2, 2008 CanSub completed a $6.5 million acquisition of a package of wireline assets from an industry peer. The assets included five electric line units, various specialty tools and auxiliary equipment. This strategic acquisition will allow the Company to grow its most profitable service line (the electric line service which is primarily involved in well perforating and logging) and makes CanSub one of the largest independent cased-hole wireline companies in Canada. A portion of this asset acquisition was financed by a non-brokered, $3.85 million private placement offering to CanSub employees that closed on May 1, 2008.

For the remainder of 2008, CanSub has minimal capital expenditures planned. However, the Company will continue to monitor industry activity and evaluate strategic opportunities in determining the extent and timing of further expansion.

During Q1 2008, the Company added 1 wireline unit to its operating equipment fleet. An additional 5 wireline units were added on May 2, 2008 as part of the asset acquisition described above. Below is a summary of the changes to CanSub's equipment fleet from January 1 to May 7, 2008.



----------------------------------------------------------------------------
# of # of # of
Wireline Units Swabbing Units Testing packages
----------------------------------------------------------------------------
Operating fleet at
Dec. 31 2007 44 10 61
----------------------------------------------------------------------------
Additions to fleet
during Q1 2008 1 - -
----------------------------------------------------------------------------
Operating fleet at
March 31, 2008 45 10 61
----------------------------------------------------------------------------
Acquisition of wireline
units from industry
peer on May 2, 2008 5 - -
----------------------------------------------------------------------------
Operating fleet at
May 7, 2008 (i)50 10 (ii)61
----------------------------------------------------------------------------

(i) Excludes two older electric line units that have been parked to reduce
costs. These units will either be refurbished and put back into
operation or sold. Included in the 50 operating wireline units are 28
electric line and 22 slickline units.

(ii) Comprised of 52 major testing packages plus various other testing
related equipment (ie flow-back tanks, high pressure storage tanks and
cold separators) which equate to approximately an additional 9 major
testing packages when fully utilized.


During June 2008, CanSub plans on converting two of its existing swabbing units into electric line units which will increase the operating wireline fleet to 52 units and decrease the swabbing fleet to eight units.


Canadian Sub-Surface Energy Services Corp.

Management's Discussion and Analysis

The following Management's Discussion and Analysis ("MD&A") is for the consolidated financial statements of Canadian Sub-Surface Energy Services Corp. ("CanSub" or "the Company") as at and for the three-month periods ended March 31, 2008 and 2007. The consolidated financial statements and MD&A have been prepared taking into consideration information available as at May 7, 2008 and should be read in conjunction with the interim consolidated financial statements of the Company for the three-month period ended March 31, 2008 and the audited financial statements of the Company for the year ended December 31, 2007.

Forward-looking statements

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

Business Units and Segmentation

The Company's operations are conducted through its operating partnership and consist of two main operating divisions: Wireline and Testing. The Wireline division is comprised primarily of cased-hole wireline services (which include electric line and slickline) and also includes swabbing and well optimization. The Testing division includes primarily natural gas production testing services.

Seasonality

The Company's wireline and production testing operations are seasonal. The oil and gas industry is generally more active during the winter months (historically from November through March) as the movement of heavy equipment is easier over frozen ground. In the spring months, road bans and wet weather can limit the ability to move equipment and adversely impacts the Company's revenue generating capability. Rain in the summer and fall months can also have a significant impact on the Company's revenue. However, when equipment is not in use, crews are not required (particularly in the Testing division) and therefore operating costs normally decrease in slow operating periods.

Results of Operations

Revenues

The break-down of consolidated revenue between the Wireline and Testing divisions for the three-month periods ended March 31, 2008 and 2007 are as follows:



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$000s Three-month Three-month
(Unaudited) period ended period ended
Mar 31, 2008 Mar 31, 2007 % Change
----------------------------------------------------------------------------
Wireline 15,053 13,935 +8.0%
----------------------------------------------------------------------------
Testing 8,338 11,107 -24.9%
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Consolidated 23,391 25,042 -6.6%
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Equipment utilization rates for both the Wireline and Testing divisions during Q1 2008 were lower than Q1 2007 reflecting the continued industry slow-down in drilling and completion activity in the WCSB. The slow-down is largely due to weak natural gas prices that have persisted over the past two years. Although CanSub's average in service wireline fleet (electric line and slickline units) increased from 38 units in Q1 2007 to 45 units in Q1 2008 (an 18% increase), lower utilization rates lead to overall wireline divisional revenue being up only up 8%. Lower equipment utilization rates in the Testing division lead to a 25% decline in overall Testing revenue as the equipment fleet remained the same quarter over quarter.

Cansub was able to mitigate the effects of pricing erosion in the wireline division through an increase in work done in northern Alberta and northeastern British Columbia and also increasing the amount of "Specialty" service work performed. Specialty services involve the use of special tools used for work such as production logging, analysis of down-hole pipe integrity and reservoir formation analysis. These services, which were heavily marketed by the Company over the past year, add incremental pricing to jobs with little associated cost.

In Q1 2008, Wireline divisional revenue amounted to $15.1 million. Of that amount, $13.5 million was related solely to the wireline fleet, which averaged 45 units in operation during the period. The remaining $1.5 million of revenue was attributed to swabbing and well optimization services. The wireline units completed approximately 2,114 jobs during the current quarter at an average per job revenue of approximately $6,395. This per job revenue was significantly greater than the per job revenue of $5,794 realized during Q4 2007 for several reasons:

- CanSub's wireline fleet completed more jobs in the lucrative areas of northern Alberta and northeastern British Columbia during Q1 2008 than in Q4 2007. Wells in these areas are typically deeper and more complex and the related work commands a higher price. This partially reflects the deferral of drilling and completion projects from Q4 2007 to Q1 2008 by some oil and natural gas producers as they evaluated the impact of the new Alberta royalty regime announced in October, 2007. In addition, the establishment of CanSub's new operating hub in Fort Nelson (in northeast British Columbia) has had a positive impact on the Company's equipment utilization rates. There has been a surge of activity in this area due to the discovery of several large natural gas plays combined with the fact that this area will not be impacted by the new Alberta royalty regime.

- CanSub completed significantly more of the higher priced "Specialty Service" jobs during Q1 2008 than in Q4 2007. The Company recently increased its Specialty Services offering capability by acquiring additional specialty tools as part of the acquisition of assets that closed on May 2, 2008.

In the comparable Q1 2007 period, Wireline divisional revenue amounted to $13.9 million. Of that amount, $12.0 million was attributed solely to the wireline fleet which averaged 38 units in operation. Swabbing and well optimization services comprised the remaining $1.9 million in revenue. The wireline units completed approximately 2,110 jobs at an average per job revenue of $5,684.

The reduced utilization of equipment in CanSub's fleet in Q1 2008 resulted in a quarter over quarter erosion of base pricing for many of the Company's services. However, the Wireline fleet was able to increase its average per job revenue quarter over quarter due to:

- A larger portion of the wireline fleet operating in northern Alberta during the current quarter.

- The positive impact from new work in northeast British Columbia.

- The positive impact on pricing from the increased amount of Specialty Service work.

Testing division revenue amounted to $8.3 million in Q1 2008 as compared to $11.1 million in Q1 2007. CanSub had an in-service fleet of 61 testing packages during both periods. The 25% revenue decline reflects lower equipment utilization combined with lower pricing. This division has seen the greatest impact from the industry slow-down as it is geared towards new natural gas well completions.

CanSub has re-positioned approximately 15% of its Testing fleet into southeast Saskatchewan to take advantage of the high activity levels in that area. Although pricing of services in this division remains competitive, the recent strengthening in natural gas commodity prices is providing some optimism about overall activity levels for this service in the near term.

Gross Margins (refer to Non-GAAP measures below)

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



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$000s Three-month Three-month
period ended period ended
Mar 31, 2008 Mar 31, 2007 % Change
----------------------------------------------------------------------------
(Unaudited)
----------------------------------------------------------------------------
Gross Margins:
----------------------------------------------------------------------------
Wireline 5,202 4,322 +20.4%
----------------------------------------------------------------------------
Testing 2,708 3,472 -22.0%
----------------------------------------------------------------------------
Consolidated 7,910 7,794 +1.5%
----------------------------------------------------------------------------
Gross Margin %
----------------------------------------------------------------------------
Wireline 34.6% 31.0% +11.6%
----------------------------------------------------------------------------
Testing 32.5% 31.3% +3.8%
----------------------------------------------------------------------------
Consolidated 33.8% 31.1% +8.7%
----------------------------------------------------------------------------


Consolidated gross margins were $7.9 million for Q1 2008 and $7.8 million for Q1 2007. Gross margin percentages improved from 31.1% in Q1 2007 to 33.8% in Q1 2008. Although lower equipment utilization rates have put pressure on the pricing of many of CanSub's services (and related operating margins) over the past year, the Company has been able to reduce operating costs, optimize operations and preserve margins by implementing the following in the latter part of 2007:

- Negotiating discounts from suppliers.

- Moving equipment to higher activity areas such as northeast British Columbia and southeast Saskatchewan to increase utilization.

- Re-positioning station managers and some office personnel to work in the field.

- Identifying niche, specialty service markets for both the wireline and testing divisions to increase equipment utilization.

During Q1 2007, the operating margins of the Wireline division were negatively impacted by set-up expenses associated with the establishment of new bases in northern Alberta and the commissioning of a significant amount of new equipment added during that quarter.

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

Selling, general and administrative expenses

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



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

$000s Three-month Three-month
(Unaudited) period ended period ended
Mar 31, 2008 Mar 31, 2007 % Change
----------------------------------------------------------------------------
Selling, general and admin
expenses 2,110 2,605 -19.0%
----------------------------------------------------------------------------


SG&A expenses were approximately 19% lower in Q1 2008 as compared to Q1 2007. This decrease primarily reflects a quarter over quarter decline in bad debt expense and the effects of cost cutting measures initiated during Q4 2007. SG&A expenses were 9% of sales in Q1 2008 as compared to 10% of sales in Q1 2007. CanSub's management continues to closely monitor all SG&A expenses.



Stock-based compensation expense

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

$000s Three-month Three-month
(Unaudited) period ended period ended
Mar 31, 2008 Mar 31, 2007 % Change
----------------------------------------------------------------------------
Stock-based compensation expense 271 330 -17.9%
----------------------------------------------------------------------------


Stock-based compensation expense in Q1 2008 was materially consistent with
the amount reported in Q1 2007.


Depreciation and amortization expense

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

$000s Three-month Three-month
(Unaudited) period ended period ended
Mar 31, 2008 Mar 31, 2007 % Change
----------------------------------------------------------------------------
Depreciation 1,979 1,886 +4.9%
----------------------------------------------------------------------------
Amortization - 628 n/a
----------------------------------------------------------------------------
Total 1,979 2,514 -21.3%
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Depreciation expense (which relates to depreciation of the Company's property and equipment) amounted to $2.0 million during Q1 2008. The increase over the Q1 2007 expense of $1.9 million reflects the higher property and equipment balance during the current quarter, offset by a 3% decrease in the declining balance rate at which field equipment (an asset category within property and equipment) is depreciated. During Q1 2008, the Company reduced the declining balance depreciation rate on field equipment from 15% to 12%. In management's opinion, the 12% rate provides a better estimate of the useful life of these types of assets.

Amortization expense (which relates to amortization of the Company's intangible assets) was nil for Q1 2008. During Q4 2007, a full impairment loss was taken on all of the Company's intangible assets, leaving nil balances for these assets at the December 31, 2007 balance sheet date. As a result, there will be no future amortization expense from the intangible assets acquired during 2007 and prior years.



Interest expense

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

$000s Three-month Three-month
(Unaudited) period ended period ended
Mar 31, 2008 Mar 31, 2007 % Change
----------------------------------------------------------------------------
Interest on long-term debt 493 365 +35.1%
----------------------------------------------------------------------------


Total interest expense for Q1 2008 of $0.5 million was 35% higher than the Q1 2007 interest expense of $0.4 million. The increase is primarily due to a net increase in the average total debt balance (comprised of operating loan, long-term debt and capital lease obligations).

Current tax expense (recovery)

During Q1 2008, CanSub incurred a net current tax expense of $0.1 million. This expense was planned in order to utilize expiring investment tax credits ("ITC's") of $0.1 million. The utilization of these credits resulted in nil cash taxes payable for the period.

Future income tax expense (reduction)

The Company recognized a future income tax recovery of $0.1 million in Q1 2008. The future income tax expense is typically impacted by net timing differences between amounts for tax and accounting and draw-downs of the deferred credit.

Net Earnings

The Company recorded net earnings of $3.1 million in Q1 2008 ($0.16 per share - basic and diluted) as compared to net earnings of $1.7 million ($0.09 per share - basic and diluted) for Q1 2007.

Income tax amounts

The Company had the following estimated income tax amounts available at March 31, 2008 to apply against future taxable income: non-capital losses of $12.0 million and unclaimed scientific research and development expenditures ("SRED") of $9.4 million. In addition, the Company had approximately $1.4 million in investment tax credits which may be claimed against taxes otherwise payable for federal purposes and expire between 2008 and 2014. These tax amounts are subject to review and assessment by the taxation authorities.

Share Capital

There were no changes to Share Capital during the three-month period ended March 31, 2008. On May 1, 2008, the Company issued 2.2 million Class A common shares to employees in a non-brokered private placement (at a share price of $1.75) resulting in gross proceeds of $3.85 million. After this financing, the Company had 21,523,742 shares outstanding at May 7, 2008.

Stock Options

During Q1 2008, the Company granted 30,000 options and 87,000 options were forfeited, for a net decrease of 57,000 options outstanding. At March 31, 2008, the Company had 1.585 million options outstanding with an average exercise price of $4.21.

Liquidity and Capital Resources

The Company recorded positive cash flow from operations (before changes in non-cash working capital) of $5.3 million for Q1 2008 as compared to positive cash flow from operations of $4.9 million in Q1 2007. The increase in cash flow primarily reflects the increased gross margins in 2008 (see Revenue and Gross Margin analysis above) and the reduction in SG&A expenses.

As at March 31, 2008, the Company had working capital of $3.2 million and total long-term debt (i.e. long-term debt plus long-term portion of capital leases) of $18.5 million for a net debt position of $15.3 million. On March 31, 2008, the Company converted its previous $44 million revolving, committed credit facility into two new facilities:

a) a $15 million operating loan facility to finance the Company's working capital requirements; and

b) a $30 million committed, term facility to be used for the acquisition of capital assets. Advances under this facility are repayable over a five year term with blended monthly payments of principal and interest.

These new facilities have lower interest rates and lower stand-by fees than the previous credit facility and will provide CanSub with greater borrowing flexibility. At March 31, 2008, the Company had drawn $3.8 million on the new operating loan facility and $22.0 million on the new committed, term facility. Amounts available to be drawn under the operating loan facility are limited to 75% of marginable accounts receivable. Amounts available to be drawn under the committed, term facility are limited to 50% of the net book value of property and equipment on the Company's balance sheet less assets pledged as security for the Company's capital lease obligations. Based on the marginable fixed assets at March 31, 2008, approximately $23.1 million was available to be drawn on this facility. Future purchases of property and equipment can be financed 50% through the committed term facility, as long as total drawn amounts do not exceed $30 million. Amounts the Company is eligible to draw under both facilities are subject to CanSub meeting all related loan covenants and margin requirements. At March 31, 2008 CanSub was in compliance with these restrictions.

The Company believes that its available credit facilities and cash flow from operating activities will provide sufficient capital resources to fund near term capital expenditures and on-going operations. The Company's management continues to evaluate its capital and operational spending programs in response to industry conditions.

Investing Activities

The Company's net capital expenditures (ie acquisitions net of proceeds from disposals) for property and equipment during Q1 2008 amounted to $1.5 million and related primarily to 1 new wireline unit, certain equipment required to meet operating regulations and auxiliary equipment. The chart below provides a summary of the changes to CanSub's fleet during Q1 2008.



----------------------------------------------------------------------------
# of # of # of
Wireline Units Swabbing Units Testing packages
----------------------------------------------------------------------------
Operating fleet at
December 31, 2007 44 10 61
----------------------------------------------------------------------------
Additions during Q1 2008 1 - -
----------------------------------------------------------------------------
Operating fleet at
March 31, 2008 45 10 61
----------------------------------------------------------------------------


The 45 wireline units in operation at March 31, 2008 were comprised of 23 electric line units and 22 slickline units. In addition, there are 2 older electric line units that were parked to reduce costs.

On May 2, 2008, the Company acquired 5 additional wireline units (all electric line) along with various specialty tools and auxiliary equipment from an industry peer for $6.5 million. This acquisition was financed in part by the $3.85 million private placement financing that closed on May 1 with the remainder financed by the Company's committed, term loan facility.

Financing Activities

Financing activities during Q1 2008 consisted of the conversion of the Company's previous $44 million revolving, committed credit facility into the new facilities noted in the section above titled "Liquidity and Capital Resources". In addition, the Company made $0.6 million in repayments on the Company's capital lease obligations during Q1 2008.

Related Party Transactions

There were no significant related party transactions during Q1 2008. Any minor related party transactions were in the normal course of business at market rates. Material related party transactions during fiscal 2007 are outlined in the notes to the audited December 31, 2007 financial statements.

Quarterly Financial Summary

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



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

----------------------------------------------------------------------------
(Unaudited) Three-month Three-month Three-month Three-month
period ended period ended period ended period ended
Mar 31 2008 Dec 31 2007 Sept 30 2007 June 30 2007
----------------------------------------------------------------------------

Revenue 23,391 16,312 17,533 7,282
----------------------------------------------------------------------------
Cash Flow (1) 5,307 1,465 2,170 (3,370)
----------------------------------------------------------------------------
EBITDAS (1) (2) 5,800 1,968 2,690 (3,010)
----------------------------------------------------------------------------
EBITDAS as a
% of revenue 24.8% 12.1% 15.3% (41.8%)
----------------------------------------------------------------------------
Net Earnings (loss) 3,068 (21,024) (830) (4,597)
----------------------------------------------------------------------------
Net Earnings per share
- basic and diluted $0.16 ($1.09) ($0.04) ($0.24)
----------------------------------------------------------------------------


----------------------------------------------------------------------------
(Unaudited) Three-month Three-month Three-month Three-month
period ended period ended period ended period ended
Mar 31 2007 Dec 31 2006 Sept 30 2006 June 30 2006
----------------------------------------------------------------------------

Revenue 25,042 19,611 20,625 10,714
----------------------------------------------------------------------------
Cash Flow (1) 4,867 4,110 5,002 (29)
----------------------------------------------------------------------------
EBITDAS (1) (2) 5,189 4,360 5,228 175
----------------------------------------------------------------------------
EBITDAS as a
% of revenue 20.7% 22.2% 25.3% 1.6%
----------------------------------------------------------------------------
Net Earnings (loss) 1,714 1,616 2,192 806
----------------------------------------------------------------------------
Net Earnings per share
- basic and diluted $0.09 $0.08 $0.12 $0.05
----------------------------------------------------------------------------

(1) Refer to the "Non-GAAP measures" section below for details.

(2) EBITDAS means earnings before interest, taxes, depreciation,
amortization, and excludes stock based compensation expense. Refer to
the section below titled "Reconciliation of Cash Flow and EBITDAS to
Net Earnings".

(3) Results in the various quarters are subject to seasonality. See above
section titled "Seasonality".


Commitments and obligations

See notes to the interim, unaudited financial statements for the three-month period ended March 31, 2008 for a summary of the Company's commitments and obligations.

Off balance sheet financing arrangements

Other than the vehicle, equipment and facility leases described in the commitments note in the financial statements for the period ended March 31, 2008 there are no material off balance sheet financing arrangements.

Use of estimates and assumptions

The financial statements of the Company have been prepared by management in accordance with Canadian Generally Accepted Accounting Principals ("GAAP"). The timely preparation of these financial statements in conformity with Canadian GAAP requires that management make estimates and assumptions and use judgment regarding the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. The most significant are estimates for depreciation and amortization, stock based compensation and other components of employee compensation and valuation of future income tax assets. The financial statements have, in management's opinion, been prepared within reasonable limits of materiality and within the framework of the Company's accounting policies.

New accounting pronouncements

On January 1, 2008, the Company adopted the following sections of the Canadian Institute of Chartered Accountants ("CICA") Handbook: Section 1535 - "Capital Disclosures" and Section 3862 - "Financial Instruments - Disclosures".

The adoption of these new standards has had no material impact on the Company's current or prior period net earnings or cash flows. However, the Company has expanded its disclosure related to these items in the March 31, 2008 interim financial statements (see notes related to Capital Management and Financial Risk Management).

Risks and Uncertainties

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

Evaluation of Disclosure Controls and Procedures

Management has designed disclosure controls and procedures to provide reasonable assurance that material information relating to the Company is made known to the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") on a timely basis in order for the Company to comply with its disclosure and financial reporting obligations and in order to safeguard assets. The CEO and CFO have concluded that the Company's disclosure controls and procedures, as at March 31, 2008 were designed and operating effectively in providing reasonable assurance that material information is accumulated and made known to them on a timely basis.

Evaluation of Internal Controls over Financial Reporting

The Company's CEO and CFO are responsible for designing internal controls over financial reporting ("ICFR") or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

The Company has assessed the design of its internal controls over financial reporting as at March 31, 2008. Based on this assessment, the Company's CEO and CFO have concluded that the Company's ICFR is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

As required, the Company records complex and non-routine transactions. These are sometimes extremely technical in nature and require an in-depth understanding of GAAP. To address this risk, the Company consults with third party advisors as needed in connection with the recording and reporting of complex and non-routine transactions. Management does not expect that the internal controls over financial reporting would prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

There was no material change to the Company's internal controls over financial reporting that occurred during the most recently completed interim period that has materially affected, or is reasonably likely to materially affect, the Company's ICFR.

Outlook

Strengthening natural gas prices combined with continuing robust oil prices have provided optimism with regards to a recovery in drilling activity in the WCSB. CanSub has positioned itself for a recovery in activity levels by expanding its wireline fleet with the acquisition of 5 wireline units (and associated specialy tools and auxiliary equipment) from an industry peer during early May. In addition, CanSub's geographic diversity has enabled the Company to take advantage of busier areas in the basin such as northeast British Columbia and southeast Saskatchewan.

The Company's cost cutting and optimization measures undertaken during the latter part of 2007 have enabled CanSub to preserve margins and increase cash flow. If a sustained recovery in activity levels is realized in the WCSB, the Company expects a recovery in pricing levels which should improve operating margins and cash flow.

The Company's largest division, wireline and related services, was able to sustain reasonable utilization rates during the industry slow-down as this division is geared to existing, producing wells as well as to activities related to oil and natural gas well completions . The Testing division, which is involved primarily in natural gas well completion work, has felt the greatest impact of the industry slow-down but remained profitable even at reduced utilization and pricing. Both of these divisions will benefit from a recovery in activity levels.

The Company's management continues to closely monitor industry activity, including evaluating growth opportunities that make sense strategically. Given the Company's strong client base, geographical spread across the WCSB and diversification of services, CanSub is positioned to respond to the industry turnaround, expected later in 2008.



RECONCILIATION OF CASH FLOW AND EBITDAS TO NET EARNINGS

----------------------------------------------------------------------------
In $000's Three months ended Three months ended
Mar 31 2008 Mar 31 2007
(unaudited) (unaudited)
----------------------------------------------------------------------------
Net earnings 3,068 1,714
----------------------------------------------------------------------------
Add back (deduct):
----------------------------------------------------------------------------
Depreciation and amortization expense 1,979 2,514
----------------------------------------------------------------------------
Future income tax expense (reduction) (108) 309
----------------------------------------------------------------------------
Stock-based compensation expense 271 330
----------------------------------------------------------------------------
Investment tax credit utilized 97 -
----------------------------------------------------------------------------
Cash Flow (1) 5,307 4,867
----------------------------------------------------------------------------
Long-term and other interest expense 493 365
----------------------------------------------------------------------------
Current tax expense (recovery) 97 (43)
----------------------------------------------------------------------------
Utilization of investment tax credit (97) -
----------------------------------------------------------------------------
EBITDAS (1) 5,800 5,189
----------------------------------------------------------------------------

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


NON-GAAP MEASURES

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



CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Consolidated Balance Sheets
(In thousands of dollars)
(Unaudited)
----------------------------------------------------------------------------
March 31, December 31,
2008 2007
----------------------------------------------------------------------------
Assets
Current assets:
Accounts receivable $ 20,462 $ 13,531
Deposits and other 585 888
Inventory 361 348
---------------------------------------------------------------------------
21,408 14,767
Property and equipment 50,344 50,809
Future income tax asset (note 8) 8,445 9,442
----------------------------------------------------------------------------
$ 80,197 $ 75,018
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 8,662 $ 7,860
Operating loan (note 6) 3,799 --
Current portion of long-term debt (note 7) 3,930 3,862
Current portion of obligations under capital
leases 1,796 2,091
Income taxes payable - 27
---------------------------------------------------------------------------
18,187 13,840
Long-term debt (note 7) 18,070 19,319
Obligations under capital leases 425 675
Deferred credit 5,715 6,723
----------------------------------------------------------------------------
42,397 40,557
Shareholders' equity:
Share capital (note 9) 47,593 47,593
Contributed surplus (note 9) 4,910 4,639
Deficit (14,703) (17,771)
----------------------------------------------------------------------------
37,800 34,461
Commitments (note 10)
----------------------------------------------------------------------------
$ 80,197 $ 75,018
----------------------------------------------------------------------------
----------------------------------------------------------------------------


See accompanying notes to consolidated financial statements.


On behalf of the Board:


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


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

----------------------------------------------------------------------------
Three months ended
March 31,
---------------------------
2008 2007
----------------------------------------------------------------------------

Revenue $ 23,391 $ 25,042

Expenses:
Operating 15,481 17,248
Selling, general and administrative 2,110 2,605
Stock-based compensation 271 330
Depreciation and amortization 1,979 2,514
Interest on long-term debt 493 365
---------------------------------------------------------------------------
20,334 23,062

----------------------------------------------------------------------------
Earnings before income taxes 3,057 1,980

Income taxes (note 8):
Current (recovery) 97 (43)
Future (reduction) (108) 309
---------------------------------------------------------------------------
(11) 266
----------------------------------------------------------------------------
Net earnings 3,068 1,714

Retained earnings (deficit), beginning of period (17,771) 6,966

----------------------------------------------------------------------------
Retained earnings (deficit), end of period $ (14,703) $ 8,680
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Earnings per common share
Basic $ 0.16 $ 0.09
Diluted $ 0.16 $ 0.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Consolidated Statements of Cash Flows
(In thousands of dollars)
(Unaudited)

----------------------------------------------------------------------------
Three months ended
March 31,
--------------------------
2008 2007
----------------------------------------------------------------------------

Cash provided by (used in):

Operations:
Net earnings $ 3,068 $ 1,714
Depreciation and amortization 1,979 2,514
Future income taxes (108) 309
Stock based compensation 271 330
Investment tax credit utilized 97 -
----------------------------------------------------------------------------
5,307 4,867
Change in non-cash working capital related to
operating activities (7,081) (845)
----------------------------------------------------------------------------
(1,774) 4,022
----------------------------------------------------------------------------

Financing:
Operating loan 3,799 -
Increase (decrease) in long-term debt (1,181) 2,191
Repayment of obligations under capital lease (545) (623)
----------------------------------------------------------------------------
2,073 1,568
----------------------------------------------------------------------------
Investing:
Acquisition of property and equipment (1,514) (6,885)
Change in non-cash working capital related to
investing activities 1,215 1,295
----------------------------------------------------------------------------
(299) (5,590)
----------------------------------------------------------------------------

Net change in cash - -

Cash, beginning of period - -

----------------------------------------------------------------------------
Cash, end of period $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.




CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Notes to the Consolidated Financial Statements
(in thousands of dollars)
(Unaudited)

Three months ended March 31, 2008

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


1. Basis of presentation and nature of operations:

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

The interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the annual audited financial statements for the year ended December 31, 2007, except as noted below. The disclosures provided below are incremental to those included with the annual audited consolidated financial statements. The interim consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and the notes thereto for the year ended December 31, 2007.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end and the results of operations for the interim periods shown in these statements are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the accompanying unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary to present fairly the consolidated results of the Company's operations and cash flows for the three month periods ended March 31, 2008 and 2007.

The Company provides the following oilfield services in Western Canada through its operating divisions: wireline services (including cased-hole electric line and slickline), swabbing, well optimization and production testing.

2. Changes in accounting policies and practices:

Effective January 1, 2008, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1535 "Capital Disclosures", CICA Handbook Section 3862 "Financial Instruments - Disclosures" and CICA Handbook Section 3863 "Financial Instruments - Presentation".

The adoption of these standards has had no material impact on the Company's current or prior period net earnings or cash flows. The disclosure effects of the implementation of the new standards are described in (a) and (b) below.

(a) Capital Disclosures:

Section 1535 requires disclosure of the Company's objectives, policies and processes for managing capital. The disclosure includes a description of what the Company manages as capital, the nature of externally imposed capital requirements and how these requirements are met. The disclosure also includes summary quantitative data regarding the capital, changes from the previous period, and whether the Company has met the externally proposed capital requirements. Refer to note 12, "Capital management."

(b) Financial instruments - Disclosures and Presentation:

Section 3862 requires disclosure of the significance of financial instruments on the Company's financial position, the nature and extent of the related risks arising from financial instruments and how the Company manages those risks. Section 3863 sets the standards for presentation of financial instruments and non-financial derivatives. Refer to note 11, "Financial risk management."

3. Use of estimates:

The financial statements of the Company have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The timely preparation of these financial statements in conformity with Canadian GAAP requires that management make estimates and assumptions and use judgment regarding the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. The most significant are the estimates for depreciation and amortization, stock based compensation and valuation of income tax assets. Accordingly, actual results could differ from those estimates. The financial statements have, in management's opinion, been prepared within reasonable limits of materiality and within the framework of the Company's accounting policies.

4. Change in accounting estimate:

Prior to January 1, 2008, the Company used a declining balance depreciation rate of 15% to depreciate property and equipment categorized as "field equipment". Management has determined that a 12% declining balance rate provides a more representative estimate of the useful lives of these assets. Accordingly, effective January 1, 2008, the rate at which these assets are amortized was changed from 15% to 12%. The effect on depreciation expense for the current period has been to reduce the amount by approximately $180.

5. Business acquisitions:

Acquisition of the assets of Sky-Hook Picker Services Inc.

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



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

Property and equipment $ 316
Intangible asset:
Customer relationships 59

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


6. Operating loan:

On March 31, 2008, the Company established a demand revolving credit facility in the amount of $15,000 with a major Canadian chartered bank. The amount available at any one time is equal to 75% of marginable accounts receivable less priority claims. The facility is secured by:

(a) a general security agreement covering all present and future property of the Company; and

(b) assignment of all risk insurance proceeds

The interest rate on the loan is at the bank's prime rate plus 0.75%.

7. Long-term debt:

On March 31, 2008, the Company established a committed, term credit facility in the amount of $30,000 with a major Canadian chartered bank, for capital asset acquisitions. The amount available at any one time is equal to 50% of the net book value of property and equipment on the Company's balance sheet, less property and equipment pledged as security to capital lease obligations. Advances under this facility have a five year repayment term which includes blended monthly payments of principal and interest. Monthly blended payments for this advance are $422. The facility is secured by:

(a) a general security agreement covering all present and future property of the Company; and

(b) assignment of all risk insurance proceeds.

The interest rate on the committed, term facility is at the bank's prime rate plus 0.75%.



----------------------------------------------------------------------------
----------------------------------------------------------------------------
March 31, December 31,
2008 2007
----------------------------------------------------------------------------

Total $ 22,000 $ 23,181
Less: Current portion (3,930) (3,862)
----------------------------------------------------------------------------
Total $ 18,070 $ 19,319
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Estimated principal repayments for the long-term debt are as follows:

Twelve month period ended March 31,
2009 $ 3,930
2010 4,120
2011 4,390
2012 4,640
2013 4,920
----------------------------------------------------------------------------
Total $22,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------


8. Income taxes:

Income tax expense is calculated using the combined federal and provincial statutory income tax rate. The reconciliation of income tax expense calculations and the provision reported in the financial statements is as follows:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended March 31,
2008 2007
----------------------------------------------------------------------------

Earnings before income taxes $ 3,057 $ 1,980
----------------------------------------------------------------------------

Combined federal and provincial income tax rate 29.70% 32.42%

Expected income tax provision 908 642

Change in deferred credit (1,008) (534)
Non-deductible stock based compensation expense 80 106
Other non-deductible expenses 10 73
Impact of tax rate changes on future tax expense (1) (31)
Reassessments of prior years - (43)
Other - 53

----------------------------------------------------------------------------
Income tax expense $ (11) $ 266
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

----------------------------------------------------------------------------
----------------------------------------------------------------------------
March 31, March 31,
2008 2007
----------------------------------------------------------------------------

Non capital losses and unclaimed scientific
research and development expenses $ 5,783 $ 6,062
Intangible assets 1,619 -
Investment tax credits 1,360 1,945
Capital lease obligations 657 1,346
Transaction costs 720 1,025
----------------------------------------------------------------------------
Total assets $ 10,139 $ 10,378
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Property and equipment $ 1,000 $ 2,828
Intangible assets - 2,299
Partnership income 301 -
Investment tax credits (inclusion in income) 393 618
----------------------------------------------------------------------------
Total liabilities $ 1,694 $ 5,745
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net future income tax asset $ 8,445 $ 4,633
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The Company has non-capital losses of $12,004 available to reduce future
taxable income. These losses expire as follows:

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

2008 $ 1,013
2009 3,220
2010 7,159
2014 272
2015 340
----------------------------------------------------------------------------
$ 12,004
----------------------------------------------------------------------------
----------------------------------------------------------------------------


In addition, the Company has the following: research and development costs of $9,385 which are available to reduce future taxable income and do not expire; capital losses of $3,500 which are available to reduce future capital gains and do not expire and investment tax credits of $1,360 which can be claimed against federal income taxes payable and expire between 2008 and 2014.The above amounts are subject to review and assessment by taxation authorities.

9. Share capital:

Authorized and issued capital stock consists of the following:

(a) Common shares:

(i) Authorized:

Unlimited number of Class A voting common shares

(ii) Issued and outstanding:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number of
Class A voting common shares Amount
----------------------------------------------------------------------------
Balance at December 31, 2007 and March 31,
2008 (1) 19,323,742 $ 47,593
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) See also Note 16 - Subsequent events.


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



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended March 31,
2008 2007
----------------------------------------------------------------------------

Weighted average shares outstanding -
basic and diluted 19,323,742 19,323,742

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


There were no changes to share capital during the three month period ended March 31, 2008. In the calculation of earnings per share for the three months ended March 31, 2008, 1,584,750 options were excluded as the impact would be anti-dilutive.

(b) Stock options:

Options to purchase common shares may be granted by the Board of Directors to directors, officers, employees, and consultants of the Company. Options vest one third on each of the first, second and third anniversary dates of the grant date on a cumulative basis and have a maximum term of 5 years. When stock options are exercised, the proceeds, together with the amount of compensation expense previously recorded in the contributed surplus is added to capital stock.

The maximum number of shares reserved for issuance under the stock option plan or any other stock option or share purchase plan will not exceed 10% of the total number of the Company's outstanding common shares.

The following is a summary of the stock option transactions during the respective three month periods ended March 31:




2008 2007
--------------------------- --------------------------
Weighted Weighted
Number of average Number of average
Options exercise price Options exercise price
----------------------------------------------------------------------------

Class A common
shares:

Outstanding at the
beginning of the
period 1,641,750 $ 4.21 1,548,750 $ 5.05

Granted 30,000 4.20 82,500 4.28
Exercised - - - -
Forfeited (87,000) 4.20 (60,250) 5.65
Reduction in
average exercise
price as a result
of February 20,
2007 re-pricing - (0.77)
----------------------------------------------------------------------------
Outstanding at the
end of the period 1,584,750 4.21 1,571,000 4.22
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Exercisable at the
end of the period 750,889 4.21 354,833 4.20
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(c) Contributed surplus:

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

Contributed surplus at December 31, 2007 $ 4,639

Stock based compensation expense for the three-month
period ended March 31, 2008 271

----------------------------------------------------------------------------
Contributed surplus at March 31, 2008 $ 4,910
----------------------------------------------------------------------------
----------------------------------------------------------------------------


10. Commitments:

(a) At March 31, 2008, the Company had the following annual commitments under equipment operating lease agreements:



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

April 1 - March 31:

2009 $ 1,229
2010 236
2011 23
2012 11
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(b) At March 31, 2008, the Company had the following annual commitments under office and warehouse lease agreements:



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

April 1 - March 31:

2009 $ 2,714
2010 2,390
2011 2,279
2012 2,262
2013 2,345
Thereafter 9,085
----------------------------------------------------------------------------
----------------------------------------------------------------------------


11. Financial risk management:

Overview

The Company is exposed to the following risks from the use of financial instruments:

- Credit risk

- Liquidity risk

- Market risk

The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management policies. The Company's risk management policies are established to identify and analyze risks faced by the Company, to set risk limits and controls and to monitor compliance with these policies. The Company's Audit Committee oversees management's compliance with risk management policies.

Credit risk

Credit risk is the risk of financial loss to the Company as a result of granting credit to a customer and arises principally from the Company's trade receivables from customers.

The Company's exposure to credit risk is influenced primarily by the individual characteristics of each customer. A substantial portion of the accounts receivable are with customers who are dependent upon the oil and gas industry, and are subject to normal industry credit risks. The Company has established a credit policy under which each new customer must be approved for credit worthiness before standard service delivery terms are offered. The Company's review includes information provided by external rating agencies when available, bank and trade references, and customer financial information. Credit limits are established for each customer based on the assessment. Customers that fail to meet the Company's required benchmark for creditworthiness are required to pre-pay for services. The Company reviews customer accounts monthly and circulates a list of those customers that are to be transacted with on pre-payment terms.

The Company has established an allowance for doubtful accounts that represents management's best estimate of the losses expected to be incurred in the collection of its trade receivables. The provision is based on both specifically identified accounts at risk, as well as a general provision for accounts based on a combination of aging and amount for losses that may have occurred but have not yet been identified. The carrying amount of accounts receivable represents the Company's maximum exposure to credit risk at the reporting date.

Revenues from one customer accounted for approximately 18% of total revenues for the three month period ended March 31, 2008. The related credit risk is mitigated as the revenues from this customer are generated from multiple business units, each of which operates as an autonomous entity.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company's approach to managing liquidity is to monitor financial performance, forecasting required working capital needs and ensuring that obligations will be met as they become due. The Company maintains a $15,000 line of credit to finance working capital as required. At March 31, 2008, the Company had drawn $3,799 on this line of credit. The following are the contractual maturities of financial liabilities, including interest payments at the reporting date:



Carrying Contractual 6mths 6 - 12 1 - 2 2 - 5
Amount Cash Flows or less months years years

Non-derivative
financial
Liabilities

Accounts
payable and
accrued
Liabilities 8,662 (8,662) (8,662)
Operating loan 3,799 (3,799) (3,799) - - -
Long term debt(1) 22,000 (25,366) (2,537) (2,537) (5,073) (15,219)
Capital lease
obligations(1) 2,221 (2,304) (1,157) (713) (434) -

----------------------------------------------------------------------------
Total $ 36,682 (40,131) (16,155) (3,250) (5,507) (15,219)
----------------------------------------------------------------------------
(1) Contractual cash flows include principal plus interest.


Market risk

Market risk is the risk that changes in market prices, such as interest rates, will affect the income of the Company. The Company is exposed to interest rate risk to the extent that most of its debt is at variable interest rates based on the prime rate. The Company has not entered into any interest rate swaps to fix the rate of its borrowing costs. At the reporting date, the interest rate profile of the Company's interest-bearing financial liabilities was:



Carrying Amount
Mar 31, Dec 31,
2008 2007

Fixed rate instruments $ 2,221 $ 2,766

Variable rate instruments $ 25,799 $ 23,181


The Company does not account for any financial liabilities as held for trading. A change in interest rates would affect net income with respect to variable rate instruments; a change of 100 basis points in interest rates would have had approximately a $60 affect on interest expense and net income before tax for the reporting period.

Fair values

The fair values of accounts receivable, deposits and other, accounts payable and accrued liabilities, and obligations under capital lease approximate their carrying value due to the relatively short-term period to maturity of the instruments. The fair value of the Company's operating loan and long term debt is assumed to be approximately equal to the carrying value since the interest rate on the debt obligation is based on the prime rate.

12. Capital management

The Company's objectives when managing capital are to provide an adequate return to shareholders, minimize the cost of capital to the company, and maintain stakeholder confidence in the Company. Adjustments to the capital structure are made in light of economic conditions and the risk characteristics of the underlying assets. The Company may issue shares or increase debt to take advantage of opportunities as they arise and will adjust capital spending as required to manage its current and projected debt levels.

The Company prepares an annual budget for both operations and capital expenditures which are approved by the Board of Directors. The budgets are reviewed and compared to actual results monthly and expenditures adjusted as necessary.

The Company's credit facilities are subject to externally imposed restrictions regarding the amount available to be borrowed based on the underlying value of the assets being margined and covenants regarding minimum working capital, debt to tangible net worth and debt service ratios. At March 31, 2008, the Company was in compliance with these restrictions.

There were no changes to the Company's approach to capital management from the prior year.

13. Seasonality

The operations of the Company are seasonal. The oil and gas industry is generally more active during the winter months as the movement of heavy equipment is easier over frozen ground. In the spring months, road bans and bad weather can hamper the ability to move equipment and adversely impacts the Company's revenue generating capability. Rain in the summer and fall months can also have a significant impact on the Company's revenue. When equipment is not in use, crews are not required and therefore operating costs normally decrease in slow operating periods.

14. Comparative information:

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

15. Segmented information:

The Company's reportable operating segments, as determined by management, are strategic operating units that offer different products and services, and do not transact with one another. The Company has two reportable operating segments: Wireline and Gas Testing. These two segments operate in one geographic area, the Western Canadian Sedimentary Basin.

The Wireline segment provides primarily cased hole electric line and slick line services as well as swabbing and well optimization services to the oil gas industry.

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

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



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended
March 31, 2008
---------------------------------------------
Wireline Gas Testing Corporate Total
----------------------------------------------------------------------------

Revenue $ 15,053 $ 8,338 $ - $ 23,391
Operating expenses 9,851 5,630 - 15,481
----------------------------------------------------------------------------
5,202 2,708 - 7,910

Selling, general and
administrative - - 2,110 2,110
Stock-based compensation - - 271 271
Depreciation and
amortization 1,526 453 - 1,979
----------------------------------------------------------------------------
3,550

Property and equipment 35,753 14,591 - 50,344
Goodwill - - - -
Intangible assets - - - -
Capital expenditures -
property and equipment 1,406 108 - 1,514

Total assets 49,719 22,033 8,445 80,197
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended
March 31, 2007
---------------------------------------------
Wireline Gas Testing Corporate Total
----------------------------------------------------------------------------

Revenue $ 13,935 $ 11,107 $ - $ 25,042
Operating expenses 9,613 7,635 - 17,248
----------------------------------------------------------------------------
4,322 3,472 - 7,794

Selling, general and
administrative - - 2,605 2,605
Stock-based compensation - - 330 330
Depreciation and
amortization 1,330 553 628 2,514
----------------------------------------------------------------------------
2,345

Property and equipment 32,826 15,511 - 48,337
Goodwill 8,067 6,110 - 14,177
Intangible assets 5,201 4,244 - 9,445
Capital expenditures -
property and equipment 5,426 1,459 - 6,885

Total assets 60,507 36,002 4,753 101,262
----------------------------------------------------------------------------
----------------------------------------------------------------------------


16. Subsequent events:

(a) Private placement financing:

On May 1, 2008, the Company closed a non-brokered private placement share offering to employees of the Company. The offering involved the issuance of 2.2 million Class A common shares at a price of $1.75 per share resulting in gross proceeds of $3,850.

(b) Acquisition of wireline assets:

On May 2, 2008, the Company closed the acquisition of a package of assets from an industry peer for $6,500. The assets consisted of five electric line wireline units (valued at approximately $4,000), specialty tools and various auxiliary equipment.

Contact Information

  • Canadian Sub-Surface Energy Services Corp.
    Brad Gabel
    President & CEO
    (403) 262-3247
    Email: bgabel@cansub.com
    or
    Canadian Sub-Surface Energy Services Corp.
    Chris Martin
    Vice President, Finance & CFO
    (403) 262-3247
    Email: cmartin@cansub.com