Canadian Sub-Surface Energy Services Corp.
TSX : CSE

Canadian Sub-Surface Energy Services Corp.

May 13, 2009 08:30 ET

Canadian Sub-Surface Energy Services Announces Q1 2009 Financial Results

CALGARY, ALBERTA--(Marketwire - May 13, 2009) - 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, 2009. The following should be read in conjunction with the Company's Management's Discussion and Analysis and the consolidated financial statements and notes which are available on SEDAR at www.SEDAR.com.



Financial Highlights

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

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

(Unaudited) Three-month Three-month
period ended period ended
Mar 31, 2009 Mar 31, 2008 % Change
----------------------------------------------------------------------------

Revenue 19,860 22,896 -13.3%
----------------------------------------------------------------------------
Gross Margin 3,446 7,910 -56.4%
----------------------------------------------------------------------------
Gross Margin % 17.4% 34.5% -49.6%
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Cash Flow (1) 1,038 5,307 -80.4%
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EBITDAS (1) (2) 1,253 5,800 -78.4%
----------------------------------------------------------------------------
EBITDAS as a % of revenue 6.3% 25.3% -75.2%
----------------------------------------------------------------------------
Net Earnings (loss) (1,300) 3,068 -142.4%
----------------------------------------------------------------------------
Net Earnings (loss) per share
- basic and diluted ($0.05) $0.16 -131.3%
----------------------------------------------------------------------------
Average number of Class A
common shares outstanding
(in thousands) 25,968 19,324 +34.4%
----------------------------------------------------------------------------

(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
(Loss)".


Operational Highlights

Revenue during Q1 2009 of $19.9 million was 13% lower than the $22.9 million of revenue recognized during Q1 2008 reflecting lower equipment utilization rates and reduced pricing for the Company's services. The significant revenue reduction and resulting margin erosion lead to an EBITDAS amount of $1.3 million which was considerably lower than the $5.8 million in EBITDAS recorded in Q1 2008. CanSub recorded a net loss of $1.3 million in Q1 2009 compared to net earnings of $3.1 million in the comparable quarter of last year.

The decreased equipment utilization reflects a significant slow-down in drilling and completion activity as oil and natural gas producers drilled only 2,976 wells (rig released) in the Western Canadian Sedimentary Basin ("WCSB") in Q1 2009 as compared to 5,138 wells drilled in Q1 2008 (figures reported by Nickles Group). This 42% drop reflects a combination of factors, including lower oil and natural gas prices, reduced access to capital for many of the producers (due to the recent global credit crisis) and increased royalty rates in the province of Alberta.

In response to the current environment, CanSub implemented significant cost cutting measures during Q1 2009, lead by CanSub's officers and senior management taking salary roll backs from 20 to 26%. In addition, all other employees of the Company have taken base salary reductions from 5 to 15%. The combination of wage roll backs and staff reductions, combined with other cost cutting measures, have significantly reduced the Company's fixed and variable cost components and will serve to right size the Company for the decreased activity levels.

At March 31, 2009 the Company had net debt of $14.2 million, calculated as long-term portion of debt less working capital. The available borrowing capacity of the Company's operating loan and committed, term loan facility are outlined in the section below titled "Liquidity and Capital Resources."

Business Combination with Pure Energy Services Ltd.

On May 6, 2009, the Company entered into a definitive agreement to combine its business, through a share exchange transaction, with Pure Energy Services Ltd. ("Pure") under which CanSub will exchange all of its outstanding Class A common shares for common shares of Pure (the "Combination").

The Combination will be effected by way of a plan of arrangement ("Arrangement") under the Business Corporations Act (Alberta) whereby CanSub shareholders will receive 0.3017 of a Pure Energy common share for each CanSub Class A common share. On completion of the Combination, the current shareholders of Pure will own approximately 67% of Pure's outstanding common shares, and the shareholders of CanSub will own approximately 33% of Pure's outstanding common shares.

The proposed Arrangement is subject to customary stock exchange, court and regulatory approvals as well as approval by 66 2/3% of the shareholders of CanSub voting in person or by proxy at a meeting of CanSub shareholders to be scheduled for late June, 2009. The Combination is expected to close shortly thereafter.

Following the transaction, the combined entity, "Pure", will have a total fleet of 94 wireline units, 123 production testing units, 10 swabbing units, 10 drilling rigs and three well fracturing spreads operating in the WCSB and US Rocky Mountain region.

In Canada, the combined entity will be one of the largest wireline and production testing companies, with a combined fleet of 87 wireline units and 87 production testing units, further supported with 10 swab rigs. The combined US completions equipment fleet, consisting of 7 wireline units, 36 production testing units and 3 fracturing spreads will offer further expansion opportunities which the combined entity will be able to support with its increased size. The combined entity's Drilling Services segment will serve to further diversify the revenue stream.

Combined, CanSub and Pure are a stronger company which will provide a number of benefits including:

- An increased customer base;

- Increased exposure to unconventional oil and gas plays such as the Horn River and Montney gas plays in north eastern British Columbia, and the Bakken oil play in Saskatchewan and North Dakota;

- An increased fleet size and diversity of equipment which will allow the combined entity to reallocate equipment to support the growth of new markets in the US, such as the Marcellus shale gas play, as well as to better support the existing operations of the two companies;

- Improved cost efficiencies through consolidation of the existing operating and support infrastructures as well as cost benefits resulting from economies of scale; and

- Further diversification of customers, geographic coverage and services.

In conjunction with the proposed Combination, Pure Energy has obtained a commitment letter from its existing lender 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 is subject to renewal on March 31, 2010, and if not extended would term 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 will 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 will 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 the new facilities, including financial covenants and borrowing limits, are similar to those contained in Pure's current credit facilities. The commitment from the lender expires June 30, 2009.

Forward-looking statements

Certain statements in this press release including (i) statements that may contain words such as "anticipate", "could", "expect", "seek", "may" "intend", "will", "believe", "should", "project", "predict", "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 press release specifically 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 Company's business and operations including the Company's market share and position in the oilfield service market, use of proceeds of equity offerings and other such matters.

The forward-looking statements contained in this press release reflect several material factors, expectations and assumptions including, without limitation: (i) oil and natural gas production levels; (ii) commodity prices and interest rates; (iii) capital expenditure programs and other expenditures; (iv) supply and demand for oil and natural gas; (v) expectations regarding the Company's ability to raise capital and to increase its equipment fleets through acquisitions and manufacture; (vi) schedules and timing of certain projects and the Company's strategy for growth; (vii) the Company's future operating and financial results, including pricing of services and activity levels in the Company's operating regions; (viii) the Company's ability to retain and hire qualified personnel; and (ix) treatment under governmental regulatory regimes and tax, environmental and other laws.

Financial outlook information contained in this press release about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this press release should not be used for purposes other than for which it is disclosed herein.

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; 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 there from. The Company's actual results could differ materially from those anticipated in these forward-looking statements and information as a result of both known and unknown risks. Many of these risk factors and other specific risks and uncertainties are discussed in further detail throughout the Company's Annual Information Form ("AIF") and the Company's Annual MD&A. Readers are specifically referred to the risk factors described in the AIF under "Risk Factors" and in other documents the Company files from time to time with securities regulatory authorities. Copies of these documents are available without charge from the Company or electronically on the internet on the Company's SEDAR profile at www.sedar.com. Accordingly, readers should not place undue reliance upon any of the forward-looking information set out in this press release. All of the forward-looking statements in this press release are expressly qualified in their entirety by this cautionary statement.

Business Units and Segmentation

The Company's operations are primarily 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 services. The Testing division includes primarily natural gas production testing and production evaluation services. A portion of the Testing division operations are conducted in the U.S. through CanSub's wholly-owned U.S. subsidiary, United Sub-Surface Energy Services Corp.

Results of Operations

Revenues



The break-down of consolidated revenue between the Wireline and Testing
divisions for the three-month periods ended March 31, 2009
and 2008 are as follows:


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

$000s Three-month Three-month
(Unaudited) period ended period ended
Mar 31, 2009 Mar 31, 2008 % Change
----------------------------------------------------------------------------
Wireline 12,702 15,053 -15.6%
----------------------------------------------------------------------------
Testing 7,158 7,843 -8.7%
----------------------------------------------------------------------------
Consolidated 19,860 22,896 -13.3%
----------------------------------------------------------------------------


The lower revenue for Q1 2009, for both the Wireline and Testing divisions, reflected lower equipment utilization rates and lower pricing levels. Oil and natural gas producers drilled 42% less wells in the WCSB in Q1 2009 compared to Q1 2008 as a result of: lower commodity prices, reduced access to capital for many producers and the increased production royalty rates in the province of Alberta which came into effect on January 1, 2009.

Wireline divisional revenue in Q1 2009 amounted to $12.7 million. Of that amount, $10.8 million was related solely to the wireline fleet (electric line and slickline units) which averaged 53 units in operation during the period. The remaining $1.9 million of revenue was attributed to swabbing and well optimization services. The wireline units completed 1,855 jobs during the current quarter at an average per job revenue of $5,804.

In the comparable Q1 2008 period, Wireline divisional revenue amounted to $15.1 million. Of that amount, $13.5 million was attributed solely to the wireline fleet which averaged 45 units in operation. Swabbing and well optimization services comprised the remaining $1.6 million in revenue. The wireline units completed 2,114 jobs during Q1 2008 at an average per job revenue of $6,395.

Testing division revenue amounted to $7.2 million in Q1 2009 as compared to $7.8 million in Q1 2008. CanSub had a slightly higher in-service fleet of testing packages in Q1 2009 of 55 compared to 52 packages in the prior year first quarter. Although it was a challenging quarter for testing equipment utilization on an overall basis, CanSub did see good utilization rates for some of its high pressure testing packages in the northern Alberta and northeastern British Columbia areas. The Company has 15 testing packages to handle this niche market which is expected to continue to be active for the remainder of 2009 despite the recent drop in natural gas prices.

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 period is as follows:



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

$000s Three-month Three-month
(Unaudited) period ended period ended
Mar 31, 2009 Mar 31, 2008 % Change
----------------------------------------------------------------------------
Gross Margins:
----------------------------------------------------------------------------
Wireline 1,865 5,202 -64.1%
----------------------------------------------------------------------------
Testing 1,581 2,708 -41.6%
----------------------------------------------------------------------------
Consolidated 3,446 7,910 -56.4%
----------------------------------------------------------------------------
Gross Margin %
----------------------------------------------------------------------------
Wireline 14.7% 34.6% -57.5%
----------------------------------------------------------------------------
Testing 22.1% 34.5% -35.9%
----------------------------------------------------------------------------
Consolidated 17.4% 34.5% -49.8%
----------------------------------------------------------------------------


Consolidated gross margins were $3.4 million (or 17.4% of revenue) for Q1 2009 compared to $7.9 million (or 34.5% of revenue) for Q1 2008. The significant erosion in margin is primarily attributed to lower equipment utilization rates and reduced pricing in both the Wireline and Testing divisions.

Margins were more severely impacted in the Wireline division due to the high portion of fixed costs in this business. The Wireline operating infrastructure (ie equipment, facilities, operating crews and support staff) had been sized to handle a much larger revenue stream than was recognized in Q1 2009. To reduce the fixed and variable cost components in this division and strengthen margins for the remainder of the year, CanSub implemented the following cost cutting measures at the end of Q1 2009:

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

- Parked units and reduced related crews in areas of lower equipment utilization.

- Reduced the number of leased vehicles.

- Reduced fixed wage levels for all operating personnel and eliminated retention bonuses and certain incentive components of compensation.

- Negotiated discounts on supplies and services from suppliers.

Margins in the Testing Division were not as severely impacted due to the high variable cost component in this business. The crews are paid on a day rate basis and paid only when the related equipment is working. To match this division's cost structure with the competitive pricing expected for the remainder of 2009, the Testing Division has reduced crew day rates, as well as reduced vehicle and subsistence costs and other operating costs.

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 operating 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, 2009 Mar 31, 2008 % Change
----------------------------------------------------------------------------
Selling, general and admin
expenses 2,201 2,110 +4.3%
----------------------------------------------------------------------------


SG&A expenses increased as a percentage of sales from 9.2% in Q1 2008 to 11.1% in Q1 2009. However, the $2.2 million in SG&A expenses recognized in Q1 2009 were approximately $0.4 million lower than the $2.6 million in SG&A recognized in Q4 2008, partially reflecting the implementation of various cost cutting measures during Q1 2009.



Stock-based compensation expense

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

$000s Three-month Three-month
(Unaudited) period ended period ended
Mar 31, 2009 Mar 31, 2008 % Change
----------------------------------------------------------------------------
Stock-based compensation expense 225 271 -17.0%
----------------------------------------------------------------------------


Stock-based compensation expense in Q1 2009 was 17% lower than the expense recognized in the prior period. This reduction partially reflected full vesting of the first tranche of options granted by CanSub as part of its go public transaction on February 14, 2006. That tranche of options, which was the largest tranche granted by the Company since being public, became fully vested on February 14, 2009 and no further stock-based compensation expense was incurred on this group of options subsequent to that date.

See "Stock Options" section below for further discussion of options.



Depreciation and amortization expense

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

$000s Three-month Three-month
(Unaudited) period ended period ended
Mar 31, 2009 Mar 31, 2008 % Change
----------------------------------------------------------------------------
Depreciation 2,430 1,979 +22.8%
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Depreciation expense (which relates to depreciation of the Company's property and equipment) amounted to $2.4 million during Q1 2009. The increase from the prior period reflects a larger property and equipment base during Q1 2009 resulting from the significant equipment additions during calendar 2008 of $22.3 million.



Interest expense

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$000s Three-month Three-month
(Unaudited) period ended period ended
Mar 31, 2009 Mar 31, 2008 % Change
----------------------------------------------------------------------------
Interest on long-term debt 191 493 -61.3%
----------------------------------------------------------------------------
Other interest 24 - n/a%
----------------------------------------------------------------------------
Total interest 215 493 -56.4%
----------------------------------------------------------------------------


Total interest expense for Q1 2009 of $215,000 was significantly lower than the $493,000 of interest expense recognized for Q1 2008. This reflected a reduction in average total debt balances (such debt comprised of operating loan, long-term debt and capital lease obligations) combined with reduced interest rates. The interest on most of CanSub's debt is based on the Canadian prime rate of interest which averaged 3.0% in Q1 2009 compared to 5.7% in Q1 2008.

Future income tax expense (reduction)

The Company recognized a future income tax reduction of $0.3 million during Q1 2009. The future income tax expense is typically impacted by net timing differences between amounts for tax and accounting.

Net Earnings (loss)

The Company recorded a net loss of $1.3 million for Q1 2009 (negative $0.05 per share - basic and diluted) compared to net earnings of $3.1 million for Q1 2009 ($0.16 per share - basic and diluted).

Income tax amounts

The Company had the following estimated income tax amounts available at March 31, 2009 to apply against future taxable income: non-capital losses of $11.8 million and unclaimed scientific research and development expenditures ("SRED") of $8.8 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 2019 and 2026. These tax amounts are subject to review and assessment by the taxation authorities.

Share Capital and Normal Course Issuer Bid

There were no changes to share capital during the three-month period ended March 31, 2009 and through to May 6, 2009. The Company had 26.0 million shares outstanding at May 6, 2009.

During September 2008, CanSub announced a normal course issuer bid wherein the Company was able to purchase up to 500,000 of its shares in the open market for a one-year period. There were no shares acquired under the issuer bid from January 1, 2009 through May 6, 2009.

Stock Options

During Q1 2009, the Company granted 26,500 options and 95,499 options were forfeited resulting in a net decrease of 68,999 in options outstanding for the period ended March 31, 2009. As at March 31, 2009, the Company had approximately 2.2 million options outstanding with a weighted average exercise price of $3.35.

Subsequent to March 31, 2009 and effective April 30, 2009 certain employees and consultants of CanSub (excluding directors and officers) agreed to cancel an aggregate of approximately 1.4 million stock options. No stock-based compensation expense has been recognized for this cancellation in Q1 2009.

Liquidity and Capital Resources

The Company recorded positive cash flow from operations (before changes in non-cash working capital) of $1.0 million for Q1 2009 as compared to positive cash flow from operations of $5.3 million for Q1 2008. The decrease in cash flow primarily reflects the decreased revenues and gross margins in 2009 (see Revenue and Gross Margin Analysis above).

As at March 31, 2009, the Company had working capital of $3.0 million and long-term debt (i.e. long-term portion of long-term debt) of $17.2 million for a net debt position of $14.2 million. The Company has the following two credit facilities:

a) An operating loan facility with a maximum amount of $15 million to finance the Company's working capital requirements; and

b) A committed, term facility with a maximum amount of $30 million 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.

At March 31, 2009, the Company had an outstanding balance of $0.6 million on the operating loan facility. Amounts available to be drawn under this loan facility at each month-end are limited to 75% of marginable accounts receivable less certain priority accounts payable amounts. Based on the margin requirements, an additional $8.7 million of operating loan was available to be drawn at March 31, 2009.

At March 31, 2009, the Company had 21.7 million outstanding on its committed term facility. Amounts available to be drawn at each month-end under the committed, term facility are limited to approximately 50% of the net book value of property and equipment on the Company's balance sheet. Based on the marginable fixed assets at March 31, 2009, an additional $8.3 million was available to be drawn on this facility. During April 2009, in accordance with the terms of this credit facility, the Company requested a renewal of this facility for a one year term from the Term Date of June 30, 2009. If the facility is not renewed for an additional term, the outstanding balance will be capped and repaid over the remaining amortization schedule in effect.

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, 2009, CanSub was in compliance with these terms.

As disclosed in the subsequent events note in the Company's March 31, 2009 interim financial statements, on May 6, 2009 CanSub entered into a definitive agreement to combine its business with Pure Energy Services Ltd. Closing of this business combination is expected to occur in late June 2009. As part of this transaction, a commitment letter has been obtained from the lender of Pure Energy to provide new credit facilities to the combined entity.

If this business combination does not occur, and the industry slow-down continues, then CanSub could potentially breach one of its bank covenants which is tested on an annual basis at December 31, 2009. The Company and its bankers have postponed discussions about this potential breach and discussions about the renewal of the Company's committed, term facility until the outcome of this business combination is known.

Investing Activities

During Q1 2009, the Company's capital expenditures amounted to $2.2 million. Of this amount, approximately $1.8 million related to delivery of equipment that had commenced construction in the fall of 2008. The last significant equipment item from the 2008 build program (ie one slickline unit) was received early in Q2 2009. Other than this slickline unit, there are only minimal capital expenditures planned for the remainder of 2009.

Below is a summary of the changes to CanSub's equipment fleet during Q1
2009.



# of Wireline # of Swabbing # of major
units units Testing packages
----------------------------------------------------------------------------

Operating fleet at
December 31, 2008 53 10 55
----------------------------------------------------------------------------
Additions
During Q1 2009 1 0 0
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Operating fleet at
March 31, 2009 (i) 54 10 (ii) 55
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(i) Included in the wireline fleet at March 31, 2009 were 33 electric
line and 21 slickline units. One slickline unit was added to the
fleet in April 2009.

(ii) In addition to the 55 major testing packages, the Company has other
various testing related equipment (ie flow-back tanks, high
pressure storage tanks and cold separators) which also generate
revenue. Two of the major testing packages are currently operating
out of Williston, North Dakota.



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
March 31, 2009 Dec 31, 2008 Sept 30, 2008 June 30, 2008
----------------------------------------------------------------------------
Revenue 19,860 24,566 23,538 12,543
----------------------------------------------------------------------------
Cash Flow (1) 1,038 3,356 3,984 (1,940)
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Cash Flow from
Operations (463) 7,008 (2,824) 2,977
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EBITDAS (1) (2) 1,253 3,633 4,244 (1,542)
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EBITDAS as a % of
revenue 6.3% 14.8% 18.0% (12.3%)
----------------------------------------------------------------------------
Net Earnings (loss) (1,300) (273) 1,153 (2,933)
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Net Earnings (loss)
per share - basic ($0.05) ($0.01) $0.04 ($0.14)
----------------------------------------------------------------------------

----------------------------------------------------------------------------
(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 22,896 16,312 17,533 7,282
----------------------------------------------------------------------------
Cash Flow (1) 5,307 1,465 2,170 (3,370)
----------------------------------------------------------------------------
Cash Flow from
Operations (1,774) 2,426 (896) 4,918
----------------------------------------------------------------------------
EBITDAS (1) (2) 5,800 1,968 2,690 (3,010)
----------------------------------------------------------------------------
EBITDAS as a %
of revenue 25.3% 12.1% 15.3% (41.3%)
----------------------------------------------------------------------------
Net Earnings (loss) 3,068 (21,024) (830) (4,597)
----------------------------------------------------------------------------
Net Earnings (loss)
per share - basic $0.16 ($1.09) ($0.04) ($0.24)
----------------------------------------------------------------------------


Trends in quarterly results

In a typical calendar period, the first and fourth quarters (during winter season) are the busiest for the oilfield service industry as the movement of heavy equipment is easier over frozen ground. The second quarter (during spring) is typically the slowest quarter as road bans and wet weather can limit the ability to move equipment and adversely impacts the Company's revenue producing capability. The third quarter (summer / early fall) can be negatively impacted by wet weather and availability of personnel and is usually less active than the winter quarters but more active than the second quarter.

The Company's results for each of the quarters during 2007 were negatively impacted by the slow-down in drilling activity caused primarily by the continued weakness in natural gas prices from the fall of 2006. Activity levels at the end of 2007 were also negatively impacted by the announcement by the Alberta government in October 2007 that royalties would be increased for oil and natural gas production commencing in 2009. Many producers slowed down drilling activity in Alberta during that period while they assessed the financial impact of the new royalty regime on their operations.

Due to the lower activity levels during 2007, CanSub and its competitors were forced to reduce prices for their services to maintain equipment utilization rates which adversely affected revenues, gross margins, net earnings and EBITDAS percentages during those periods. In addition, during 2007, the Company's establishment of new field locations in northern Alberta and northeastern British Columbia further reduced gross margins and EBITDAS percentages.

At the end of 2007, to address the impact of reduced operating margins, CanSub implemented significant cost cutting measures including wage reductions, staff reductions and cost concessions from suppliers. These measures were partly responsible for CanSub realizing an improvement in gross margin and EBITDAS percentages in Q1 2008 (as compared to Q1 2007). During Q2 2008, as a result of strengthening oil and natural gas prices, CanSub's equipment utilization rates were higher than the corresponding Q2 2007 (particularly in the Testing division) which resulted in improvements in revenue, gross margins, gross margin percentage, net earnings and EBITDAS percentage.

The robust commodity prices continued through part of Q3 2008, which lead to continuing high equipment utilization rates and corresponding improved revenue figures (over the comparable Q3 2007). The improved revenue in Q3 2008 also reflected a higher equipment base, specifically in the Company's Wireline division. Although commodity prices dropped significantly during Q4 2008 (both oil and natural gas) and the number of wells drilled in the WCSB was reduced (ie 4,823 wells rig released in Q4 2008 vs. 5,252 wells rig released in Q4 2007), CanSub's revenue was significantly higher in Q4 2008 compared to Q4 2007. This reflected a higher equipment base in the Company's Wireline division combined with higher utilization rates in both the Wireline and Testing divisions. The higher equipment utilization rates were attributed partially to the Company's geographic diversity which gives CanSub exposure to higher activity areas of the WCSB. Margins in Q4 2008 were negatively impacted by the commissioning and set-up costs of new Wireline and Testing units delivered during the quarter.

In Q1 of 2009, the further erosion of the price of oil and natural gas, reduced access to capital for many of the producers and increased Alberta royalties resulted in lower equipment utilization rates, downward pressure on pricing and ultimately resulted in lower operating margins (compared to Q1 of 2008). To address the impact of reduced operating margins, CanSub implemented significant cost cutting measures (see "Gross Margins" section above).

Financing Activities

During Q1 2009, the Company's financing activities included advances of $3.0 million from its long-term debt facility and repayments on this facility of $1.0 million (net advances of $2.0 million). In addition, during Q1 2009 CanSub made $0.3 million in repayments on the Company's capital lease obligations and had net repayments on the operating loan of $0.8 million.

Commitments and obligations

The Company, through the conduct of its operations, has undertaken certain contractual obligations. As at March 31, 2009 CanSub's contractual obligations were as follows:



Contractual
Obligations Carrying Contractual 0 - 12 1 -2 2 - 5 5+
($000's) Amount Cash Flows Months Years Years Years
----------------------------------------------------------------------------
Accounts Payable 8,353 (8,353) (8,353) - - -
----------------------------------------------------------------------------
Operating Loan 561 (561) (561) - - -
----------------------------------------------------------------------------
Long-term debt(1) 21,698 (23,652) (5,232) (5,232)(13,188) -
----------------------------------------------------------------------------
Capital lease
obligations(1) 425 (434) (362) (8) - -
----------------------------------------------------------------------------
Operating lease
obligations (2) - (29,989) (4,790) (4,199) (9,981)(11,019)

(1) Contractual cash flows include principal plus interest
(2) Relate to vehicle, equipment and facility operating leases as described
in the Commitments note in the interim financial statements at March 31,
2009.


In addition to the above, at March 31, 2009, the Company had commitments to purchase approximately $245,000 of wireline, testing and related equipment, of which $90,000 has been advanced to equipment manufacturers in the form of deposits. Delivery of these items occurred in April 2009.

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, 2009, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook section 3064 "Goodwill and Intangible Assets". The adoption of the new standard revises the requirement for recognition, measurement, presentation and disclosure of goodwill and intangible assets. At March 31, 2009 and March 31, 2008, the Company had no goodwill or intangible assets and therefore there was no immediate impact of adopting this policy.

Future accounting pronouncements

Business Combinations

In January 2009, the CICA issued handbook section 1582 "Business Combinations," which will replace CICA section 1581 of the same name. Under this guidance the purchase price used in a business combination is based on fair value of shares exchanged at their market price at the date of the exchange. Currently, the purchase price used is based on the market price of the shares for a reasonable period before and after the date the acquisition is agreed upon and announced. This new guidance generally requires all acquisition costs to be expensed, which currently are capitalized as part of the purchase price. Contingent liabilities are to be recognized at fair value at the acquisition date and remeasured at fair value through earnings each period until settled. Currently, only contingent liabilities that are resolved and payable are included in the cost to acquire a business. In addition, negative goodwill is required to be recognized immediately in earnings, unlike the current requirement to eliminate it by deducting it from non-current assets in the purchase allocation. Section 1582 is effective for the Company on January 1, 2011 with prospective application and early adoption permitted.

Consolidated Financial Statements

In January 2009, the CICA issued section 1601, "Consolidated Financial Statements," which will replace CICA section 1600 of the same name. This guidance requires uniform accounting policies to be consistent throughout all consolidated entities and the difference between reporting dates of a parent and a subsidiary to be no longer than three months. These are not explicitly required under the current standard. Section 1601 is effective for the Company on January 1, 2011 with early adoption permitted. This standard will have no impact on the Company.

Non-controlling Interests

In January 2009, the CICA issued section 1602, "Non-controlling Interests," which will replace CICA section 1600 "Consolidated Financial Statements." Minority interest is now referred to as non-controlling interest, ("NCI"), and is presented within equity. Under this new guidance, when there is a change in control the previously held interest is revalued at fair value. Currently, a gain of control is accounted for using the purchase method and a loss of control is accounted for as a sale resulting in a gain or loss in earnings. In addition, NCI can be in a deficit position because it is recorded at fair value. Currently, NCI is recorded at the carrying amount and can only be in a deficit position if the NCI has an obligation to fund losses. Section 1602 is effective for the Company on January 1, 2011 with early adoption permitted. This standard will have no impact on the Company.

International Financial Reporting Standards

For years beginning on or after January 1, 2011, all Canadian publicly accountable entities will be required to report under International Financial Reporting Standards ("IFRS")(see Conversion from Canadian GAAP to International Financial Reporting Standards section below).

Risk Factors and Risk Management

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, 2009 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.

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 were no material changes to the Company's internal controls over financial reporting that occurred during the three month period ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company's ICFR.

Conversion from Canadian GAAP to International Financial Reporting Standards ("IFRS")

In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed that the changeover to IFRS from Canadian GAAP will be required for publicly accountable enterprises effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The AcSB issued the "omnibus" exposure draft of IFRS wherein early adoption by Canadian entities is also permitted. The Canadian Securities Administrators ("CSA") has also issued Concept Paper 52-402, which requested feedback on the early adoption of IFRS as well as the (continued) use of US GAAP by domestic issuers. The eventual changeover to IFRS represents changes due to new accounting standards. The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the Company's reported financial position and results of operations.

The Company is in the process of developing its IFRS changeover plan, which will include project structure and governance, resourcing and training, analysis of key GAAP differences and a phased plan to assess accounting policies under IFRS as well as potential IFRS exemptions. The Company plans to complete its project scoping, which will include a timetable for assessing the impact on data systems, internal controls over financial reporting, and business activities, such as financing and compensation arrangements, prior to June 30, 2009. The Company has determined that the accounting for property and equipment and leases will be impacted by the conversion to IFRS. The conversion will result in other changes which may be significant in nature and these continue to be assessed and examined by management.

Outlook

CanSub's proposed business combination with Pure Energy Services Ltd. provides CanSub shareholders with a stronger combined entity that has:

-An increased customer base;

- Increased exposure to unconventional oil and gas plays in north eastern British Columbia, Saskatchewan and parts of the US;

- An increased fleet size and diversity of equipment which will allow the Corporation to reallocate equipment to support the growth of new markets in the US and Canada as well as to better support the Corporation's existing operations;

- Improved cost efficiencies through consolidation of the existing operating and support infrastructures as well as cost benefits resulting from economies of scale; and

- Further diversification of customers, geographic coverage and services



RECONCILIATION OF CASH FLOW AND EBITDAS TO NET EARNINGS (LOSS)


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In $000's Three months ended Three months ended
(unaudited) Mar 31 2009 Mar 31 2008

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Net earnings(loss) (1,300) 3,068
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Add back (deduct):
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Depreciation and amortization expense 2,430 1,979
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Future income tax expense (reduction) (317) (108)
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Stock-based compensation expense 225 271
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Investment tax credit utilized - 97
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Cash Flow (1) 1,038 5,307
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Long-term and other interest expense 215 493
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Current tax expense (recovery) - 97
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Utilization of investment tax credit - (97)
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EBITDAS (1) 1,253 5,800
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(1) Refer to "Non-GAAP Measures" section below.


NON-GAAP MEASURES

Cash Flow 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 to compare performance between peers. 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. The EBITDAS measure is also used by the Company to determine bonuses for operating management and assessing divisional performance. 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 GAAP and should not be construed as an alternative to net earnings or 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)
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March 31, December 31,
2009 2008
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Assets
Current assets:
Cash $ 258 $ 66
Accounts receivable 15,254 18,896
Deposits and other 888 1,550
Inventory 447 499
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16,847 21,011

Property and equipment 64,107 64,379
Future income tax asset 8,964 8,647
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$ 89,918 $ 94,037
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 8,353 $ 12,353
Operating loan 561 1,335
Current portion of long-term debt 4,507 3,909
Current portion of obligations under
capital leases 425 672
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13,846 18,269
Long-term debt 17,191 15,812
Deferred credit 5,472 5,472
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36,509 39,553

Shareholders' equity:
Share capital 65,190 65,190
Contributed surplus 6,275 6,050
Deficit (18,056) (16,756)
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53,409 54,484

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$ 89,918 $ 94,037
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CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Consolidated Statements of Earnings (Loss) and Deficit
(In thousands of dollars; except per share amounts)
(Unaudited)

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Three months ended
March 31,
---------------------------
2009 2008
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Revenue $ 19,860 $ 22,896

Expenses:
Operating 16,414 14,986
Selling, general and administrative 2,201 2,110
Stock-based compensation 225 271
Depreciation and amortization 2,430 1,979
Interest on long-term debt 191 493
Foreign exchange gain (8) -
Other interest 24 -
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21,477 19,839

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Earnings before income taxes (1,617) 3,057

Income taxes
Current (recovery) - 97
Future (reduction) (317) (108)
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(317) (11)
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Net earnings (loss) (1,300) 3,068

Retained earnings (deficit), beginning of period (16,756) (17,771)

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Retained earnings (deficit), end of period $ (18,056) $(14,703)
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Net earnings (loss) per common share
Basic $ (0.05) $ 0.16
Diluted $ (0.05) $ 0.16
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See accompanying notes to consolidated financial statements.


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

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Three months ended
March 31,
--------------------------
2009 2008
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Cash provided by (used in):

Operations:
Net earnings (loss) $ (1,300) $ 3,068
Depreciation and amortization 2,430 1,979
Future income taxes (317) (108)
Stock based compensation 225 271
Investment tax credit utilized - 97
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1,038 5,307
Change in non-cash working capital related to
operating activities (1,501) (7,081)
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(463) (1,774)
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Financing:
Operating loan (774) 3,799
Proceeds from long-term debt 3,000 4,338
Repayment of long-term debt (1,023) (5,519)
Repayment of obligations under capital lease (247) (545)
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956 2,073
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Investing:
Acquisition of equipment (2,158) (1,514)
Change in non-cash working capital related to
investing activities 1,857 1,215
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(301) (299)
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Net change in cash 192 -

Cash, beginning of period 66 -

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Cash, end of period $ 258 $ -
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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