Canadian Sub-Surface Energy Services Corp.
TSX : CSE

Canadian Sub-Surface Energy Services Corp.

August 14, 2007 08:30 ET

Canadian Sub-Surface Energy Services Announces Q2 2007 Financial Results

CALGARY, ALBERTA--(Marketwire - Aug. 14, 2007) - Canadian Sub-Surface Energy Services Corp. (TSX:CSE) ("CanSub" or "the Company") announced today its financial and operating results for the three and six month periods ended June 30, 2007.



Financial Highlights

(In thousands of dollars, except per share amounts or as otherwise noted.)
----------------------------------------------------------------------------
Three Three
months months Six months Six months
ended ended ended ended
June June June June
30, 2007 30, 2006 % 30, 2007 30, 2006 %
(unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Revenue 7,282 10,714 (32%) 32,324 33,116 (2%)
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Gross Margin (1,176) 1,847 (164%) 6,751 10,427 (35%)
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Gross Margin % (16.1%) 17.2% (194%) 20.9% 31.5% (34%)
----------------------------------------------------------------------------
Cash Flow (1) (3,370) (29) (11,521%) 1,497 6,524 (77%)
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Normalized
EBITDA (1)(2) (3,010) 175 (1,820%) 2,179 6,930 (69%)
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Normalized
EBITDA as a
% of revenue (41.3%) 1.6% (2,681%) 6.7% 20.9% (68%)
----------------------------------------------------------------------------
Net Earnings
(loss) (4,597) 806 (670%) (2,883) 3,158 (191%)
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Net Earnings
(loss) per
share - basic
and diluted ($0.24) $0.05 - ($0.15) $0.25 -
----------------------------------------------------------------------------

Average
number of
common
shares
outstanding
(in
thousands) 19,324 15,418 - 19,324 14,689 -
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Diluted
number of
common
shares - at
June 30, 2007
(in
thousands) (3) 20,960 19,835 - 20,960 19,835 -
----------------------------------------------------------------------------

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

(2) EBITDA means earnings before interest, taxes, depreciation and
amortization and excludes stock based compensation expense. Normalized
EBITDA means EBITDA adjusted for certain equipment lease expenses that
are included in operating expenses. Refer to the section below titled
"Reconciliation of EBITDA and Normalized EBITDA to Net Earnings".

(3) The June 30, 2007 figure is based on 19.324 million outstanding common
shares outstanding plus 1.636 million stock options outstanding.


Operational Highlights

Revenue during the second quarter of 2007 was $7.3 million as compared to revenue of $10.7 million recognized during the second quarter of 2006. Normalized EBITDA was negative $3.0 million during the current quarter bringing year to date Normalized EBITDA to positive $2.2 million. Although CanSub's wireline, swabbing and production testing equipment fleets have all grown over the past year, the longer than normal spring break-up in the current period combined with wet weather during May and June significantly impacted the Company's ability to complete jobs for customers. Weak natural gas prices further impacted equipment utilization rates during the current quarter as oil and gas producers continue to defer natural gas drilling and completion programs. Per industry sources, the drilling rig utilization rate in the Western Canadian Sedimentary Basing ("WCSB") during the second quarter of 2007 was 17% as compared to 43% in the prior year second quarter. A total of 3,232 wells were completed during the current quarter as compared to 4,946 wells completed in the second quarter of 2006 - a 35% decrease.

As a result of the hot weather in the WCSB during July and early August, the terrain in many of CanSub's operating areas has dried up and the Company's equipment fleet has been able to re-commence operations. Due to the current industry slow-down there has been increased pricing pressure on the majority of the services offered by CanSub. As a result, CanSub has competitively priced its services (depending on the service and geographic region) in order to keep equipment utilized and crews working. This reduced pricing will result in margin erosion over the next two quarters, some of which will be offset by previously announced cost cutting measures and operational optimization.

During early July, CanSub moved all of its wireline, production testing, swabbing and well optimization services in the Grande Prairie area of northern Alberta into a new, centralized facility. This will provide more cross selling opportunities as well as increased operating efficiencies. A centralized, leased facility is already being used in Whitecourt and additional such facilities are planned for hubs in Medicine Hat (late 2007) and Red Deer (mid 2008).

Despite the industry slow-down, the Company's wireline division (which accounts for approximately 60% of current annual revenue) has been able to sustain reasonable utilization rates for its equipment due to its diversified service portfolio. In addition to services related to the completion of natural gas wells, this division also provides services related to oil wells, workovers of producing wells and abandonments. The Company's production testing division (which accounts for the remaining 40% of annual revenue) has a significant exposure to natural gas well drilling, and has experienced the greatest negative impact as a result of the industry slow-down.

During the second quarter, the Company added 1 swabbing unit to its equipment fleet. Below is a summary of CanSub's fleet at June 30, 2007 as well as the budgeted equipment additions for the remainder of 2007.



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# of Wireline # of Swabbing # of Testing
Units Units packages
----------------------------------------------------------------------------
Operating fleet at
December 31, 2006 35 8 61
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Additions during Q1 2007 6 - -
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Additions during Q2 2007 - 1 -
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Operating fleet at June
30, 2007 41 9 61
----------------------------------------------------------------------------
Budgeted additions
during remainder of 2007 6 1 -
----------------------------------------------------------------------------
Budgeted fleet size at
December 31, 2007 47 10 61
----------------------------------------------------------------------------


At June 30, 2007, CanSub's net debt position (i.e. long-term debt net of working capital) was $17.4 million or approximately 1.6 times the Company's trailing twelve-month cash flow from operations of $10.6 million.

Canadian Sub-Surface Energy Services Corp. provides cased-hole wireline, production testing and related services to oil and gas companies operating in the Western Canadian Sedimentary Basin.

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 and six-month periods ended June 30, 2007 and 2006. The consolidated financial statements and MD&A have been prepared taking into consideration information available as at August 10, 2007 and should be read in conjunction with the interim consolidated financial statements of the Company for the three and six-month periods ended June 30, 2007 and the audited consolidated financial statements of the Company for the year ended December 31, 2006.

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.

February 14, 2006 Transaction between Canada West Capital and the CanSub Group

On February 14, 2006, Canada West Capital Inc. ("CWC") an inactive, public company acquired all of the shares of Canadian Sub-Surface Energy Services Inc., Canadian Sub-Surface Gas Testing Inc. and 1156853 Alberta Ltd. (collectively the "CanSub Group"). Subsequent to the acquisition, the former shareholders of the CanSub Group held the largest percentage of common shares of the new consolidated entity and controlled the management of the Company. Therefore the CanSub Group was deemed to be the acquirer for accounting purposes. Accordingly, the transaction was accounted for as a reverse takeover (using the purchase method) whereby the assets and liabilities of CWC were recorded at their fair market values at the February 14, 2006 transaction date. CWC changed its name to Canadian Sub-Surface Energy Services Corp. as part of the transaction.

Internal corporate reorganization effective May 31, 2006

Immediately after the February 14, 2006 transaction, the CanSub Group of companies became wholly-owned subsidiaries of the Company. The three entities comprising the CanSub Group were amalgamated on May 31, 2006 and the amalgamated entity was subsequently wound up into the Company on June 1, 2006.

During 2005, the CanSub Group established a partnership through which the operating activities were conducted. The partnership has a June 30 year end (with the initial year end being June 30, 2006).

Comparative Information

Since the CanSub Group has been deemed the acquirer for accounting purposes, the comparative financial statements for the three and six-month periods ended June 30, 2006 include the financial results of the CanSub Group from January 1 to February 14, 2006 and then the results of the Company thereafter.

Business Units and Segmentation

The Company's operations are conducted through the partnership and consist of two main operating divisions: Wireline and Testing. The Wireline division is comprised primarily of wireline services (which include cased-hole electric line and slickline) and also includes swabbing and well optimization services. The Testing division includes primarily natural gas production testing services. Prior to June 1, 2006, a portion of the electric line and slickline services in the Wireline division were conducted through three private owner-operators, who owned their equipment and employed the crews who worked on the units. One of the advantages of utilizing the owner-operators is that they represented the Company in areas where the Company did not operate. There are no owner operators involved in the Testing division. The Company realized average margins of approximately 18% on the revenues generated by the owner operator wireline units. On May 31, 2006, the Company acquired all of the business assets of these three owner operators.

Acquisition of Colter Production Services on May 31, 2006

On May 31, 2006, the Company completed the acquisition of the business assets of Colter Production Services Inc. ("Colter"), a private production testing Company operating in Alberta. Commencing June 1, 2006 the revenues and earnings from Colter have been included in the Company's financial statements.

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 and six-month periods ended June 30, 2007 and 2006
are as follows:

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Three Three
months months Six months Six months
ended ended ended ended
June June June June
30 2007 30 2006 % 30 2007 30 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Wireline 5,544 6,980 (21%) 19,479 21,143 (8%)
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Testing 1,738 3,734 (53%) 12,845 11,973 7%
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Consolidated 7,282 10,714 (32%) 32,324 33,116 (2%)
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Equipment utilization rates for both the Testing and Wireline divisions during the second quarter of 2007 were significantly lower than the prior year second quarter, reflecting the longer than normal spring break-up and wet weather in western Canada in May and June. In addition, oil and gas producers continued to defer natural gas drilling and completion projects in response to a continued weakness in natural gas prices. As a result of these factors, revenue during the current quarter of $7.3 million was 32% lower (or $3.4 million) than the same period in the prior year even though the Company's wireline, swabbing and testing equipment fleets have grown over the past year.

In the current quarter, Wireline divisional revenue amounted to $5.5 million. Of that amount, $4.5 million was related solely to the wireline fleet (electric line and slickline units), which averaged 41 units during the period. The remaining $1.0 million of revenue was attributed to swabbing services ($0.4 million from an average of 8 swabbing units in operation) and well optimization and other ($0.6 million). The wireline units completed approximately 808 jobs during the current quarter at an average revenue per job of approximately $5,625. This average revenue per job was consistent with the first quarter of 2007, but about 10% lower than revenue per job recognized in the last half of 2006. This reflects more competitive pricing, a higher utilization of CanSub's slickline units during the current quarter (which charge less per job and perform a variety of work, some of which is related solely to existing, producing wells) and a lower utilization of electric line units. The majority of jobs performed by the electric line units relate to logging and perforating of new well completions; work that was significantly reduced as evidenced by the drop in the number of wells drilled during the current quarter.

In the prior year second quarter, Wireline divisional revenue amounted to $7.0 million. Of that amount, $6.0 million was attributed solely to the wireline fleet (electric line and slickline) which averaged 32 units in operation and completed approximately 1,080 jobs at an average revenue per job revenue of $5,464. During the third and fourth quarters of 2006, average wireline pricing increased to a high of $6,467 as the Company expanded its operations in the deeper, more lucrative areas of the basin in northern Alberta and British Columbia.

Testing division revenue in the second quarter of 2007 of $1.7 million was generated from an average in-service fleet of 61 testing packages. The 2006 second quarter Testing revenue of $3.7 million was generated from an average in-service fleet of approximately 37 testing packages. Although the testing fleet has increased significantly, the weather related factors noted above combined with the slow-down in natural gas drilling resulted in the $2.0 million revenue decline over the comparable quarter of the prior year. The testing fleet increase reflects the acquisition of Colter on May 31, 2006 (which added 16 testing packages) with the remaining increase from internal additions. This division has seen the greatest impact from the industry slow-down as it is geared towards new natural gas well completions. Pricing of services in this division is expected to remain extremely competitive until natural gas related activities in the WCSB recover.

During the recently completed quarter, the operations of the Colter division were integrated into the Company's own testing operations, which will result in future operating efficiencies.



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:

----------------------------------------------------------------------------
Three Three
months months Six months Six months
ended ended ended ended
June June June June
30 2007 30 2006 % 30 2007 30 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Gross Margins:
----------------------------------------------------------------------------
Wireline (687) 1,257 (155%) 3,702 6,201 (40%)
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Testing (489) 590 (183%) 3,049 4,226 (28%)
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Consolidated (1,176) 1,847 (164%) 6,751 10,427 (35%)
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Gross Margin %
----------------------------------------------------------------------------
Wireline (12.3%) 18.0% (168%) 19.0% 29.3% (35%)
----------------------------------------------------------------------------
Testing (28.1%) 15.8% (278%) 23.7% 35.3% (33%)
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Consolidated (16.1%) 17.2% (194%) 20.9% 31.5% (34%)
----------------------------------------------------------------------------


Consolidated gross margins for the second quarter of 2007 were negative $1.2 million (negative 16.1%) as compared to positive margins of $1.8 million (17.2%) in the prior year second quarter. Margins for both the Wireline and Testing divisions during the current quarter suffered from the significant decline in equipment utilization rates resulting from long spring break-up and wet weather combined with the slower industry activity. The prior year second quarter benefited from a shorter break-up period and drier spring weather.

One of the largest components of operating expenses is 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 (as they are currently), the Company is not burdened with high fixed compensation amounts at the field level. 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.



----------------------------------------------------------------------------
Three Three
months months Six months Six months
ended ended ended ended
June June June June
30 2007 30 2006 % 30 2007 30 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
SG&A 1,852 1,672 11% 4,590 3,569 29%
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SG&A expenses were $1.9 million in the current quarter as compared to $1.7 million in the second quarter of 2006. The increase over the prior period reflects the increased staffing and infrastructure to accommodate the Company's growth over the prior year.

The first quarter 2007 SG&A expenses were $2.7 million. The significant reduction in the current quarter primarily reflects lower commissions paid to sales personnel (resulting from the lower sales level in the second quarter) and a reduction in bad debt expense provision.

Stock based compensation expense



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Three Three
months months Six months Six months
ended ended ended ended
June June June June
30 2007 30 2006 % 30 2007 30 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Stock-based
compensation
expense 344 210 64% 674 858 (21%)
----------------------------------------------------------------------------


The quarter over quarter increase in the stock-based compensation expense reflects the increased employee base over the past year, especially at the field level. In the prior year, the six-month figure of $858,000 includes $567,000 associated with stock options that vested in the CanSub Group of companies just prior to the February 14, 2006 transaction. See further discussion of options in the section below titled "Stock Options".



Depreciation and amortization expense

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----------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
June June June June
30 2007 30 2006 % 30 2007 30 2006 %
$ 000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Depreciation 2,133 967 121% 3,931 1,503 162%
----------------------------------------------------------------------------
Amortization 618 253 144% 1,334 317 321%
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Total 2,751 1,220 125% 5,265 1,820 189%
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Depreciation and amortization

Depreciation expense (which relates to depreciation of the Company's property and equipment) amounted to $2.1 million during the current quarter. This was 2.2 times higher than the $1.0 million of depreciation expense recorded in the prior year second quarter and reflects the significant increase in property and equipment over the past year. The average net book value (i.e. beginning of the quarter balance plus end of the quarter balance divided by 2) was 2.0 times higher in the current period (i.e. $49.1 million in second quarter of 2007 compared to $25.1 million in the second quarter of 2006).

Amortization expense (which relates to amortization of the Company's intangible assets) amounted to $0.6 million during the current quarter. The majority of this amount relates to amortization of the $11.3 million of intangible assets acquired as part of the business acquisitions of the three owner operators and Colter Production Services that closed on May 31, 2006.



Interest expense

----------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
June June June June
30 2007 30 2006 % 30 2007 30 2006 %
$ 000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Interest on
long- term
debt 360 168 114% 725 261 178%
----------------------------------------------------------------------------
Other interest - 36 - - 73 -
----------------------------------------------------------------------------
Total interest 360 204 76% 725 334 117%
----------------------------------------------------------------------------


Interest on long-term debt

Total interest expense for the current quarter of $360,000 was 1.8 times greater than the 2006 second quarter total interest expense of $204,000. The increase in 2007 reflected a net increase in average total debt balances (comprised of bank indebtedness, callable debt, long-term debt, capital leases and preferred share liability) which were 1.8 times higher during the current quarter as compared to the prior period second quarter.

Future tax expense (reduction)

The Company recognized a future tax reduction of $1.9 million during the second quarter of 2007. The future tax reduction is impacted by net timing differences between amounts for tax and accounting, draw-downs of the deferred credit (such draw-down in proportion to the utilization of future tax assets originally recognized as part of the February 14, 2006 transaction with Canada West Capital), and in the current quarter, it is impacted by losses for tax purposes generated in this quarter.

Net Earnings (loss)

The Company recorded a net loss in the second quarter of 2007 of $4.6 million (negative $0.24 per share - basic and diluted) as compared to net earnings of $0.8 million ($0.05 per share - basic and diluted) for the prior period second quarter. On a year to date basis, the Company recorded a net loss for the six months ended June 30, 2007 of $2.9 million (negative $0.15 per share).

Retained Earnings (deficit)

At June 30, 2007, the Company's retained earnings balance was $4.1 million. On November 13, 2006, the Company's shareholders approved the reduction of the accumulated deficit by $22.7 million which eliminated the Company's accumulated deficit balance and resulted in a retained earnings balance at December 31, 2006 of $7.0 million. This revised retained earnings figure reflects the cumulative earnings of CanSub since January 1, 2006, and in the opinion of the Company's management, is more representative of the performance of the Company since the February 14, 2006 transaction.

Income Tax amounts

The Company had the following estimated tax amounts available at June 30, 2007 to apply against future taxable income: non-capital losses of $16.2 million and unclaimed scientific research and development expenditures ("SRED") of $9.4 million. In addition, the Company had approximately $1.9 million in investment tax credits which may be claimed against taxes otherwise payable for federal purposes and expire between 2007 and 2012. These tax amounts are subject to review and assessment by the taxation authorities.

Share Capital

There were no changes to Share Capital during the current quarter and to August 10, 2007. The number of common shares outstanding remained at 19.3 million.

Stock Options

During the current quarter, the Company granted 118,500 options and forfeited 53,500 options for a net increase of 65,000 options. At June 30, 2007 the Company had 1.636 million options outstanding.

During February 2007, the Company's Board of Directors approved the re-pricing of 397,000 options held by employees of the Company (excluding directors, officers, senior management and other insiders). The exercise prices of these options, which ranged from $4.49 to $7.80 per option were all reduced to $4.20. As a result of this re-pricing, substantially all of the Company's outstanding options at June 30, 2007 had an exercise price of $4.20 which is equal to the price of the Company's shares issued as part of the February 14, 2006 go-public transaction.

Liquidity and Capital Resources

The Company recorded negative cash flow from operations (before changes in non-cash working capital) of $3.4 million for the second quarter of 2007 as compared to break-even cash flow from operations in the prior year second quarter. Cash flow in the current quarter reflected the low revenue levels.

As at June 30, 2007 the Company had working capital of $0.3 million and total long-term debt (i.e. long-term debt plus long-term portion of capital leases) of $17.7 million for a net debt position of $17.4 million. At June 30, 2007 the Company had drawn $19.8 million of its committed, revolving facility. The total credit under this facility is $44.0 million. However, the actual available amount at any one time is equal to 75% of marginable accounts receivable plus 50% of the net book value of property and equipment on the Company's balance sheet less assets pledged as security for capital lease liabilities. This resulted in an actual available amount from this facility of approximately $26.9 million at June 30, 2007.

The committed, revolving facility can be used to finance working capital requirements, acquire capital assets and for business acquisitions. Based on the related repayment terms of this new facility (such terms outlined in the notes to the audited December 31, 2006 financial statements), $3.7 million of the $19.8 million of drawn amounts at June 30, 2007 were reflected as a current liability with the remainder reflected as long-term.

The Company believes that its available credit facilities and cash flow from operating activities will provide sufficient capital resources to fund the remainder of its planned 2007 capital expenditure program (which is approximately $4.5 million) and on-going operations. The Company's management continues to evaluate cost cutting measures as well as its capital expenditure programs in response to the current industry conditions.

Investing Activities

The Company's net capital expenditures (ie acquisitions net of proceeds from disposals) for property and equipment during the second quarter of 2007 amounted to $3.2 million which brings year to date net capital expenditures to $10.1 million. Capital expenditures incurred in the second quarter related to the following: the new swabbing unit that was placed into service during the second quarter, costs to refurbish existing equipment, costs of certain auxiliary equipment and construction costs of new wireline and swabbing units scheduled for delivery in the second half of 2007.

A significant portion of the Company's year to date capital expenditures have been for the refurbishment of older equipment as well as the acquisition of equipment focused on oil and gas production related activities (such as slickline, swabbing and well optimization equipment).

During the current quarter, the Company also acquired the business assets of a small wireline company working in southern Alberta for $375,000.



The chart below outlines the year to date fleet additions for 2007 as well
as budgeted additions for the reminder of the year.

----------------------------------------------------------------------------
# of Wireline # of Swabbing # of Testing
Units Units packages
----------------------------------------------------------------------------
Operating fleet at 35 8 61
December 31, 2006
----------------------------------------------------------------------------
Additions during Q1 2007 6 - -
----------------------------------------------------------------------------
Additions during Q2 2007 - 1 -
----------------------------------------------------------------------------
Operating fleet at June 41 9 61
30, 2007
----------------------------------------------------------------------------
Budgeted additions 6 1 -
during remainder of
2007
----------------------------------------------------------------------------
Budgeted fleet size at 47 10 61
December 31, 2007
----------------------------------------------------------------------------


The budgeted fleet additions for wireline and testing units remain unchanged from numbers previously disclosed. However, the number of swabbing unit additions for 2007 has been reduced from three to two units. Included in the 41 wireline units at June 30, 2007 was 21 electric line ("e-line") and 20 slick-line units. An additional 3 e-line units are budgeted for the remainder of 2007 and 2 existing e-line units are planned to be converted to slickline units, which will result in 22 e-line units at the end of the year. An additional 3 slickline units are budgeted for the remainder of 2007, which will result in 25 slickine units at year end (after factoring in conversion of the 2 e-line units).

Management will continue to monitor industry activity throughout 2007 and will adjust the capital budget if necessary.

Financing Activities

Financing activities during the second quarter of 2007 consisted of an increase in the Company's committed, revolving facility of $0.1 million offset by repayments of the Company's capital lease obligations totaling $0.6 million.

Related Party Transactions

All related party transactions during the three and six-month periods ended June 30, 2007 were in the normal course of business at market rates. Related party transactions during calendar 2006 are outlined in the notes to the audited December 31, 2006 financial statements.



Quarterly Financial Summary

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

(In thousands of dollars, except per share amounts or as otherwise noted.)
----------------------------------------------------------------------------
Three Three Three Three
months months months months
ended ended ended ended
June 30 Mar 31 Dec 31 Sept 30
2007 2007 2006 2006
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Revenue 7,282 25,042 19,611 20,625
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Cash Flow (1) (3,370) 4,867 4,110 5,002
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Normalized
EBITDA (1) (2) (3,010) 5,189 4,360 5,228
----------------------------------------------------------------------------
Normalized
EBITDA as a % of
revenue (41.8%) 20.7% 22.2% 25.3%
----------------------------------------------------------------------------
Net Earnings
(loss) (4,597) 1,714 1,616 2,192
----------------------------------------------------------------------------
Net Earnings
(loss) per share -
basic $ (0.24) $ 0.09 $ 0.08 $ 0.12
----------------------------------------------------------------------------
Net Earnings
(loss) per share -
diluted $ (0.24) $ 0.09 $ 0.08 $ 0.12
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Three Three Three Three
months months months months
ended ended ended ended
June 30 March 31 Dec 31 Sept 30
2006 2006 2005 2005
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Revenue 10,714 22,402 16,269 12,208
----------------------------------------------------------------------------
Cash Flow (1) (29) 6,553 3,244 2,350
----------------------------------------------------------------------------
Normalized
EBITDA (1) (2) 175 6,757 3,843 2,567
----------------------------------------------------------------------------
Normalized
EBITDA as a % of
revenue 1.6% 30.1% 23.6% 22.6%
----------------------------------------------------------------------------
Net Earnings
(loss) 806 2,352 (889) 982
----------------------------------------------------------------------------
Net Earnings per
share - basic $ 0.05 $ 0.25 N/A N/A
----------------------------------------------------------------------------
Net Earnings per
share - diluted $ 0.05 $ 0.24 N/A N/A
----------------------------------------------------------------------------

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

(2) EBITDA means earnings before interest, taxes, depreciation and
amortization and excludes stock based compensation expense. Normalized
EBITDA means EBITDA adjusted for certain equipment lease expenses that
are included in operating expenses. Refer to the section below titled
"Reconciliation of EBITDA and Normalized EBITDA 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 and six month periods ended June 30, 2007 for a summary of the Company's commitments and obligations at June 30, 2007.

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, valuation of goodwill, valuation of intangible assets, 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, 2007, the Company adopted the following sections of the Canadian Institute of Chartered Accountants ("CICA") Handbook: Section 1530 - "Comprehensive Income" and Section 3855 - "Financial Instruments - Recognition and Measurement". The comprehensive income standard requires a separate financial statement that captures items included in other comprehensive income but excluded from income in accordance with Canadian GAAP. The new financial instrument standards deal with the recording of financial instruments at fair value in the financial statements unless certain criteria are met allowing them to be recorded at cost or amortized cost.

The adoption of these new standards has had no material impact on the Company's current or prior period net earnings or cash flows.

Two new Canadian accounting standards have been issued which will require additional disclosure in the Company's financial statements commencing January 1, 2008 regarding the Company's financial instruments, as well as the Company's capital with a description as to how the capital is managed. In addition, there is a new standard related to the measurement and disclosure of inventory which will be applied retrospectively effective January 1, 2008. Management is assessing the impact of these changes.

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 dated March 30, 2007 which is available under the Corporation's profile at www.sedar.com.

Internal Controls over Financial Reporting

There have been no changes in the design of the Company's internal controls over financial reporting that have materially affected, or likely to materially affect, the Company's internal controls over financial reporting during the quarter ended June 30, 2007.

Outlook

Activity levels during the second quarter of 2007 were significantly impacted by the long spring break-up and wet weather in May and June. However, it appears that the current softening of natural gas prices will result in a continued slow-down in activity levels in the WCSB, particularly for natural gas drilling and completions (which have historically accounted for approximately 70% of all wells drilled annually). With natural gas prices being dependent, in part, on weather patterns across certain areas of North America, it is difficult to predict when and if, natural gas prices will rebound. However, many industry analysts are predicting recoveries in natural gas prices in late 2007 and into 2008 and a related recovery in natural gas drilling levels in 2008.

Although the current competitive price environment will impact the Company's margins in the third and fourth quarters, CanSub has seen reasonable utilization rates in its Wireline division during July and early August. The services in this division are geared to oil and natural gas well completions as well as to activities related to existing, producing wells. Activity related to new and existing oil wells remains strong given the current, robust oil prices. The Testing division, which is involved primarily in natural gas well completion work, is still running at lower utilization rates than the prior year at this time.

The Company's management continues to closely monitor industry activity and will make adjustments to capital expenditures and operating costs if activity levels during the third and fourth quarters are lower than anticipated.

Given the Company's strong client base and diversification of services we are positioned to weather the current industry slow-down.



RECONCILIATION OF CASH FLOW, EBITDA AND NORMALIZED EBITDA TO NET EARNINGS

----------------------------------------------------------------------------
Three months Three months Six months Six months
ended June 30 ended June 30 ended June ended June
In $000's 2007 2006 30 2007 30 2006
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Net earnings (loss) (4,597) 806 (2,883) 3,158
----------------------------------------------------------------------------
Add back (deduct):
----------------------------------------------------------------------------
Depreciation and
amortization
expense 2,751 1,220 5,265 1,820
----------------------------------------------------------------------------
Future income tax
expense (reduction) (1,886) (2,265) (1,577) (98)
----------------------------------------------------------------------------
(Gain) loss on
disposal of capital
assets 18 - 18 -
----------------------------------------------------------------------------
Stock-based compensation
expense 344 210 674 858
----------------------------------------------------------------------------
Non-Controlling
interest - - - 786
----------------------------------------------------------------------------
Cash Flow (1) (3,370) (29) 1,497 6,524
----------------------------------------------------------------------------
Add Back (Deduct):
----------------------------------------------------------------------------
Long-term and other
interest expense 360 204 725 334
----------------------------------------------------------------------------
Current tax expense
(recovery) - - (43) -
----------------------------------------------------------------------------
EBITDA (1) (3,010) 175 2,179 6,858
----------------------------------------------------------------------------
Normalization adjustments:
----------------------------------------------------------------------------
Equipment lease
expenses included
in operating
expenses (2) - - - 72
----------------------------------------------------------------------------
Normalized EBITDA (1) (3,010) 175 2,179 6,930
----------------------------------------------------------------------------

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

(2) Certain of the Company's wireline units, swabbing units, testing
packages and related equipment in the prior year were leased through
operating leases (with the related lease payments being expensed as a
component of operating expenses in the statement of operations). If the
Company had owned these assets, the related depreciation expense would
have been an add back in determining an EBITDA figure. In order to be
comparable between the current and prior year operating periods, the
equipment lease payments expensed in the prior periods are reflected as
an add back in the Company's Normalized EBITDA calculation.


NON-GAAP MEASURES

Cash Flow from operations represents cash provided by operations prior to 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 unaudited, interim statement of cash flows. EBITDA represents earnings before interest, income taxes, depreciation and amortization and stock-based compensation expense and is a widely used financial indicator in the oilfield services sector. Normalized EBITDA represents EBITDA adjusted for certain equipment lease expenses that are recorded in operating expenses. EBITDA 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, EBITDA and Normalized EBITDA are not measures determined in accordance with Canadian Generally Accepted Accounting Principals ("GAAP") and therefore these measures as presented may not be comparable to similarly titled measures of other companies.



Financial Statements of

CANADIAN SUB-SURFACE ENERGY SERVICES CORP.

For the three and six months ended June 30, 2007
(unaudited)



CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Consolidated Balance Sheets
(In thousands of dollars)

(unaudited)

----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, December 31,
2007 2006
----------------------------------------------------------------------------

Assets

Current assets:
Accounts receivable $ 8,797 $ 18,962
Deposits and other 1,598 2,346
Income taxes receivable 120 134
Inventory 227 302
----------------------------------------------------------------------------
10,742 21,744

Property and equipment 49,789 43,338

Future income tax asset (note 6) 6,519 5,476

Intangible assets 8,796 10,073

Goodwill 14,177 14,177

----------------------------------------------------------------------------
$ 90,023 $ 94,808
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 4,474 $ 7,556
Current portion of obligations under capital leases 2,253 2,278
Current portion of long-term debt 3,740 487
----------------------------------------------------------------------------
10,467 10,321

Obligations under capital leases 1,617 2,833

Long-term debt 16,055 17,027

Deferred credit (note 6) 6,189 6,723
----------------------------------------------------------------------------
34,328 36,904
Shareholders' equity:
Share capital (note 7) 47,593 47,593
Contributed surplus (note 7) 4,019 3,345
Retained earnings 4,083 6,966
----------------------------------------------------------------------------
55,695 57,904
Commitments (note 8)

----------------------------------------------------------------------------
$ 90,023 $ 94,808
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


On behalf of the Board:

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



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

(unaudited)

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2007 2006 2007 2006
----------------------------------------------------------------------------
Revenue $ 7,282 $ 10,714 $ 32,324 $ 33,116

Expenses:
Operating 8,458 8,867 25,573 22,689
Selling, general and
administrative 1,852 1,672 4,590 3,569
Stock-based compensation 344 210 674 858
Depreciation and amortization 2,751 1,220 5,265 1,820
Interest on long-term debt 360 168 725 261
Other interest - 36 - 73
----------------------------------------------------------------------------
13,765 12,173 36,827 29,270

----------------------------------------------------------------------------
Earnings (loss) before income
taxes (6,483) (1,459) (4,503) 3,846

Income taxes (note 6):
Current (recovery) - - (43) -
Future (reduction) (1,886) (2,265) (1,577) (98)
----------------------------------------------------------------------------
(1,886) (2,265) (1,620) (98)

----------------------------------------------------------------------------
Earnings (loss) before
non-controlling interest (4,597) 806 (2,883) 3,944
Non-controlling interest - - - 786

----------------------------------------------------------------------------
Net earnings (loss) (4,597) 806 (2,883) 3,158

Retained earnings (deficit),
beginning of period 8,680 (20,301) 6,966 1,607

Purchase of non-controlling
interest - - - 3,306

Cash and Class B preferred
shares paid to CanSub Group
shareholders - - - (27,566)

----------------------------------------------------------------------------
Retained earnings (deficit),
end of period $ 4,083 $(19,495) $ 4,083 $(19,495)
----------------------------------------------------------------------------

Net earnings (loss) per common
share:
Basic $ (0.24) $ 0.05 $ (0.15) $ 0.25
Diluted $ (0.24) $ 0.05 $ (0.15) $ 0.25
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 Six months ended
June 30, June 30,
---------------------- ----------------------
2007 2006 2007 2006
----------------------------------------------------------------------------

Cash provided by (used in):
Operations:
Net earnings (loss) $ (4,597) $ 806 $ (2,883) $ 3,158
Depreciation and amortization 2,751 1,220 5,265 1,820
Future income taxes (reduction) (1,886) (2,265) (1,577) (98)
Stock based compensation 344 210 674 858
Non-controlling interest - - - 786
Loss on disposal of assets 18 - 18 -
----------------------------------------------------------------------------
(3,370) (29) 1,497 6,524
Change in non-cash working
capital related to operating
activities 8,288 4,138 7,443 (766)
----------------------------------------------------------------------------
4,918 4,109 8,940 5,758
----------------------------------------------------------------------------

Financing:
Decrease in amounts due from
related parties - 176 - 174
Repayment of callable debt - (171) - (493)
Increase (decrease) in bank
indebtedness - (1,700) - (3,412)
Repayment of notes
payable - - - (1,266)
Repayment of long-term debt - (24) - (49)
Increase in long-term debt 90 - 2,281 -
Repayment of shareholders'
loans - - - (803)
Increase in obligations under
capital lease - - - 3,448
Repayment of obligations
under capital lease (618) (654) (1,241) (1,173)
Decrease in loans receivable - 103 - 147
Net proceeds on issue of
common shares - 17,789 - 48,589
Proceeds from exercise of
stock options - - - 810
Cash portion of payment to
CanSub Group shareholders - - - (26,066)
----------------------------------------------------------------------------
(528) 15,519 1,040 19,906
----------------------------------------------------------------------------

Investing:
Acquisition of businesses (375) (16,795) (375) (16,795)
Acquisition of property and
equipment (3,271) (4,619) (10,156) (11,057)
Disposal of property and
equipment 74 75 74 79
Change in non-cash working
capital related to investing
activities (818) 2,835 477 3,233
----------------------------------------------------------------------------
(4,390) (18,504) (9,980) (24,540)
----------------------------------------------------------------------------

Net change in cash - 1,124 - 1,124
Cash, beginning of period - - - -

----------------------------------------------------------------------------
Cash,end of period $ - $ 1,124 $ - $ 1,124
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.



CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Notes to the Consolidated Financial Statements
(In thousands of dollars; except per share amounts)

Three and six months ended June 30, 2007
(unaudited)

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


1. Basis of presentation and nature of operations:

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, 2006, 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, 2006.

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 Corporation's operations and cash flows for the three and six month periods ended June 30, 2007 and 2006.

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.

The 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 a partnership (collectively the "Company"), and are presented in accordance with Canadian Generally Accepted Accounting Principles ("GAAP").

On February 14, 2006 ("the transaction date"), CWC acquired all of the outstanding shares of Canadian Sub-Surface Energy Services Inc., Canadian Sub-Surface Gas Testing Inc. and 1156853 Alberta Ltd. ("115") (collectively "the CanSub Group"). After the acquisition, the former shareholders of the CanSub Group held the largest percentage of Class A common voting shares and controlled the Company's management and therefore the CanSub Group was the deemed acquirer for accounting purposes.

For the comparative period ended June 30, 2006, the combined consolidated financial statements from January 1, 2006 up to the February 14, 2006 transaction date are the accounts of the CanSub Group. The non-controlling interest recorded on the income statement is attributed to a minority interest held outside the CanSub Group. For the period between the February 14, 2006 transaction date and June 30, 2006 these consolidated financial statements include the accounts of the Company.

2. Changes in accounting policies and practices:

On January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530 "Comprehensive Income", Handbook Section 3855 "Financial Instruments - Recognition and Measurement" and Handbook Section 3861 "Financial Instruments - Disclosure and 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 other effects of the implementation of the new standards are described below.

(a) Comprehensive income:

The new standards introduce comprehensive income, which consists of net earnings and other comprehensive income ("OCI"). The cumulative changes in OCI are included in the accumulated other comprehensive income, which is presented as a new category within shareholders' equity in the consolidated balance sheet. The adoption of the comprehensive income standard has been made in accordance with its transitional provisions. A statement of comprehensive income has not been included in these consolidated financial statements as the Company has no adjustments that are required to be reported in OCI.

(b) Financial instruments:

The financial instrument standard establishes the recognition and measurement criteria for financial assets, financial liabilities and derivatives. All financial instruments are required to be measured at fair value on initial recognition of the instrument, except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as "held-for-trading", "available-for-sale", "held-to-maturity", "loans and receivables", or "other financial liabilities" as defined by the standard.

Financial assets and financial liabilities "held-for-trading" are measured at fair value with changes in those fair values recognized in net earnings. Financial assets "available-for-sale" are measured at fair value, with changes in those fair values recognized in OCI. Financial assets "held-to-maturity", "loans and receivables" and "other financial liabilities" are measured at amortized cost using the effective interest method of amortization. The methods used by the Company in determining fair value of financial instruments are unchanged as a result of implementing the new standard.

Accounts receivable and accrued revenues are designated as "loans and receivables". Accounts payable and accrued liabilities, and long-term debt are designated as "other liabilities".

The adoption of the financial instruments standard has been made in accordance with its transitional provisions.

In addition to a) and b) above, two new Canadian accounting standards have been issued which will require additional disclosure in the Company's financial statements commencing January 1, 2008 regarding the Company's financial instruments, as well as the Company's capital with a description as to how it's capital is managed. There is also a new standard related to the measurement and disclosure of inventory which will be applied retrospectively effective January 1, 2008. Management is assessing the impact of these changes.

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, valuation of goodwill, valuation of intangible assets, 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. 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.

5. Acquisitions:

On June 1, 2007, the Company completed the acquisition of the business assets of Sky-Hook Picker Services Inc. for cash consideration of $375. The results of operations 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. Income taxes:

Income tax expense is calculated using the combined federal and provincial
statutory income tax rate. Actual income tax expense differs from the
"expected" income tax expense that would have been computed by applying the
statutory income tax rate as follows:

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

Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2007 2006 2007 2006
----------------------------------------------------------------------------

Earnings (loss) before income
taxes $ (6,483) $ (1,459) $ (4,503) $ 3,846
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Combined federal and
provincial income tax rate 32.42% 32.76% 32.42% 32.76%

Expected income tax provision (2,101) (478) (1,459) 1,260
Change in deferred credit - (2,193) (534) (2,193)
Non-deductible stock based
compensation 112 69 218 282
Non-deductible expenses 58 18 131 26
Reassessments of prior years - - (43) -
Income tax rate change 17 270 (14) 270
Other 28 49 81 257

----------------------------------------------------------------------------
Income tax expense (recovery) $ (1,886) $ (2,265) $ (1,620) $ (98)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, December 31,
2007 2006
----------------------------------------------------------------------------
Non capital losses and unclaimed scientific
research and development expenses $ 8,155 $ 6,747
Investment tax credits ("ITC") 1,903 1,944
Liability arising from ITC income inclusion (605) (617)
----------------------------------------------------------------------------
Total assets $ 9,453 $ 8,074
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The components of the future income tax liability are as follows:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, December 31,
2007 2006
----------------------------------------------------------------------------
Property, equipment and capital leases $ 1,734 $ 1,154
Transaction costs (954) (1,141)
Intangible Assets 2,154 2,453
Other - 132
----------------------------------------------------------------------------
Total liabilities $ 2,934 $ 2,598
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net future income tax asset $ 6,519 $ 5,476
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The Company has losses of $16,249 available to reduce future taxable income.
These losses expire as follows:

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

2007 $ 804
2008 4,296
2009 3,220
2010 7,159
2011 272
2012 498

----------------------------------------------------------------------------
$ 16,249
----------------------------------------------------------------------------
----------------------------------------------------------------------------


In addition, the Company has the following: research and development costs of $9,400 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 1,944 which can be claimed against federal income taxes payable and expire between 2007 and 2012.

The above amounts are subject to review and assessment by taxation authorities.



7. 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, 2006 and June 30,
2007 19,323,742 $ 47,593
----------------------------------------------------------------------------
----------------------------------------------------------------------------

There were no changes to share capital during the six month period ended
June 30, 2007.


The basic and diluted weighted average number of shares outstanding for the three and six months ended June 30, 2007 was 19,323,742 (three months ended June 30, 2006 - 15,450,149 basic shares and 15,711,144 diluted shares; six months ended June 30, 2006 - 12,531,144 basic shares and 12,792,139 diluted shares). In the calculation of earnings per share for the three months ended June 30, 2007, 1,636,000 options were excluded as the impact would be anti-dilutive.

(b) Stock options:

On February 20, 2007, the Company's board of directors approved a re-pricing of stock options held by certain employees of the Company (excluding directors, officers and other insiders). The exercise price of 397,000 options (such exercise prices ranging from $4.49 to $7.80) was repriced at $4.20. Stock based compensation expense of $217 related to this re-pricing will be recognized over the remaining vesting period of the options.



The following is a summary of the stock option transactions during the
respective six month periods:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30,
----------------------------------------------------------------------------
2007 2006
------------------------ ------------------------
Weighted Weighted
average average
Number of exercise Number of exercise
Options price Options price
----------------------------------------------------------------------------

Class A common shares:
Outstanding at the
beginning
of the period 1,548,750 $ 5.05 366,658 $ 2.21
Exercised as part of the
February 14, 2006
transaction with CWC - - (366,658) 2.21
Granted 201,000 4.28 1,510,250 5.03
Forfeited (113,750) 4.86 (8,000) 4.20
Reduction in average
exercise price as a result
of February 20, 2007
repricing (0.77)

----------------------------------------------------------------------------
Outstanding at the end of
the period 1,636,000 4.22 1,502,250 5.03
----------------------------------------------------------------------------

Exercisable at the end of
the period 433,667 4.20 - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(c) Contributed surplus:

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

Contributed surplus at December 31, 2006 $ 3,345

Stock based compensation expense 674

----------------------------------------------------------------------------
Contributed surplus at June 30, 2007 $ 4,019
----------------------------------------------------------------------------
----------------------------------------------------------------------------

8. Commitments:

(a) At June 30, 2007, the Company had the following annual commitments
under equipment operating lease agreements:

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

July 1 - June 30:

2007 - 2008 $ 1,305
2008 - 2009 568
2009 - 2010 70
2010 - 2011 20
2011 - 2012 7
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(b) At June 30, 2007, the Company had the following annual commitments under
office and field facility lease agreements:

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

July 1 - June 30:

2007 - 2008 $ 2,206
2008 - 2009 2,129
2009 - 2010 1,994
2010 - 2011 1,935
2011 - 2012 1,876
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(c) At June 30, 2007, the Company had commitments to purchase $2,139 of
wireline, swabbing, production testing and related equipment to be
financed by cash flow from operations and long term debt. Delivery of
these items is scheduled to occur in calendar 2007.


9. 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 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 and also provides swabbing and well optimization to the oil and gas industry.

The 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
June 30, 2007
------------------------------------
Wireline Testing Corporate Total
----------------------------------------------------------------------------

Revenue $ 5,544 $ 1,738 $ - $ 7,282
Operating expenses 6,231 2,227 - 8,458
----------------------------------------------------------------------------
(687) (489) - (1,176)

Selling, general and
administrative - - 1,852 1,852
Stock based compensation - - 344 344
Depreciation and
amortization 1,594 1,157 2,751
----------------------------------------------------------------------------
(6,123)

Goodwill 8,067 6,110 - 14,177
Property and equipment 35,121 14,668 - 49,789
Intangible assets 3,890 4,906 - 8,796
Capital expenditures -
property and equipment 2,408 1,179 - 3,587
Capital expenditures -
intangible assets 59 - - 59
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six months ended
June 30, 2007
------------------------------------
Wireline Testing Corporate Total
----------------------------------------------------------------------------

Revenue $ 19,479 $ 12,845 $ - $ 32,324
Operating expenses 15,777 9,796 - 25,573
----------------------------------------------------------------------------
3,702 3,049 - 6,751

Selling, general and
administrative - - 4,590 4,590
Stock based compensation - - 674 674
Depreciation and
amortization 3,552 1,713 - 5,265
----------------------------------------------------------------------------
(3,778)

Goodwill 8,067 6,110 - 14,177
Property and equipment 35,121 14,668 - 49,789
Intangible assets 3,890 4,906 - 8,796
Capital expenditures -
property and equipment 7,834 2,638 - 10,472
Capital expenditures -
intangible assets 59 - - 59
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended
June 30, 2006
------------------------------------
Wireline Testing Corporate Total
----------------------------------------------------------------------------

Revenue $ 6,980 $ 3,734 $ - $ 10,714
Operating expenses 5,723 3,144 - 8,867
----------------------------------------------------------------------------
1,257 590 1,847

Selling, general and
administrative - - 1,672 1,672
Stock based compensation - - 210 210
Depreciation and
amortization 851 369 - 1,220
----------------------------------------------------------------------------
(1,255)

Goodwill 8,067 6,110 - 14,177
Property and equipment 20,568 10,971 - 31,539
Capital expenditures -
property and equipment 8,647 5,321 - 13,968
Capital expenditures -
intangible assets 6,340 4,916 - 11,256
Total assets 64,254 14,920 - 79,174
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six months ended
June 30, 2006
------------------------------------
Wireline Testing Corporate Total
----------------------------------------------------------------------------

Revenue $ 21,143 $ 11,973 $ - $ 33,116
Operating expenses 14,942 7,747 - 22,689
----------------------------------------------------------------------------
6,201 4,226 10,427

Selling, general and
administrative - - 3,569 3,569
Stock based compensation - - 858 858
Depreciation and
amortization 1,342 478 - 1,820
----------------------------------------------------------------------------
4,180

Goodwill 8,067 6,110 - 14,177
Property and equipment 20,568 10,971 - 31,539
Capital expenditures -
property and equipment 12,533 7,873 - 20,406
Capital expenditures -
intangibles assets 6,340 4,916 - 11,256
Total assets 64,254 14,920 - 79,174
----------------------------------------------------------------------------
----------------------------------------------------------------------------


10. Comparative figures:

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

Certain statements in this news release, 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 release 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.

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