Canadian Sub-Surface Energy Services Corp.
TSX : CSE

Canadian Sub-Surface Energy Services Corp.

November 14, 2006 08:30 ET

Canadian Sub-Surface Energy Services Announces Q3 2006 Financial Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 14, 2006) - Canadian Sub-Surface Energy Services Corp. (TSX:CSE) (the "Company") is pleased to announce its financial and operating results for the three and nine-month periods ended September 30, 2006.



Financial Highlights

---------------------------------------------------------------------------
(in thousands of dollars, Three-month Three-month Nine-month Nine-month
except per share amounts period period period period
or as otherwise noted) ended ended ended ended
Sept 30, Sept 30, Sept 30, Sept 30,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
---------------------------------------------------------------------------
Revenue 20,625 12,208 53,741 33,160
---------------------------------------------------------------------------
Gross Margin 7,528 4,147 18,125 9,996
---------------------------------------------------------------------------
Cash Flow (1) 5,002 2,471 11,526 4,988
---------------------------------------------------------------------------
Normalized EBITDA (1) (2) 5,228 2,765 12,158 5,825
---------------------------------------------------------------------------
Normalized EBITDA as a %
of revenue 25.3% 22.6% 22.6% 17.6%
---------------------------------------------------------------------------
Net Earnings 2,192 982 5,350 2,168
---------------------------------------------------------------------------
Average number of Class A
common shares outstanding
(in thousands) (3) 18,333 N/A 17,327 N/A
---------------------------------------------------------------------------
Diluted number of Class A
common shares - at Sept
30, 2006 (in thousands) (4) 19,890 N/A 19,890 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) The average outstanding share figure calculated for the nine months
ended September 30, 2006 assumes that the 13.961 million Class A common
shares that were outstanding immediately after the February 14, 2006
go-public transaction were outstanding at January 1, 2006.

(4) Based on 18.333 million outstanding Class A common shares at September
30, 2006 plus 1.557 million stock options outstanding at September 30,
2006


Revenue and Normalized EBITDA during the third quarter of 2006 increased by 69% and 89% respectively as compared to the third quarter of 2005 reflecting a significantly larger equipment fleet. During the current quarter, the Company added equipment to newly established operating areas in northern Alberta (Whitecourt and High Level) and in other strategic operating areas. The Company's activities continue to be comprised of approximately two-thirds natural gas related activities and one-third light and heavy oil. Natural gas activities are primarily focused on intermediate and deeper gas reserves in Alberta and northern British Columbia with approximately 3% of total corporate revenue attributed to shallower gas.

Due to concerns over a buildup in natural gas inventory levels in North America during the second and third quarters of this year, natural gas prices have declined significantly from pricing experienced during the fall and winter of 2005/2006. As a result of these lower prices, natural gas drilling and completions activity (particularly for shallow gas) have declined from record levels in the prior year. However, the Company's equipment utilization rates have not declined as significantly as those industry peers with more of a shallow gas focus.

As previously announced in August, the Company's Board of Directors approved a revised capital expenditure program for calendar 2006 of $20.9 million (which excluded approximately $3.4 million in capitalized lease equipment and additional equipment added as part of the four business acquisitions that closed on May 31, 2006). Approximately $16.8 million of this budgeted amount had been incurred at September 30, 2006. All budgeted equipment additions are anticipated to be delivered before December 31, 2006 other than 3 wireline trucks which have been delayed to early 2007. The 2006 budget allocation for these units has been re-allocated to auxiliary and other equipment.

During November the Company's Board approved a preliminary capital expenditure budget for calendar 2007 of $5.5 million. This budget will be reviewed in early 2007 once the Company has a better outlook for industry activity levels for next year.

Based on the anticipated equipment deliveries for the remainder of 2006, the Company is planning to exit calendar 2006 with the following equipment fleet:



---------------------------------------------------------------------------
# of Wireline # of Swabbing # of Testing
Units Units packages
---------------------------------------------------------------------------
In operation at December 31, 2005 30 4 32
---------------------------------------------------------------------------
Asset acquisitions closed on
May 31, 2006 2(a) - 16
---------------------------------------------------------------------------
Internal additions
- Jan. 1 - Sept. 30 2006 3 1 8
---------------------------------------------------------------------------
Fleet size at Sept. 30 2006 35 5 56
---------------------------------------------------------------------------
Expected internal additions - Q4 2006 9 4 5
---------------------------------------------------------------------------
Expected equipment retirements - Q4 2006 (1) (1) -
---------------------------------------------------------------------------
Planned fleet size at December 31, 2006 43 8 61
---------------------------------------------------------------------------

(a) Canadian Sub-Surface has historically included the wireline units owned
by the owner operators as part of the Company's available fleet. At
December 31, 2005, the available fleet of 30 wireline units included 11
units owned by the owner operators. One of the owner operators added 2
units to his fleet during 2006, prior to the May 31 acquisition date.


Due to manufacturing delays, many of the wireline units that were initially scheduled for delivery during the second and third quarters of 2006 have been delayed until the fourth quarter.

Subsequent to quarter end, on November 13, 2006, the Company's shareholders approved the conversion of all of the Company's outstanding Class B preferred shares to Class A common voting shares on a one to one basis which results in a more simplified corporate share structure. The Class B share amount of $4.2 million that was classified as long-term debt on the September 30, 2006 balance sheet will now be eliminated.

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. (the "Company", formerly Canada West Capital Inc. ("CWC")) as at and for the three and nine-month periods ended September 30, 2006. These consolidated financial statements have been prepared taking into consideration information available as at November 13, 2006 and should be read in conjunction with the annual audited combined consolidated financial statements for the CanSub Group for the year ended December 31, 2005 (see section titled "Comparative Information" below). The unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles using the same accounting policies as the annual audited December 31, 2005 financial statements of the CanSub Group and the policies described in note 2 of the financial statements.

Forward-looking statements

Certain statements contained in this MD&A constitute forward-looking statements. When used in this document the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "seek", "propose", "estimate", "expect" and similar expressions, as they relate to the business of the Company, are intended to identify forward-looking statements. Such statements reflect the Company's current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including, without limitation, those described in this MD&A under the heading "Risks and Uncertainties", and "Outlook". Many factors could cause the Company's actual results, performance or achievements to vary from those anticipated in this MD&A. Should one or more risks or uncertainties materialize, or should assumptions underlying forward-looking statements prove incorrect, actual results may vary materially from those described in this MD&A as intended, planned, anticipated, believed, estimated or expected. The Company does not assume any obligation to update these forward-looking statements if conditions or opinions should change.

February 14, 2006 Transaction between CWC and the CanSub Group

On February 14, 2006, CWC 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 Class A common voting shares of the new consolidated entity and 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.

Comparative Information

Since the CanSub Group has been deemed the acquirer for accounting purposes, the comparative financial statements reflect the financial results of the CanSub Group. The audited, consolidated financial statements for the CanSub Group for the year end December 31, 2005 were previously posted on SEDAR. The audited financial statements for Canada West Capital Inc. for the year ended December 31, 2005 were also posted on SEDAR.

Business Units and Segmentation

The Company's operations are conducted through its 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 owner-operators, who owned their equipment and employed the crews who worked on the units. One of the advantages of utilizing the owner-operators was that they represented the Company in areas where the Company did not operate. There are no owner operators involved in the business of Testing. The Company realized average margins of approximately 18% on the revenues generated by these owner-operator units. On May 31, 2006, the Company acquired all of the business assets of these owner operators.

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 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 nine-month periods ended September 30, 2006 and 2005 is as follows:



---------------------------------------------------------------------------
Three months Three months Nine months Nine months
ended Sept 30 ended Sept 30 ended Sept 30 ended Sept 30
$000s 2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
---------------------------------------------------------------------------
Wireline 13,073 7,549 34,216 20,480
---------------------------------------------------------------------------
Testing 7,552 4,659 19,525 12,680
---------------------------------------------------------------------------
Consolidated 20,625 12,208 53,741 33,160
---------------------------------------------------------------------------


The Company's operations in the current quarter benefited from dry conditions in the months of July and August but were negatively impacted by approximately two weeks of wet weather in the month of September. Overall utilization rates in both wireline and testing were down from the prior year third quarter due to the wet September weather and also due to the slow-down in natural gas drilling and development resulting from the lower natural gas prices experienced this quarter as compared to the prior year third quarter. Revenue from the Wireline division during the third quarter of 2006 amounted to $13.1 million (or approximately 63% of total Company revenue) with the remaining $7.5 million (or 37%) generated by the Testing division.

A significant portion of the current quarter Wireline divisional revenue (approximately $11.5 million) was related solely to the wireline fleet (electric line and slickline units), which averaged 33.5 units during the third quarter of 2006. The remaining $1.5 million of revenue in this division was attributed to swabbing services, which generated approximately $0.8 million in revenue from an average of 4.5 swabbing trucks in operation during the third quarter and well optimization which generated revenue of approximately $0.7 million. The wireline units completed approximately 1,882 jobs during the current quarter at an average per job revenue of approximately $6,128.

In the third quarter of 2005, Wireline divisional revenue amounted to $7.5 million. Of that amount, $6.9 million was attributed solely to the wireline fleet (electric line and slickline) which averaged 27.0 units in operation during that period. Revenue from owner operator wireline units during the 2005 period was $2.6 million or 35% of overall wireline fleet revenue. During the prior year quarter, the wireline fleet completed approximately 1,477 jobs at an average per job revenue of $4,736. The increase in average revenue per wireline job recognized in the third quarter of 2006 of approximately 29% was attributed primarily to price increases implemented during the fourth quarter of 2005 and a greater proportion of work done in northern Alberta and British Columbia. The northern work involves deeper and typically more complex work resulting in higher revenues per job. During 2006, the Company has established new stations in Whitecourt and High Level, northern Alberta to handle the strong activity levels in these areas.

Testing division revenue in the third quarter of 2006 of $7.6 million was generated from an average in-service fleet of 50.0 testing packages. The 2005 third quarter Testing revenue of $4.7 million was generated from an average in-service fleet of approximately 27.0 testing packages. The significant revenue increase of 62% reflects the 85% increase in the number of testing packages offset by a lower utilization rate experienced in the current quarter.

Gross Margins (refer to non-GAAP measures)

The break-down of gross margin between the Wireline and Testing divisions is as follows:



---------------------------------------------------------------------------
Three months Three months Nine months Nine months
ended Sept 30 ended Sept 30 ended Sept 30 ended Sept 30
$000s 2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
---------------------------------------------------------------------------
Gross Margins:
---------------------------------------------------------------------------
Wireline 5,097 2,127 11,449 5,149
---------------------------------------------------------------------------
Testing 2,431 2,020 6,676 4,847
---------------------------------------------------------------------------
Consolidated 7,528 4,147 18,125 9,996
---------------------------------------------------------------------------
Gross Margin %
---------------------------------------------------------------------------
Wireline 39.0% 28.2% 33.5% 25.1%
---------------------------------------------------------------------------
Testing 32.2% 43.3% 34.2% 38.2%
---------------------------------------------------------------------------
Consolidated 36.5% 34.0% 33.7% 30.1%
---------------------------------------------------------------------------


Consolidated gross margins for the third quarter of 2006 were $7.5 million or 36.5% as compared to margins of $4.1 million or 34.0% in the prior year third quarter. The improvement in the Wireline division margin primarily reflects the increased revenue per job and the improved margins on sales from units previously owned by the owner operators.

The decrease in Testing margins in the 2006 third quarter is attributed primarily to a lower utilization rate for testing equipment. This division is more heavily exposed to natural gas drilling and development and, as such, was impacted more heavily by the industry slow-down in this area. Price increases in the testing division implemented at the end of 2005 were offset by higher employee costs.

Selling, general and administrative expenses

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



---------------------------------------------------------------------------
Three months Three months Nine months Nine months
ended Sept 30 ended Sept 30 ended Sept 30 ended Sept 30
$000s 2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
---------------------------------------------------------------------------
Total Selling,
general and admin
expenses 2,646 1,581 7,243 3,853
---------------------------------------------------------------------------
Less: stock-based
compensation expense 346 - 1,204 -
---------------------------------------------------------------------------
Net 2,300 1,581 6,039 3,853
---------------------------------------------------------------------------


Selling, general and administrative expenses (net of stock-based compensation expense) was $2.3 million in the current year third quarter (or 11.2% of revenue) as compared to $1.6 million in the third quarter of 2005 (or 13.0% of revenue). The savings, on a percentage basis, reflect the Company's significantly larger revenue base in the current period.

The stock-based compensation expense for the nine months ended September 30, 2006 relates to stock options that vested in the CanSub Group of companies just prior to the February 14, 2006 transaction date plus the expense associated with options granted to the employees of the newly formed consolidated entity from February 14th through to September 30. See discussion of options that were issued by the newly formed entity in the section below titled "Stock Option Plan".

Other expenses



---------------------------------------------------------------------------
Three months Three months Nine months Nine months
ended Sept 30 ended Sept 30 ended Sept 30 ended Sept 30
$000s 2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
---------------------------------------------------------------------------
Depreciation and
amortization 2,445 466 4,265 1,257
---------------------------------------------------------------------------
Long-term interest 114 27 375 118
---------------------------------------------------------------------------
Other interest 112 29 185 117
---------------------------------------------------------------------------


Depreciation and amortization

Depreciation and amortization expense in the current quarter is approximately 5.2 times higher than the related expense recorded in the third quarter of 2005. This reflects a 5 fold increase in the depreciable capital asset base (which includes property, plant and equipment plus intangible assets) from $9.8 million at September 30, 2005 to $49.2 million at September 30, 2006. The significant increase to the asset base is primarily attributed to the May 31, 2006 asset acquisitions of Colter Production Services Inc. and the three owner operators combined with internal equipment additions over the past year.

Long-term interest expense

Long-term interest expense increased from $27,000 in the third quarter of 2005 to $114,000 in the current quarter reflecting a net increase in long-term debt over the past year combined with an increase in the bank's prime lending rate. Total long-term debt (comprised of callable debt, long-term debt, capital leases and preferred share liability) increased from $4.0 million at September 30, 2005 to $11.1 million at September 30, 2006. This is due primarily to a net increase of $4.0 million in new capital leases over the past year as well as the $4.2 million preferred share liability acquired as part of the February 14, 2006 go-public transaction.

Other interest expense

Other interest expense, which relates to operating loan interest, increased from $29,000 during the third quarter of 2005 to $112,000 during the current quarter. This reflects a higher operating loan balance at the end of the current quarter (ie balance of $11.6 million at Sept. 30 2006 compared to a balance of $5.0 million at Sept. 30 2005) due to greater working capital requirements this year combined with utilization of the operating loan during 2006 to finance capital expenditures. In 2005, capital expenditures were largely financed through the Company's lease facility. The increase in the bank's prime lending rate also resulted in increased interest in the current quarter.

Income taxes

The Company recognized a net tax expense of $45,000 during the third quarter of 2006 as compared to a net tax expense of $0.8 million recognized in the third quarter of 2005. The low net tax expense recognized in the current quarter primarily reflects a draw-down of the deferred credit that was recorded as part of the go public transaction, combined with the reversal of several timing differences between certain amounts recorded for tax versus accounting. The draw-down of the deferred credit is in proportion to the draw-down (or utilization) of the income tax asset that was also recorded as part of the February 14th transaction date.

Net Earnings

The Company recorded net earnings for the third quarter ended September 30, 2006 of $2.2 million, which brings net earnings for the nine months ended September 30, 2006 to $5.4 million. During 2005, the Company recorded net earnings of $1.0 million for the third quarter and a nine month net earnings figure of $2.2 million.

Normalized EBITDA

Normalized EBITDA was $5.2 million for the third quarter of 2006 as compared to $2.8 million for the prior year third quarter (see section below titled "Reconciliation of Normalized EBITDA to Net Earnings).

Capital Expenditures

The Company's capital expenditures for property and equipment during the third quarter of 2006 amounted to $9.1 million and related to budgeted fixed asset additions in the Wireline and Testing divisions. Internal capital expenditures for the nine months ended September 30, 2006 (which exclude the capitalization of equipment operating leases of $3.4 million and capital equipment purchased as part of the May 31, 2006 business acquisitions of $9.3 million) were approximately $16.8 million.

As previously announced in August, the Company's Board of Directors approved a revised capital expenditure program for calendar 2006 of $20.9 million (excluding the above mentioned capital leases and equipment from the May 31, 2006 asset acquisitions). All budgeted equipment additions are anticipated to be delivered before December 31, 2006 other than 3 wireline trucks which have been delayed to early 2007. The 2006 budget allocation for these units has been re-allocated to auxiliary and other equipment.

During November, the Company's Board approved a preliminary capital expenditure budget for calendar 2007 of $5.5 million. This budget will be reviewed in early 2007 once the Company has a better outlook for industry activity levels for next year.

Based on the anticipated equipment deliveries for the remainder of 2006, the Company is planning to exit calendar 2006 with the following equipment fleet:



---------------------------------------------------------------------------
# of Wireline # of Swabbing # of Testing
Units Units packages
---------------------------------------------------------------------------
In operation at December 31, 2005 30 4 32
---------------------------------------------------------------------------
Asset acquisitions closed
on May 31, 2006 2(a) - 16
---------------------------------------------------------------------------
Internal additions
- Jan. 1 - Sept. 30 2006 3 1 8
---------------------------------------------------------------------------
Fleet size at Sept. 30 2006 35 5 56
---------------------------------------------------------------------------
Expected internal additions - Q4 2006 9 4 5
---------------------------------------------------------------------------
Expected equipment retirements - Q4 2006 (1) (1) -
---------------------------------------------------------------------------
Planned fleet size at December 31, 2006 43 8 61
---------------------------------------------------------------------------

(a) Canadian Sub-Surface has historically included the wireline units owned
by the owner operators as part of the Company's available fleet. At
December 31, 2005, the available fleet of 30 wireline units included 11
units owned by the owner operators. One of the owner operators added 2
units to his fleet during 2006, prior to the May 31 acquisition date.


Due to manufacturing delays, many of the wireline units that were initially scheduled for delivery during the second and third quarters of 2006 have been delayed until the fourth quarter.

Income Tax amounts

The Company had the following estimated tax amounts available at September 30, 2006, to apply against future taxable income: non-capital losses of $13.4 million and unclaimed scientific research and development expenditures ("SRED") of $9.4 million. In addition, the Company had $1.9 million in investment tax credits which may be claimed against taxes otherwise payable for federal purposes. The expiry dates of these tax amounts are outlined in the notes to the September 30, 2006 unaudited, interim financial statements.

Share Capital

There was no change to share capital during the third quarter of 2006. The Company exited the quarter with 18.3 million shares outstanding.

Stock Options

During the current quarter, the Company issued 87,500 options and cancelled 32,500 options for a net increase of 55,000 options. At September 30, 2006 the Company had 1.56 million options outstanding.

Liquidity and Capital Resources

As at September 30, 2006 the Company had a working capital deficit of $2.7 million. This deficit arose primarily as a result of the utilization of the Company's operating line to fund the Company's internal capital expenditure program for the first nine months of 2006 (i.e.: using a current liability to acquire a long-term asset). At September 30, 2006, the Company had drawn $11.6 million of the available $13.5 million operating loan. The operating loan had a previous limit of $8.5 million but was increased by the bank to $13.5 million during the third quarter. The Company also has an available lease facility of $13.0 million, of which $4.9 million had been drawn at September 30, 2006. As noted in the section below titled "Subsequent Events", during November 2006 the Company negotiated a new $44.0 million committed revolving loan facility with its banker. Under terms of this facility, the loan will be secured against the Company's accounts receivable and tangible capital assets. This facility will replace the current operating loan and will be used to finance working capital requirements as well as future capital expenditures. Based on the related repayment terms, a significant portion of the drawn amounts will be reflected as a long-term liability which will correspond with the long term nature of the assets acquired with funds from the facility.

The Company believes that its strong balance sheet combined with available credit facilities and cash flow from operating activities will provide sufficient capital resources to fund its planned capital expenditure program and on-going operations.

Related Party Transactions

The related party transactions during the three and nine month periods ended September 30, 2006 are disclosed in the notes to the interim financial statements.

Subsequent Events

Subsequent to quarter end, on November 13, 2006, the Company's shareholders approved the conversion of all of the Company's outstanding Class B preferred shares to Class A common voting shares on a one to one basis which results in a more simplified corporate share structure. The Class B share amount of $4.2 million which was classified as long-term debt on the balance sheet will now be eliminated. In addition, shareholders approved a reduction in the Company's accumulated deficit of $22.7 million and a corresponding reduction in the Class A share capital amount. This will result in a revised retained earnings figure that reflects cumulative earnings since January 1, 2006 which is more representative of the Company's performance since the Company's go-public transaction completed on February 14, 2006.

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, goodwill, 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.

Risks and Uncertainties

The Company's operations face a number of risks and uncertainties in the normal course of business that may be beyond its control, but which could have a material adverse effect on the financial affairs of the business, including its operating results.

In particular, the demand, pricing and terms of oilfield services largely depend upon the level of industry activity for Canadian natural gas, and to a lesser extent, oil exploration and development. The level of activity in the Canadian oil and gas exploration and development industry is volatile. No assurance can be given that expected trends in oil and gas production activities will continue or that the demand for oilfield services will reflect the level of activity in the industry. Any prolonged substantial reduction in oil and natural gas prices would likely affect oil and gas production levels and therefore affect the demand for services to oil and gas customers.

Additional risks might include: the potential impact of environmental regulations including the Kyoto protocol, seasonality and weather patterns, pricing and availability of capital equipment, the actions taken or strategies adopted by competitors, certain governmental regulations, credit risk, availability of financing and other operating risks or hazards.

Outlook

Activity levels in the WCSB related to natural gas drilling and development have been negatively impacted by natural gas prices that have declined significantly since early 2006. The shallower, less economic natural gas plays have seen the most significant impact. Since a large portion of the Company's natural gas work is centered around intermediate and deeper gas reserve areas, the decline in our equipment utilization has not been as severe as some of our peers. In addition, approximately one-third of the Company's work is related to light and heavy oil activity which has not experienced significant declines. Given the Company's strong balance sheet, and low exposure to shallow gas activity, we are positioned to weather the current lower natural gas price environment.



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

---------------------------------------------------------------------------
Three months Three months Nine months Nine months
ended Sept 30 ended Sept 30 ended Sept 30 ended Sept 30
In $000's 2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
---------------------------------------------------------------------------
Net earnings 2,192 982 5,350 2,168
---------------------------------------------------------------------------
Add back (deduct):
---------------------------------------------------------------------------
Depreciation and
amortization expense 2,445 466 4,265 1,257
---------------------------------------------------------------------------
Future income tax
expense (recovery) 45 671 (53) 550
---------------------------------------------------------------------------
Gain on disposal of
equipment (26) (4) (26) (4)
---------------------------------------------------------------------------
Stock-based
compensation expense 346 - 1,204 -
---------------------------------------------------------------------------
Non-Controlling interest - 356 786 1,017
---------------------------------------------------------------------------
Cash Flow (1) 5,002 2,471 11,526 4,988
---------------------------------------------------------------------------
Add Back:
---------------------------------------------------------------------------
Long-term and other
interest expense 226 56 560 235
---------------------------------------------------------------------------
EBITDA (1) 5,228 2,527 12,086 5,223
---------------------------------------------------------------------------
Normalization adjustments:
---------------------------------------------------------------------------
Equipment lease expenses
included in operating
expenses (2) - 238 72 602
---------------------------------------------------------------------------
Normalized EBITDA (1) 5,228 2,765 12,158 5,825
---------------------------------------------------------------------------

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

(2) Certain of the Company's wireline units, swabbing units, testing
packages and related equipment were previously 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 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 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 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. Gross Margin represents revenue less operating expenses, and is another financial indicator used in the oilfield services sector. Gross Margin percentages will vary quarter over quarter in relation to the seasonality of the Company's business. Cash Flow, EBITDA, Normalized EBITDA and Gross Margins should not be considered as an alternative to operating income or operating earnings, as an indicator of financial performance. Cash Flow, EBITDA, Normalized EBITDA and Gross Margin 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 nine months ended September 30, 2006
(unaudited)



CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Consolidated Balance Sheets
(in thousands of dollars)
(Unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30, December 31,
2006 2005
---------------------------------------------------------------------------
Assets
Current assets:
Accounts receivable $ 18,884 $ 14,085
Deposits and other 1,402 402
Current portion of loans receivable - 126
Income taxes recoverable 36 -
Inventory 326 -
---------------------------------------------------------------------------
20,648 14,613
Due from related parties - 174
Loans receivable - 37
Property and equipment (note 5) 38,960 12,715
Future income tax asset (note 9) 5,916 -
Intangible assets (note 4) 10,793 601
Goodwill (note 4) 14,177 1,401
---------------------------------------------------------------------------
$ 90,494 $ 29,541
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness (note 6) $ 11,553 $ 4,924
Accounts payable and accrued liabilities 8,894 6,574
Callable debt 1,114 1,832
Notes payable - 1,266
Current portion of long-term debt 99 99
Shareholders' loans - 803
Income taxes payable - 1,258
Current portion of obligations
under capital leases 2,257 1,346
---------------------------------------------------------------------------
23,917 18,102
Obligations under capital leases 3,450 2,657
Long-term debt 33 107
Preferred share liability(note 8) 4,162 -
Future income tax liability(note 9) - 2,180
Deferred credit 7,129 -
---------------------------------------------------------------------------
38,691 23,046
Non-controlling interest - 2,520

Shareholders' equity:
Share capital(note 8) 66,034 500
Contributed surplus(note 8) 3,072 1,868
Retained earnings(deficit) (17,303) 1,607
---------------------------------------------------------------------------
51,803 3,975
Commitments(note 10)
Subsequent events (note 13)
---------------------------------------------------------------------------
$ 90,494 $ 29,541
---------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

On behalf of the Board:

Signed "William Tobman" Signed "Darshan Kailly"
----------------------------- ------------------------------
Director Director




CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Consolidated Statements of Earnings and Retained Earnings(Deficit)
(in thousands of dollars; except per share amounts)
(Unaudited)
---------------------------------------------------------------------------
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Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
Revenue $ 20,625 $ 12,208 $ 53,741 $ 33,160

Expenses:
Operating 13,097 8,061 35,616 23,164
Selling, general and
administrative 2,646 1,581 7,243 3,853
Depreciation and
amortization 2,445 466 4,265 1,257
Interest on
long-term debt and
capital leases 114 27 375 118
Other interest 112 29 185 117
Gain on disposal of
capital assets (26) (4) (26) (4)
Gain on retirement
of leased assets - (121) - (121)
---------------------------------------------------------------------------
18,388 10,039 47,658 28,384
---------------------------------------------------------------------------
Earnings before income taxes 2,237 2,169 6,083 4,776

Income taxes(recovery)
(note 9):
Current - 160 - 1,041
Future 45 671 (53) 550
---------------------------------------------------------------------------
45 831 (53) 1,591
---------------------------------------------------------------------------
Earnings before
non-controlling interest 2,192 1,338 6,136 3,185

Non-controlling interest - 356 786 1,017
---------------------------------------------------------------------------
Net earnings 2,192 982 5,350 2,168

Retained earnings (deficit),
beginning of period (19,495) 1,514 1,607 2,622

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

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

Equity of 1156853 Alberta Ltd. - - - (2,294)
---------------------------------------------------------------------------
Retained earnings
(deficit), end of period $ (17,303) $ 2,496 $ (17,303) $ 2,496
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net earnings per
common share:
Basic $ 0.12 $ 0.19 $ 0.37 $ 0.42
Diluted $ 0.12 $ 0.19 $ 0.36 $ 0.42
---------------------------------------------------------------------------

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 Nine months ended
September 30, September 30,
-----------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
Cash provided by(used in):
Operations:
Net earnings $ 2,192 $ 982 $ 5,350 $ 2,168
Depreciation and
amortization 2,445 466 4,265 1,257
Future income taxes
(recovery) 45 671 (53) 550
Gain on disposal of
capital assets (26) (4) (26) (4)
Stock based compensation 346 - 1,204 -
Non-controlling interest - 356 786 1,017
---------------------------------------------------------------------------
5,002 2,471 11,526 4,988
Change in non-cash
working capital
related to operating
activities (6,544) (1,409) (7,312) (1,829)
---------------------------------------------------------------------------
(1,542) 1,062 4,214 3,159
---------------------------------------------------------------------------
Financing:
Decrease in amounts
due from related parties - (37) 174 (228)
Repayment of callable debt (226) (246) (718) (694)
Increase in bank
indebtedness 11,553 2,002 8,141 679
Decrease in notes
payable - (39) (1,266) -
Repayment of long-term debt (25) (24) (74) (74)
Increase in
shareholders' loans - - - 24
Repayment of shareholders'
loans - (169) (803) (526)
Increase in obligations
under capital lease - - 3,448 977
Repayment of obligations
under capital lease (571) (180) (1,744) (406)
Decrease in loans
receivable 15 133 163 196
Net proceeds on
issue of common shares 550 - 49,139 -
Proceeds from exercise of
stock options - - 810 -
Cash portion of
payment to CanSub Group
shareholders - - (26,066) -
---------------------------------------------------------------------------
11,296 1,440 31,204 (52)
---------------------------------------------------------------------------
Investing:
Acquisition of
businesses - - (16,795) -
Acquisition of property
and equipment (9,106) (3,474) (20,163) (5,070)
Disposal of property
and equipment 14 972 93 972
Equipment held for resale - - - 991
Change in non-cash
working capital
related to investing
activities (1,786) - 1,447 -
---------------------------------------------------------------------------
(10,878) (2,502) (35,418) (3,107)
---------------------------------------------------------------------------
Net change in cash (1,124) - - -

Cash and cash
equivalents,
beginning of period 1,124 - - -
---------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $ - $ - $ - $ -
---------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


CANADIAN SUB-SURFACE ENERGY SERVICES CORP.

Notes to the Consolidated Financial Statements (in thousands of dollars; except per share amounts)

Three and Nine months ended September 30, 2006 (Unaudited)

1. Basis of presentation and nature of operations:

These consolidated financial statements include the accounts of Canadian Sub-Surface Energy Services Corp. (the "Company," formerly named Canada West Capital Inc. ("CWC")). On February 14, 2006, CWC acquired all of the outstanding shares of Canadian Sub-Surface Energy Services Inc., Canadian Sub-Surface Gas Testing Inc. and 1156853 Alberta Ltd. ("the CanSub Group"). Subsequent to the acquisition, the former shareholders of the CanSub Group held the largest percentage of Class A common voting shares and therefore the CanSub Group was deemed to be the acquirer for accounting purposes. Accordingly, the transaction has been accounted for as a reverse takeover (using the purchase method) whereby the assets and liabilities of CWC were recorded at their fair values at the February 14th transaction date. The comparative figures for the three and nine month periods ended September 30, 2005 are from the combined consolidated results of the CanSub Group.

The transaction was accounted for by the purchase method with the CanSub Group being the deemed acquirer of CWC. Consideration of $1,569 consisted of 373,689 Class A common shares (with a deemed value of $4.20 per share) issued to the CWC shareholders. The results of operations of CWC are included in the consolidated financial statements from February 14, 2006.

The fair values of the net assets acquired were as follows:



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

Cash $ 1,512
Accounts receivable 47
Future income tax asset related to non-capital losses, unclaimed
scientific research and development expenditures, and investment
tax credits 12,768
Future income tax asset - transaction costs 185
Current liabilities (768)
Preferred share liability (2,219)
Deferred credit (9,956)

---------------------------------------------------------------------------
Net assets acquired $ 1,569
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Effective May 31, 2006, the three entities comprising the CanSub Group were amalgamated and wound up into the Company.

These unaudited interim consolidated financial statements for the period ended September 30, 2006 do not include all the disclosures required in the annual financial statements and should be read in conjunction with the annual audited combined consolidated financial statements for the CanSub Group for the year ended December 31, 2005. These unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles using the same accounting policies as the annual audited December 31, 2005 financial statements of the CanSub Group and the policies described in note 2.

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

2. Summary of significant accounting policies:

(a) Property and equipment:

On January 1, 2006, the Company revised its accounting estimates related to certain equipment depreciation rates. The details of this change are listed below. This change has been accounted for on a prospective basis.

Property and equipment is stated at cost. Depreciation has been calculated using the declining balance method over the estimated useful lives of the assets at the following annual rates:



---------------------------------------------------------------------------
---------------------------------------------------------------------------
Revised rate Previous rate
---------------------------------------------------------------------------

Trucks 25% 30%
Truck equipment 15% 15%
Field equipment 15% 20%
Furniture and office equipment 20% 10%
Computer hardware and software 30% 30%
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(b) Inventory:

Inventory consisting of parts and operating supplies is carried at the lower of cost, determined on a first in first out basis, and net realizable value.

(c) Intangible assets:

The Company amortizes its intangible assets on a straight-line basis over their estimated useful lives as follows:



---------------------------------------------------------------------------
---------------------------------------------------------------------------
Term
---------------------------------------------------------------------------

Non-competition agreements 4 years
Customer relationships 5 years
Patent pending technology 3 years
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(d) Cash and cash equivalents:

Cash and cash equivalents consist of cash on deposit and short-term investments with original maturities of 90 days or less that are carried at the lower of cost and market value.

(e) Long-lived assets:

On a periodic basis, management assesses the carrying value of long-lived assets for indications of impairment. Indications of impairment include items such as an ongoing lack of profitability and significant changes in technology. When an indication of impairment is present, the Company tests for impairment by comparing the carrying value of the asset to its net recoverable amount. If the carrying amount is greater than the net recoverable amount, the asset is written down to its estimated fair value.

(f) Goodwill:

Goodwill represents the portion of the purchase price paid on the acquisition of businesses in excess of the value assigned to identifiable net assets acquired. Goodwill is tested for impairment at least annually. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting segment is compared with its fair value. When the fair value of a reporting segment exceeds its carrying amount, goodwill of the reporting segment is considered not to be impaired and the second step of the impairment test is unnecessary. The second step is carried out when the carrying amount of a reporting segment exceeds its fair value, in which case the implied fair value of the reporting segment's goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. When the carrying amount of a reporting segment's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.

(g) Income taxes:

The Company follows the asset and liability method of accounting for future income taxes, whereby temporary differences arising from the difference between the tax basis of an asset or liability and its carrying amount on the balance sheet are used to calculate future income tax liabilities or assets. Future income tax liabilities or assets are calculated using income tax rates currently enacted or substantively enacted in the period that the temporary differences are expected to reverse.

(h) Stock based compensation:

The Company records stock based compensation expense for stock options granted to employees, officers, directors and consultants using the fair value method. Under this method, stock based compensation is recorded over the vesting period of the option based on the fair value of the option at the grant date.

(i) Per share amounts

Basic earnings per common share is calculated by dividing the income available to common shareholders by the weighted average number of common shares outstanding during the period.

Diluted earnings per common share is based on the treasury stock method. Under the treasury stock method, the weighted average number of common shares outstanding assumes that the proceeds to be received on the exercise of dilutive share options are used to repurchase common shares at the average market price during the period.

(j) 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, goodwill, intangible assets, stock based compensation, valuation of income tax assets and certain components of employee compensation. 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.

3. 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.

4. Acquisitions:

On May 31, 2006, the Company completed the acquisitions of the business assets of Colter Production Services Inc. ("Colter"), and three owner operators ("Owner-operators") (Southern Wireline Services Ltd., Sure Shot Perforators Ltd. and VCEE Wireline Services Ltd.). The aggregate purchase price of the four acquisitions was $29,956. Consideration consisted of $16,795 in cash and $13,161 in Class A common shares (with a deemed value for accounting purposes of $7.16 per share).



The aggregate purchase price was allocated to the estimated fair values of
the net assets acquired as follows:

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Owner- Total
Colter operators
---------------------------------------------------------------------------

Property and equipment $ 3,595 $ 5,754 $ 9,349
Intangible assets:
Customer relationships 2,717 1,057 3,774
Non-compete agreements 3,623 3,860 7,483
Future income tax liability (961) (2,465) (3,426)
Goodwill 4,709 8,067 12,776

---------------------------------------------------------------------------
Net assets acquired $ 13,683 $ 16,273 $ 29,956
---------------------------------------------------------------------------
---------------------------------------------------------------------------


5. Property and equipment:


Accumulated
September 30, 2006 Cost Depreciation Net
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Trucks 8,658 (1,635) 7,023
Truck equipment 15,270 (3,483) 11,787
Field equipment 23,307 (4,111) 19,196
Furniture, fixt & leaseholds 282 (66) 216
Computer hardware & software 1,064 (326) 738
--------------------------------
48,581 (9,621) 38,960
--------------------------------

Accumulated
December 31, 2005 Cost Depreciation Net
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Trucks 3,200 949 2,251
Truck equipment 6,925 2,609 4,316
Field equipment 8,356 2,649 5,707
Furniture, fixt & leaseholds 129 40 89
Computer hardware & software 540 188 352
--------------------------------
19,150 6,435 12,715
--------------------------------

Included in property and equipment at September 30, 2006 are assets under
capital lease with a total cost of $8,214 (December 31, 2005 - $ 4,839) and
a net book value of $6,942 (December 31, 2005 - $3,866).



6. Bank indebtedness:

At September 30, 2006, the Company had a revolving loan facility with a major chartered bank with total credit available equal to the lesser of $13,500 and 75% of the accounts receivable balances less than 90 days of age. The facility bears interest at the bank prime rate plus 0.75% per annum, and is due on demand. This loan facility is secured by:

(a) assignment and postponement of all shareholder loan advances;

(b) a general security agreement covering all present and future property of the Company (exclusive of the security otherwise noted to which they have a second charge); and

(c) assignment of all risk insurance proceeds



7. Related party transactions:

(a) For the nine months ended September 30, 2006, legal fees of $432 were charged from a professional services firm in which one of the Company's directors is a partner (three months ended September 30, 2006 - $20). In 2005, the aforementioned professional services firm was not a related party of the Company.

(b) During the three months ended September 30, 2006, the purchase price adjustment payable of $1,500 was paid to shareholders of the Company who were previously the shareholders of the CanSub Group.



8. Share capital:

(a) Common shares:

(i) Authorized:

Unlimited number of Class A voting common shares
Unlimited number of Class C non-voting common shares

(ii) Issued and outstanding:

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Number of
Class A voting common shares Amount
---------------------------------------------------------------------------

Balance at December 31, 2005 1,991 $ 500
Purchase and cancellation of CanSub Group shares (1,991) -
Issue of shares to CanSub Group shareholders 5,125,247 -
Exercise of CanSub Group options 366,658 810
Issue of shares pursuant to February 14, 2006
private placement (net of issue costs of $2,095) 8,095,237 31,905
Issue of shares to former shareholders of CWC 373,689 1,569
Transaction costs and share issue costs applied
to share capital - (1,215)
Income tax benefit of transaction costs and
commissions related to private placements - 1,299
Issue of shares pursuant to May 31, 2006 private
placement (net of issue costs of $995) 2,533,333 18,005
Issue of shares as consideration for the May 31, 2006
asset acquisitions 1,838,534 13,161

---------------------------------------------------------------------------
Balance at September 30, 2006 18,332,698 $ 66,034
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(b) Stock options:

All stock options have a five year term and vest equally over three years commencing on the first anniversary of the date of grant. When stock options are exercised, the proceeds, together with the amount of compensation expense previously recorded in contributed surplus is added to capital stock.



---------------------------------------------------------------------------
---------------------------------------------------------------------------
Weighted
average
Number of exercise
Continuity of stock options options price
---------------------------------------------------------------------------

Balance at December 31, 2005 366,658 $ 2.21
Exercised prior to February 14, 2006 (366,658) 2.21

---------------------------------------------------------------------------
Balance at February 14, 2006 - -
Granted 1,597,750 5.10
Forfeited (40,500) 4.98

---------------------------------------------------------------------------
Balance at September 30, 2006 1,557,250 $ 5.23
---------------------------------------------------------------------------
---------------------------------------------------------------------------



The Company recorded stock based compensation expense and the related credit to contributed surplus of $1,204 for the nine month period ended September 30, 2006 (three months ended September 30, 2006 - $346). The average fair value of the options granted between February 14, 2006 and September 30, 2006 was $2.39 per option. No options were granted in the nine month period ended September 30, 2005.

Due to the vesting requirements listed above, no stock options were exercisable at September 30, 2006. Similarly, no options expired during the period.

(c) Contributed surplus:



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

Contributed surplus at December 31, 2005 $ 1,868

Stock based compensation expense 1,204

---------------------------------------------------------------------------
Contributed surplus at September 30, 2006 $ 3,072
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(d) Class B non-voting preferred shares:

(i) Authorized:

Unlimited number of Class B non-voting preferred shares

(ii) Issued and outstanding:


---------------------------------------------------------------------------
---------------------------------------------------------------------------
Number of
Shares Amount
---------------------------------------------------------------------------

Shares issued to CanSub Group shareholders 357,143 $ 1,500

Conversion of 4,437,307 preferred shares of CWC
to Class B shares 633,901 2,662

---------------------------------------------------------------------------
Balance - September 30, 2006 991,044 $ 4,162
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The Class B preferred shares are non-voting, have a cumulative dividend of 2.5% per annum, are convertible at the option of the holder to Class C shares and have priority as to payment of the redemption price ($4.20/share) and all declared but unpaid dividends on winding up, liquidation or dissolution of the Company. These shares have all the characteristics of debt and have been classified as such on the balance sheet. These shares arose out of the Arrangement Agreement between the CanSub Group and CWC that was effective on February 14, 2006.

9. Income taxes:

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



---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
Earnings before income taxes $ 2,237 $ 2,169 $ 6,083 $ 4,776
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Combined federal and provincial
income tax rate 32.76% 33.62% 32.76% 33.62%

Expected income tax provision 733 729 1,993 1,605
Benefit realized from small business
deduction - (4) - (39)
Drawdown of deferred credit (634) - (2,826) -
Non-deductible stock based
compensation expense 113 - 394 -
Non-deductible expenses 14 3 42 12
Other 15 103 272 13
Differences attributable to rate (196) - 72 -

---------------------------------------------------------------------------
Income tax expense (recovery) $ 45 $ 831 $ (53) $ 1,591
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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

---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30, December 31,
2006 2005
---------------------------------------------------------------------------

Non capital losses and unclaimed scientific research
and development expenses $ 7,243 $ -
Investment tax credits and other 1,900 -

---------------------------------------------------------------------------
$ 9,143 $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30, December 31,
2006 2005
---------------------------------------------------------------------------

Property and equipment $ 2,930 $ 2,004
Capital leases (1,737) (1,192)
Intangible assets 2,475 -
Partnership income - 1,352
Transaction costs (1,156) 16
Utilization of investment tax credits 617 -
Other 98 -

---------------------------------------------------------------------------
$ 3,227 $ 2,180
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net future income tax asset (liability) $ 5,916 $ (2,180)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


At September 30, 2006 the Company had non-capital losses of approximately
$13.4 million available to reduce future taxable income. These losses
expire as follows:


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

2008 $ 2,221
2009 3,221
2010 7,159
2011 272
2012 498

---------------------------------------------------------------------------
$ 13,371
---------------------------------------------------------------------------
---------------------------------------------------------------------------


In addition, research and development cost pools of $9.4 million are available to reduce future taxable income and do not expire. Capital losses of $3.5 million are available to reduce future capital gains and do not expire. Investment tax credits of $1.9 million can be claimed against federal income taxes payable and expire between 2006 and 2013. Any investment tax credits claimed, reduce the available research and development cost pools on a dollar for dollar basis.

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

10. Commitments:

(a) At September 30, 2006, the Company had the following annual commitments under vehicle operating lease agreements:



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

October 1 - September 30:
2006 - 2007 $ 871
2007 - 2008 426
2008 - 2009 57
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(b) At September 30, 2006, the Company had the following annual commitments under office and warehouse lease agreements:



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

October 1 - September 30:
2006 - 2007 $ 1,208
2007 - 2008 1,387
2008 - 2009 1,270
2009 - 2010 1,168
2010 - 2011 1,168
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(c) At September 30, 2006, the Company had commitments to purchase $2,445 of wireline, swabbing, production testing and related equipment. Delivery of these items is scheduled to occur in 2006 and 2007.

11. 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 gas industry.

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



Selling, general and administrative expenses have not been allocated
between the segments.

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended
September 30, 2006
------------------------------
Wireline Testing Total
---------------------------------------------------------------------------

Revenue $ 13,073 $ 7,552 $ 20,625
Operating expenses 7,976 5,121 13,097
---------------------------------------------------------------------------
5,097 2,431 7,528

Selling, general and administrative - - 2,646
Depreciation 1,863 582 2,445
---------------------------------------------------------------------------
2,437

Goodwill 8,067 6,110 14,177
Property and equipment 25,529 13,431 38,960
Capital expenditures - property and equipment 5,994 3,112 9,106
Capital expenditures - intangible assets - - -
Total assets 72,387 18,107 90,494
---------------------------------------------------------------------------
---------------------------------------------------------------------------


---------------------------------------------------------------------------
---------------------------------------------------------------------------
Nine months ended
September 30, 2006
------------------------------
Wireline Testing Total
---------------------------------------------------------------------------

Revenue $ 34,216 $ 19,525 $ 53,741
Operating expenses 22,767 12,849 35,616
---------------------------------------------------------------------------
11,449 6,676 18,125

Selling, general and administrative - - 7,243
Depreciation 3,189 1,076 4,265
---------------------------------------------------------------------------
6,617

Goodwill 8,067 6,110 14,177
Property and equipment 25,529 13,431 38,960
Capital expenditures - property and equipment 18,526 10,986 29,512
Capital expenditures - intangibles assets 6,340 4,916 11,256
Total assets 72,387 18,107 90,494
---------------------------------------------------------------------------
---------------------------------------------------------------------------



---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended
September 30, 2005
------------------------------
Wireline Testing Total
---------------------------------------------------------------------------

Revenue $ 7,549 $ 4,659 $ 12,208
Operating expenses 5,422 2,639 8,061
---------------------------------------------------------------------------
2,127 2,020 4,147

Selling, general and administrative - - 1,581
Depreciation 207 259 466
---------------------------------------------------------------------------
2,100

Goodwill - 1,401 1,401
Capital expenditures - property and equipment 2,696 778 3,474
Total assets 13,484 11,032 24,516
---------------------------------------------------------------------------
---------------------------------------------------------------------------


---------------------------------------------------------------------------
---------------------------------------------------------------------------
Nine months ended
September 30, 2005
------------------------------
Wireline Testing Total
---------------------------------------------------------------------------

Revenue $ 20,480 $ 12,680 $ 33,160
Operating expenses 15,331 7,833 23,164
---------------------------------------------------------------------------
5,149 4,847 9,996

Selling, general and administrative - - 3,853
Depreciation 808 449 1,257
---------------------------------------------------------------------------
4,886

Goodwill - 1,401 1,401
Capital expenditures - property and
equipment 4,098 972 5,070
Total assets 13,484 11,032 24,516
---------------------------------------------------------------------------
---------------------------------------------------------------------------


12. Comparative information:

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

13. Subsequent events:

(a) On November 8, 2006, the Company's bank credit facilities were amended. Prior to the amendment, the Company had a $13,500 revolving facility (increased from $8,500 during September 2006) that was secured by 75% of eligible accounts receivable. In addition, the Company had a leasing credit line available for the acquisition of equipment, with a limit of $13,000. This leasing line was secured by the related equipment acquired.

As part of the amendment, a new committed revolving facility (with a credit limit of $44,000) was put in place which replaces the previous revolving and lease line facilities. Under terms of the new loan facility, outstanding amounts under the loan become repayable on the "Revolving Term Date" which is November 8, 2007. The Company can request a renewal of the revolving facility for a single one year term by notifying the bank in writing at least 60 days prior to the expiry of the initial term of the facility (November 8, 2007). The bank shall confirm within 30 days from the receipt of the Company's request whether and upon what terms it shall agree to the renewal. When the loan amounts become repayable, the repayments occur evenly over a three-year term. The amount available to be drawn on this new facility is based on 75% of eligible accounts receivable plus 50% of the net book value of unencumbered operating equipment less remaining amounts outstanding on the previous equipment lease line. The rate of interest varies between the banks prime rate plus 0.5 to 1.0 percent based on the maintenance of certain financial ratios.

(b) At the November 13, 2006 shareholders meeting, the Company's shareholders approved the following:

(i) a $22,652 reduction to the Company's accumulated deficit amount (with corresponding reduction to the carrying amount of the Company's Class A voting shares);

(ii) conversion of the Company's 991,044 outstanding Class B preferred shares to 991,044 Class A common voting shares.

This news release contains forward-looking statements that involve risks and uncertainties, which may cause actual results to differ materially from the statements made. When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect" and similar expressions are intended to identify forward-looking statements. Such statements reflect the views of Canadian Sub-Surface Energy Services Corp. with respect to future events and are subject to such risks and uncertainties. Many factors could cause our actual results to differ materially from the statements made including those factors detailed from time to time in filings made by the Company with Canadian securities regulatory authorities. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated or expected. Canadian Sub-Surface Energy Services Corp. does not intend and does not assume any obligation to update these forward-looking statements.


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