Canadian Sub-Surface Energy Services Corp.
TSX : CSE

Canadian Sub-Surface Energy Services Corp.

March 16, 2009 08:30 ET

Canadian Sub-Surface Energy Services Announces Q4 2008 and Year End 2008 Financial Results

CALGARY, ALBERTA--(Marketwire - March 16, 2009) - Canadian Sub-Surface Energy Services Corp. (TSX:CSE) ("CanSub" or "the Company") announced today its financial and operating results for the three and twelve month periods ended December 31, 2008. The following should be read in conjunction with the Company's Management's Discussion and Analysis and the consolidated financial statements and notes which are available on SEDAR at www.SEDAR.com.



Financial Highlights

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

----------------------------------------------------------------------------
(Unaudited) Three Three
months months Year Year
ended ended ended ended
Dec 31, Dec 31, % Dec 31, Dec 31, %
2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Revenue 24,566 16,312 +50.6% 84,038 66,169 +27.0%
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Gross Margin 6,259 3,936 +59.0% 21,474 15,489 +38.6%
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Gross Margin % 25.5% 24.1% +5.8% 25.6% 23.4% +0.9%
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Cash Flow (1) 3,356 1,465 +129.1% 10,707 5,132 +108.6%
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EBITDAS (1) (2) 3,633 1,968 +84.6% 12,135 6,837 +77.5%
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EBITDAS as a
% of revenue 14.8% 12.1% +22.3% 14.4% 10.3% +39.8%
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Earnings (loss)
before income tax 667 (23,385) +102.3% 850 (28,757) +103.0%
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Net Earnings (loss) (3) (273) (21,024) +98.7% 1,015 (24,737) +104.1%
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Net Earnings (loss)
per share - basic
and diluted ($0.01) ($1.09) +99.0% $0.04 ($1.28) +104.7%
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Weighted average number
of Class A common
shares outstanding
(in thousands) 26,124 19,324 +34.42% 23,168 19,324 +14.9%
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Number of field
Locations in WCSB at
end of period 14 11 +27.3% 14 11 +27.3%
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Number of field
Locations in U.S. at
end of period 1 0 +100% 1 0 +100%
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(1) Refer to the "Non-GAAP measures" section below for details.

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

(3) Net earnings before income tax were $667,000 and $850,000 respectively
for Q4 2008 and calendar 2008. Income taxes for these two periods
(which consisted primarily of future taxes) were $940,000 of expense for
Q4 2008 and a recovery of $165,000 for calendar 2008 resulting in the
net earnings (loss) figures reported. The income tax expense recorded
in Q4 2008 partially reflects the impact of the deferral of estimated
utilization of losses for income tax purposes to periods with lower tax
rates.


Operational Highlights

Revenue during Q4 2008 of $24.6 million was 51% higher than the $16.3 million of revenue recognized during Q4 2007. The increased revenue contributed to a higher EBITDAS, which improved from $2.0 million in Q4 2007 to $3.6 million in Q4 2008. CanSub recorded a net loss of $0.3 million for Q4 2008 as compared to a significant net loss of $21.0 million for Q4 2007. The net loss recorded in the prior period reflected a $21.7 million charge related to impairment losses on goodwill and intangible assets.

Revenue and EBITDAS for the year ended December 31, 2008 were $84.0 million and $12.1 million respectively as compared to $66.2 million and $6.8 million respectively for the prior year. For the current year, CanSub reported net earnings of $1.0 million as compared to a net loss of $24.7 million for calendar 2007(which reflects the $21.7 million impairment losses recorded in Q4 2007 as noted above).

CanSub's increased revenue in Q4 2008 reflected higher overall equipment utilization rates in both the Wireline and Testing divisions, combined with an increased equipment base in the Wireline division. The increased utilization occurred despite a decrease in the number of wells drilled (rig released) during the quarter in the Western Canadian Sedimentary Basin ("WCSB"). As reported by Nickles Group, there were 4,823 wells drilled in the WCSB during Q4 2008, compared to 5,252 wells drilled during Q4 2007, or an 8% drop. The total wells drilled in calendar 2008 of 16,935 represented a 9% drop from the 18,531 wells drilled in calendar 2007. The increased equipment utilization reflects CanSub's geographic diversity, as the Company has exposure to the higher activity areas of the basin, including southeastern Saskatchewan and northeastern British Columbia.

During 2008, CanSub established its first operating location in the United States in Williston, North Dakota. The Company currently has two testing packages working in North Dakota, and is evaluating customer demand for additional service lines.

As previously announced, the Company's capital expenditure program for calendar 2008 had been set at approximately $24.0 million (which included the $6.5 million acquisition of wireline assets from an industry peer in May). Approximately $22.3 million of this amount was incurred during calendar 2008, with the remaining $1.7 million carried over to Q1 2009 (as delivery of certain equipment was delayed into 2009). Based on the current industry environment, CanSub has minimal capital expenditures planned for 2009 (other than the carry over expenditures).



Below is a summary of the changes to CanSub's equipment fleet during Q4
2008.

# of Wireline # of Swabbing # of major
Units Units testing packages
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Operating fleet at
September 30, 2008 51 9 52
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Additions
During Q4 2008 (i) 4 1 3
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Sale of older slickline
Units (2) - -
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Operating fleet at
December 31, 2008 (ii) 53 10 (iii) 55
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(i) Included in the wireline additions for Q4 2008 were 3 electric
line units and 1 slickline unit.

(ii) Included in the wireline fleet at December 31, 2008 were 32 electric
line and 21 slickline units. In addition, one electric line and one
slickline unit were under construction at December 31, 2008 and
anticipated to be delivered during Q1 2009.

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


At December 31, 2008 the Company had net debt of $13.1 million, calculated as long-term portion of debt less working capital. The available borrowing capacity of the Company's operating loan and committed, term loan facility are outlined in the section below titled "Liquidity and Capital Resources".

The recent global credit crisis has resulted in a contraction of global economies and a significant reduction in commodity prices for oil and natural gas. Given the drop in these commodity prices, and the reduced access to capital faced by many oil and gas producers, industry experts are predicting a substantial slow-down in drilling activity in 2009. The Canadian Association of Drilling Contractors ("CAODC") recently estimated that the total number of wells drilled in western Canada in calendar 2009 would be in the range of 11,200, a 34% decrease over the total wells drilled for calendar 2008 of 16,935.

The current environment requires an immediate response and the Company has taken aggressive steps in implementing cost cutting measures during Q1 2009 lead by CanSub's officers and senior management taking salary roll backs from 20 to 26%. In addition, all employees of the Company have taken base salary reductions from 5 to 15%. Along with wage roll backs, CanSub has also reduced staffing levels in operations, sales and general and administration departments to right size the Company for the current operating environment. The Company has also negotiated with suppliers to reduce costs of products and services supplied to CanSub. Management continues to closely monitor the business, and if low activity levels persist, further action will be taken.

Although 2009 will be a challenging year for oilfield service firms, CanSub is well positioned to handle this challenge through:

- The Company's strong client base, which is made up of many of the well capitalized senior and intermediate oil and natural gas companies in western Canada, with no single client accounting for more than 11% of total revenue during calendar 2008.

- A geographic diversity which enables the Company to move equipment and service those areas of the basin where activity levels are higher.

- The Company's greater focus in the niche, specialty markets such as high pressure, sour well environments where sustained activity levels are predicted during 2009.

- A diverse service offering to clients, which includes services related not only to new well completions but producing wells and well abandonments.

- The development over the past two years of a strong safety and operational infrastructure which has served to reduce field incidents and attract senior clients who make safety a high priority.

- An experienced management team that has been through previous down cycles in the oil patch.

Forward-looking statements

Certain statements in this press release including (i) statements that may contain words such as "anticipate", "could", "expect", "seek", "may" "intend", "will", "believe", "should", "project", "predict", "forecast", "plan" and similar expressions, including the negatives thereof, (ii) statements that are based on current expectations and estimates about the markets in which the Company operates and (iii) statements of belief, intentions and expectations about developments, results and events that will or may occur in the future, constitute "forward-looking statements" and are based on certain assumptions and analysis made by the Company. Forward-looking statements in this press release specifically include, but are not limited to, statements with respect to future capital expenditures, including the amount, nature and timing thereof; oil and natural gas prices and demand; other development trends within the oil and natural gas industry; business strategy; expansion and growth of the Company's business and operations including the Company's market share and position in the oilfield service market, use of proceeds of equity offerings and other such matters.

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

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

Such forward-looking statements are subject to important risks and uncertainties, which are difficult to predict and that may affect the Company's operations, including but not limited to the impact of general economic conditions in Canada and the United States; industry conditions, including the adoption of new environmental, safety and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and natural gas prices; oil and natural gas product supply and demand; risks inherent in the Company's ability to generate sufficient cash flow from operations to meet its current and future obligations; increased competition; the lack of availability of qualified personnel or labor unrest; fluctuation in foreign exchange or interest rates; stock market volatility; opportunities available to or pursued by the Company and other factors, many of which are beyond the control of the Company. The Company's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do transpire or occur, what benefits the Company will derive there from. The Company's actual results could differ materially from those anticipated in these forward-looking statements and information as a result of both known and unknown risks. Many of these risk factors and other specific risks and uncertainties are discussed in further detail throughout the Company's Annual Information Form ("AIF") and the Company's Annual MD&A. Readers are specifically referred to the risk factors described in the AIF under "Risk Factors" and in other documents the Company files from time to time with securities regulatory authorities. Copies of these documents are available without charge from the Company or electronically on the internet on the Company's SEDAR profile at www.sedar.com. Accordingly, readers should not place undue reliance upon any of the forward-looking information set out in this press release. All of the forward-looking statements in this press release are expressly qualified in their entirety by this cautionary statement.

Business Units and Segmentation

The Company's operations are primarily conducted through its operating partnership and consist of two main operating divisions: Wireline and Testing. The Wireline division is comprised primarily of cased-hole wireline services (which include electric line and slickline) and also includes swabbing and well optimization. The Testing division includes primarily natural gas production testing and production evaluation services. A portion of the Testing division operations are conducted in the U.S. through CanSub's wholly-owned U.S. Subsidiary, United Sub-Surface Energy Services Corp.



Results of Operations

Revenues

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

----------------------------------------------------------------------------
Three Three
months months Year Year
ended ended ended ended
$000s Dec 31, Dec 31, % Dec 31, Dec 31, %
(unaudited) 2008 2007 change 2008 2007 change
----------------------------------------------------------------------------
Wireline 16,174 10,892 +48.5% 54,742 41,867 +30.8%
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Testing 8,392 5,420 +54.8% 29,296 24,302 +20.5%
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Consolidated 24,566 16,312 +50.6% 84,038 66,169 +27.0%
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Q4 2008 vs Q4 2007

Revenues for Q4 2008, for both the Wireline and Testing divisions, increased significantly over the comparable quarter of the prior year reflecting higher overall utilization rates and an increased equipment base in the Wireline division. Both divisions benefited from an expanded client base and a geographic diversity which gave the Company exposure to busier areas of the basin, including southeast Saskatchewan and northeast British Columbia.

In Q4 2008, Wireline divisional revenue amounted to $16.2 million. Of that amount, $14.1 million was related solely to the wireline fleet (electric line and slickline units) which averaged 52 units in operation during the period. The remaining $2.1 million of revenue was attributed to swabbing and well optimization services. The wireline units completed 2,169 jobs during the current quarter at an average per job revenue of $6,495.

In the comparable Q4 2007 period, Wireline divisional revenue amounted to $10.9 million. Of that amount, $9.0 million was attributed solely to the wireline fleet which averaged 43 units in operation. Swabbing and well optimization services comprised the remaining $1.9 million in revenue. The wireline units completed 1,555 jobs during Q4 2007 at an average per job revenue of $5,794.

The higher per job revenue reported in Q4 2008 of $6,495 partially reflects the increased number of "Specialty Service" jobs. During 2008, CanSub significantly increased its Specialty Services offering capability by acquiring specialty tools as part of the acquisition of assets from an industry peer that closed during Q2 2008. These services (which include production logging, casing inspection, through-casing formation evaluation and surface casing vent flow identification) are typically performed by the Company's electric line units and have been marketed extensively by CanSub over the past year. The higher revenue per job in Q4 2008 also reflects a greater proportion of E-line units than slickline units in the fleet (as 11 of the 14 units added to the fleet during 2008 were E-line units) and the Company doing more of the lucrative high pressure, sour work in the Foothills regions of the basin.

Testing division revenue amounted to $8.4 million in Q4 2008 as compared to $5.4 million in Q4 2007. Although CanSub had an average in-service fleet of 52 major testing packages during both periods, the Company was able to realize the increased revenue as a result of higher equipment utilization rates in most of the Company's operating areas. This higher utilization partially reflected the contribution from testing packages moved into the busy areas of southeastern Saskatchewan and northeast British Columbia.

Year ended December 31, 2008 vs December 31, 2007

For the 2008 year, the fleet of E-line and slickline units (which averaged 49 units in operation) generated $47.8 million of the $54.7 million of Wireline divisional revenue. These units completed a total of 7,493 jobs at an average per job revenue of $6,378. The remaining $6.9 million of revenue in this division was generated from swabbing services ($4.3 million) and well optimization ($2.6 million).

For the 2007 year, the fleet of E-line and slickline units (which averaged 40 units in operation) generated $35.0 million of the $41.9 million of Wireline divisional revenue. These units completed 5,985 jobs at an average per job revenue of $5,858. The remaining $6.9 million of revenue in this division was generated from swabbing services ($3.8 million) and well optimization and other services ($3.1 million).

The significant increase in Wireline divisional revenue on a year over year basis reflects the higher number of wireline units in operation, higher utilization rates and higher per job revenue. The higher utilization rates reflect CanSub's exposure to the higher activity areas of the WCSB as well as increased demand from clients for the Company's specialty services.

Testing division revenue for the 2008 year was $29.3 million as compared to $24.3 million for calendar 2007, a 20.5% increase. The increase reflects higher utilization rates attributed to moving the equipment fleet to higher activity areas of the basin.



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 Year Year
ended ended ended ended
$000s Dec 31, Dec 31, % Dec 31, Dec 31, %
(unaudited) 2008 2007 change 2008 2007 change
----------------------------------------------------------------------------
Gross Margins:
----------------------------------------------------------------------------
Wireline 4,286 3,074 +39.4% 13,752 10,186 +35.0%
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Testing 1,973 862 +128.9% 7,722 5,303 +45.6%
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Consolidated 6,259 3,936 +59.0% 21,474 15,489 +38.6%
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Gross Margin %
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Wireline 26.5% 28.2% -6.0% 25.1% 24.3% +3.3%
--------------------------------------------------- ------------------------
Testing 23.5% 15.9% +47.8% 26.4% 21.8% +21.1%
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Consolidated 25.5% 24.1% +5.8% 25.6% 23.4% +9.4%
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Q4 2008 vs Q4 2007

Consolidated gross margins were $6.3 million (or 25.5% of revenue) for Q4 2008 compared to $3.9 million (or 24.1% of revenue) for Q4 2007.

Despite a continued, competitive pricing environment, the Testing division was able to increase gross margins from 15.9% in Q4 2007 to 23.5% in Q4 2008. This increase primarily reflected the quarter over quarter revenue increase of 55% resulting from higher equipment utilization. Testing margins would have been higher during Q4 2008, if not for the $0.1 million in start-up costs related to establishing the new base in Williston, North Dakota.

On a percentage basis, Wireline division margins were lower in Q4 2008 (26.5%) as compared to Q4 2007 (28.2%) despite the higher revenues and equipment utilization in the current quarter. This decrease in margin percentage reflects the following costs that occurred during Q4 2008:

- Costs associated with commissioning the 4 new wireline units put into operation during Q4.

- Costs associated with the expansion of CanSub's specialty services department (new staff and related training).

- Costs of re-positioning equipment and crews to certain northern Alberta and northeast British Columbia stations where the client base has expanded.

These costs have better positioned the Company in some of the busier areas of the basin.

Year ended December 31, 2008 vs December 31, 2007

For calendar 2008, CanSub recorded consolidated gross margins of 25.6% as compared to 23.4% for calendar 2007 primarily reflecting the increase in year over year corporate revenue of 27%. Both the Wireline and Testing divisions posted increased margins in both dollar terms and as a percentage of sales.

Testing margins increased from 21.8% in 2007 to 26.4% reflecting higher equipment utilization rates. However, 2008 margins in this division were impacted by start-up costs associated with the new station in Williston, North Dakota.

Wireline division margins improved slightly from the 24.3% recognized in calendar 2007 to 25.1% recognized in 2008, despite the significant year over year sales increase in this division of approximately 31%. The following items negatively impacted Wireline margins in 2008:

- Commissioning costs associated with the 13 wireline units added to the fleet during the year.

- Costs associated with establishment of new operating stations in Swift Current, Saskatchewan, Hinton, Alberta and Fort St. John, British Columbia along with costs to expand existing stations in northern Alberta and northeastern British Columbia.

- Costs associated with expansion of the Company's specialty services offering.

To respond to the challenges of the industry slow-down, which includes anticipated reductions in equipment utilization and more competitive pricing in 2009, CanSub has implemented the following measures in Q1 2009 to preserve margins going forward:

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

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

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

- Negotiated discounts on supplies and services from suppliers.

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 Year Year
ended ended ended ended
$000s Dec 31, Dec 31, % Dec 31, Dec 31, %
(unaudited) 2008 2007 change 2008 2007 change
----------------------------------------------------------------------------
SG&A expenses 2,643 1,968 +34.3% 9,360 8,652 +8.2%
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Q4 2008 vs Q4 2007

As a percentage of sales, SG&A expenses declined from 12.1% in Q4 2007 to 10.8% in Q4 2008. On a dollar basis, SG&A expenses were approximately 34% higher in Q4 2008 than the comparable quarter of the prior year. This increase reflects the greater corporate infrastructure required to handle the Company's growth in equipment and operating locations, including entry into the U.S market.

Year ended December 31, 2008 vs December 31, 2007

For calendar 2008, SG&A expenses were 11.1% of corporate sales, an improvement from the 13.1% of sales reported for calendar 2007. On a year over year basis, the increased SG&A of approximately $0.7 million reflects the Company's larger infrastructure.




Stock-based compensation expense

----------------------------------------------------------------------------
Three Three
months months Year Year
ended ended ended ended
$000s Dec 31, Dec 31, % Dec 31, Dec 31, %
(unaudited) 2008 2007 change 2008 2007 change
----------------------------------------------------------------------------
Stock-based
compensation expense 315 282 +11.7% 1,167 1,294 -9.8%
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Stock-based compensation expense in Q4 2008 and calendar 2008 was consistent with the related expense recognized in the comparable 2007 periods. See "Stock Option" section below for further discussion of options.



Depreciation and amortization expense

----------------------------------------------------------------------------
Three Three
months months Year Year
ended ended ended ended
$000s Dec 31, Dec 31, % Dec 31, Dec 31, %
(unaudited) 2008 2007 change 2008 2007 change
----------------------------------------------------------------------------
Depreciation 2,301 2,166 +6.2% 8,420 8,215 +2.5%
----------------------------------------------------------------------------
Amortization - 633 N/A - 2,602 N/A
----------------------------------------------------------------------------
Total 2,301 2,799 -17.8% 8,420 10,817 -22.2%
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Q4 2008 vs Q4 2007

Depreciation expense (which relates to depreciation of the Company's property and equipment) amounted to $2.3 million during Q4 2008. The small increase from depreciation expense recognized during Q4 2007 reflects a larger property and equipment base during Q4 2008, offset by a 3% decrease in the declining balance rate at which field equipment (an asset category within property and equipment) is depreciated. During Q1 2008, the Company reduced the declining balance depreciation rate on field equipment from 15% to 12%. In management's opinion, the 12% rate provides a better estimate of the useful life of these types of assets.

Year ended December 31, 2008 vs December 31, 2007

Depreciation expense was slightly higher on a year over year basis, reflecting the larger property and equipment base throughout the year, offset by the reduced depreciation rate for the field equipment category of assets.

Amortization expense (which relates to amortization of the Company's intangible assets) was nil for the year ended December 31, 2008. During Q4 2007, a full impairment loss was taken on all of the Company's intangible assets, leaving nil balances for these assets at the December 31, 2007 balance sheet date.



Interest expense

----------------------------------------------------------------------------
Three Three
months months Year Year
ended ended ended ended
$000s Dec 31, Dec 31, % Dec 31, Dec 31, %
(unaudited) 2008 2007 change 2008 2007 change
----------------------------------------------------------------------------
Interest on
long-term debt 215 523 -58.9% 1,193 1,680 -29.0%
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Other interest 56 43 +30.2% 229 79 189.9%
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Total interest 271 566 -52.1% 1,422 1,759 -19.2%
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Q4 2008 vs Q4 2007

Total interest expense for Q4 2008 of $271,000 was significantly lower than the $566,000 of interest expense recognized for Q4 2007. This reflected a reduction in average total debt balances (such debt comprised of operating loan, long-term debt and capital lease obligations) combined with reduced interest rates. The interest on most of CanSub's debt is based on the Canadian prime rate of interest which averaged 4.0% in Q4 2008 compared to 6.2% in Q4 2007.

Year ended December 31, 2008 vs December 31, 2007

Interest expense of $1.4 million recognized in calendar 2008, was $0.3 million lower than interest expense recognized in calendar 2007 reflecting lower average debt balances and lower interest rates in 2008. The prime rate of interest averaged 4.8% in calendar 2008 compared to 6.1% in calendar 2007.

Impairment Loss on goodwill and intangible assets

During Q4 2007, CanSub recognized an impairment loss on goodwill of $14.2 million and an impairment loss on intangible assets of $7.5 million (total impairment losses of $21.7 million). Substantially all of the goodwill and intangible assets had been originally recognized on the purchase of four businesses that closed on May 31, 2006. As a result of these impairment charges, the carrying value of goodwill and intangible assets was reduced to nil at December 31, 2007.

Current income tax expense (recovery)

During the year ended December 31, 2008 CanSub incurred a net current income tax expense of $0.1 million. This expense was generated in order to utilize expiring investment tax credits ("ITC's") of $0.1 million. The utilization of these credits resulted in nil cash taxes payable for the current year.

Future income tax expense (reduction)

The Company recognized future income tax expense of $0.9 million for Q4 2008 resulting in a net future income tax reduction of $0.3 million for calendar 2008. The future income tax expense is typically impacted by net timing differences between amounts for tax and accounting, and draw-downs of the deferred credit. The Q4 2008 income tax expense partially reflects the impact of the deferral of estimated utilization of losses for income tax purposes to periods with lower tax rates.

Net Earnings (loss)

The Company recorded a net loss of $0.3 million for Q4 2008 (negative $0.01 per share - basic and diluted) and net earnings of $1.0 million for the year ended December 31, 2008 ($0.04 per share - basic and diluted). This compares to a net loss of $21.0 million during Q4 2007 (negative $1.09 per share -basic and diluted) and a net loss of $24.7 million (negative $1.28 per share - basic and diluted) for the year ended December 31, 2007. The net losses recognized during Q4 2007 and calendar 2007, reflect the impairment losses to goodwill and intangible assets (combined of $21.7 million) described in the section above titled "Impairment loss on goodwill and intangible assets".

Income tax amounts

The Company had the following estimated income tax amounts available at December 31, 2008 to apply against future taxable income: non-capital losses of $12.3 million and unclaimed scientific research and development expenditures ("SRED") of $8.8 million. In addition, the Company had approximately $1.4 million in investment tax credits which may be claimed against taxes otherwise payable for federal purposes and expire between 2018 and 2023. These tax amounts are subject to review and assessment by the taxation authorities.

Share Capital and Normal Course Issuer Bid

During calendar 2008, CanSub completed the following two equity issues:

- On May 1, 2008, the Company issued 2.2 million Class A common shares to employees in a non-brokered private placement resulting in gross proceeds of $3.8 million.

- On June 24, 2008, the Company issued 4.6 million Class A common shares in connection with a bought deal financing for gross proceeds of $15.0 million.

There were no shares issued from January 1, 2009 through to March 11, 2009. The Company had 26.0 million shares outstanding at March 11, 2008.

During September 2008, CanSub announced a normal course issuer bid wherein the Company was able to purchase up to 500,000 of its shares in the open market for a one-year period. As at December 31, 2008, the Company had acquired approximately 156,000 shares under this program and these shares were subsequently canceled. There were no shares acquired under the issuer bid from January 1, 2009 to March 11, 2009.

Stock Options

For the year ended December 31, 2008, the Company granted 1,002,500 options (220,000 which were in Q4 2008) and 386,832 options were forfeited (66,668 which were in Q4 2008) for a net increase during 2008 of 615,668 options. At December 31, 2008, CanSub had approximately 2.26 million options outstanding with an average exercise price of $3.39.

Liquidity and Capital Resources

The Company recorded cash flow from operations (before changes in non-cash working capital) of $3.4 million for Q4 2008 as compared to $1.5 million in Q4 2007. The increase in cash flow primarily reflects the increased revenues and gross margins in Q4 2008 (see Revenue and Gross Margin analysis above). For calendar 2008, CanSub recorded cash flow from operations of $10.7 million, which was more than double the $5.1 million in operating cash flow recorded in calendar 2007.

As at December 31, 2008, the Company had working capital of $2.7 million and long-term debt (i.e. long-term portion of long-term debt) of $15.8 million for a net debt position of $13.1 million. The Company has the following two credit facilities:

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

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

At December 31, 2008, the Company had outstanding balances of $1.3 million on the operating loan facility and $19.7 million on the committed, term facility. Amounts available to be drawn under the operating loan facility at each month-end are limited to 75% of marginable accounts receivable less certain priority payable amounts. Based on the margin requirements, an additional $10.2 million of operating loan was available to be drawn at December 31, 2008.

Amounts available to be drawn at each month-end under the committed, term facility are limited to approximately 50% of the net book value of property and equipment on the Company's balance sheet. Based on the marginable fixed assets at December 31, 2008, an additional $10.3 million was available to be drawn on this facility. The Company is entitled to request a renewal of this facility for a one-year term by providing written notice to the bank at least sixty days prior to the term date of June 30, 2009. Unless otherwise extended, the outstanding balance on the loan will be capped and repaid over the remaining amortization schedule in effect at June 30, 2009.

Amounts the Company is eligible to draw under both facilities are subject to CanSub meeting all related loan covenants and margin requirements. At December 31, 2008, CanSub was in compliance with these terms.

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

Investing Activities

The Company's net capital expenditures (ie equipment additions net of proceeds from disposals) for property and equipment during Q4 2008 amounted to $7.7 million. This related primarily to equipment being constructed as part of the capital expansion program announced by CanSub after completion of the $15 million (gross) bought deal financing during Q2 2008.

Net capital expenditures for the year ended December 31, 2008 were $22.3 million. Of this amount, $6.5 million related to the acquisition of wireline assets from an industry peer that closed during Q2 2008. This asset "package" included five electric line units, along with various specialty tools and auxiliary equipment. The chart below provides a summary of the changes to CanSub's equipment fleet during each quarter of 2008.



----------------------------------------------------------------------------
# of Wireline # of Swabbing # of Testing
Units Units packages
----------------------------------------------------------------------------
Operating fleet at
December 31, 2007 44 10 52
----------------------------------------------------------------------------
Additions during Q1 2008 1 - -
----------------------------------------------------------------------------
Additions during Q2 2008 5 - -
----------------------------------------------------------------------------
Conversion of swabbing units
to electric line units during Q2 2008 2 (2) -
----------------------------------------------------------------------------
Retirement of wireline
Unit in Q2 2008 (1) - -
----------------------------------------------------------------------------
Additions during Q3 2008 1 1 -
----------------------------------------------------------------------------
Retirement of wireline
Unit in Q3 2008 (1) - -
----------------------------------------------------------------------------

Additions during Q4 2008 4 1 3
----------------------------------------------------------------------------
Disposal of old wireline
Units in Q4 2008 (2) - -
----------------------------------------------------------------------------

Operating fleet at
December 31, 2008 53 10 55
----------------------------------------------------------------------------


The 53 wireline units in operation at December 31, 2008 were comprised of 32 electric line units and 21 slickline units. The Testing fleet was comprised of 55 major testing packages plus various other testing related equipment (ie flow-back tanks, high pressure storage tanks and cold separators).

Two additional wireline units (one slickline and one electric line unit) were under construction at December 31, 2008 with both scheduled to be delivered in Q1 2009.

As previously announced, total capital expenditures for calendar 2008 (including the $6.5 million asset package acquired during Q2 2008) were set at approximately $24.0 million. Of this amount, $22.3 million had been incurred at December 31, 2008 with the remainder of approximately $1.7 delayed until 2009 when the related equipment is scheduled to be delivered.

Financing Activities

Q4 2008 vs Q4 2007

During Q4 2008, the Company's financing activities included advances of $3.5 million from its long-term debt facility and repayments on this facility of $0.8 million (net advances of $2.7 million). In addition, during Q4 2008 CanSub made $0.4 million in repayments on the Company's capital lease obligations and had net repayments on the operating loan of $3.4 million.

Year ended December 31, 2008 vs December 31, 2007

The financing activities during calendar 2008 included the two financings that were completed during Q2 2008 (see discussion in the above section titled "Share Capital and Normal Course Issuer Bid") which collectively raised gross proceeds of approximately $18.8 million. Also during calendar 2008, CanSub made $27.0 million in repayments on its long-term debt facility and had advances on this facility of $23.5 million (resulting in net repayments of approximately $3.5 million). In addition, the Company made $2.1 million of repayments on the capital lease obligations and had net advances on the operating loan of $1.3 million during the 2008 year.

Commitments and obligations

The Company, through the conduct of its operations, has undertaken certain contractual obligations. As at December 31, 2008, CanSub's contractual obligations were as follows:



Contractual
Obligations Carrying Contractual 0 - 12 1 -2 2 - 5 5+
($000's) Amount Cash Flows Months Years Years Years
----------------------------------------------------------------------------
Accounts Payable 12,353 (12,353)(12,353)
----------------------------------------------------------------------------
Operating Loan 1,335 (1,335) (1,335) - - -
----------------------------------------------------------------------------
Long-term debt(1) 19,721 (21,453) (4,582) (4,582)(12,289) -
----------------------------------------------------------------------------
Capital lease
obligations(1) 672 (692) (439) (253) -
----------------------------------------------------------------------------
Operating lease
obligations (2) 30,740 (30,740) (4,717) (4,114)(13,348) (8,561)
----------------------------------------------------------------------------
(1) Contractual cash flows include principal plus interest
(2) Relate to vehicle, equipment and facility operating leases as described
in the Commitments note in the financial statements for the year ended
December 31, 2008.


In addition to the above, at December 31, 2008, the Company had commitments to purchase approximately $1,700 of wireline, testing and related equipment, of which $700 has been advanced to equipment manufacturers in the form of deposits. Delivery of these items is scheduled to occur prior to March 31, 2009.

Capital management

The Company's objectives when managing its capital structure are to balance long-term debt and capitalization in order to maintain investor, creditor and market confidence and to sustain future development of the business. The Company may issue shares or increase debt to take advantage of opportunities as they arise and will adjust capital spending as required to manage its current and projected debt levels.

The long-term debt to capitalization ratios at December 31 were as as follows:
(Stated in thousands of dollars, except ratios)



----------------------------------------------------------------------------
(Stated in thousands of dollars, except ratios) 2008 2007
----------------------------------------------------------------------------
Long-term debt 15,812 19,319
----------------------------------------------------------------------------
Shareholders' equity 54,484 34,461
----------------------------------------------------------------------------
Capitalization 70,296 53,780
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Long-term debt to capitalization ratio 0.22 0.36
----------------------------------------------------------------------------


The Company also manages its capital structure to ensure compliance with the borrowing margin and financial covenant requirements specified in its credit facilities. At December 31, 2008, the Company was in compliance with these requirements. There were no changes to the Company's approach to capital management from the pior year.

Outlook

Due to the current global credit crisis, North American and worldwide economies have contracted, resulting in reduced demand for commodities such as oil and natural gas. As a result, oil and natural gas prices have significantly declined from the robust levels experienced during the spring and summer of 2008. Given the drop in commodity prices and the reduced access to capital for oil and gas producers, industry experts have predicted a significant reduction in drilling activity in the WCSB for 2009.

CanSub is well positioned to respond to these challenging times given the Company's strong client base, geographical presence across the WCSB and diversification of services. The Company has already implemented significant cost cutting measures during Q1 2009 to conserve capital and preserve operating margins which will be impacted by reduced equipment utilization rates and very competitive pricing. The Company's management continues to closely monitor industry activity to be able to react to opportunities and challenges that arise in the near term.



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

----------------------------------------------------------------------------
(Unaudited) Three months Three months Year Year
ended Dec ended Dec ended Dec ended Dec
In $000's 31, 2008 30, 2007 31, 2008 31, 2007
----------------------------------------------------------------------------
Net earnings (loss) (273) (21,024) 1,015 (24,737)
----------------------------------------------------------------------------
Add back (deduct):
----------------------------------------------------------------------------
Depreciation and
amortization expense 2,301 2,799 8,420 10,817
----------------------------------------------------------------------------
Future income tax
expense (reduction) 934 (2,744) (268) (4,412)
----------------------------------------------------------------------------
Impairment loss on
equipment - - 197 -
----------------------------------------------------------------------------
(Gain) loss on disposal
of capital assets 79 (1) 79 17
----------------------------------------------------------------------------
Stock-based
compensation expense 315 282 1,167 1,294
----------------------------------------------------------------------------
Investment tax credit
utilized - 446 97 446
----------------------------------------------------------------------------
Impairment loss on
Goodwill and
Intangible assets - 21,707 - 21,707
----------------------------------------------------------------------------
Cash Flow (1) 3,356 1,465 10,707 5,132
----------------------------------------------------------------------------
Long-term and other
interest expense 271 566 1,422 1,759
----------------------------------------------------------------------------
Current tax expense
(recovery) 6 383 103 392
----------------------------------------------------------------------------
Utilization of
investment tax credit - (446) (97) (446)
----------------------------------------------------------------------------
EBITDAS (1) 3,633 1,968 12,135 6,837
----------------------------------------------------------------------------

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


NON-GAAP MEASURES

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



CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Consolidated Balance Sheets
(In thousands of dollars)
(Unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, December 31,
2008 2007
----------------------------------------------------------------------------

Assets
Current assets:
Cash $ 66 $ -
Accounts receivable 18,896 13,531
Deposits and other 1,550 888
Inventory 499 348
---------------------------------------------------------------------------
21,011 14,767

Property and equipment 64,379 50,809
Future income tax asset 8,647 9,442
----------------------------------------------------------------------------
$ 94,037 $ 75,018
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 12,353 $ 7,860
Operating loan 1,335 -
Current portion of long-term debt 3,909 3,862
Current portion of obligations under
capital leases 672 2,091
Income taxes payable - 27
---------------------------------------------------------------------------
18,269 13,840
Long-term debt 15,812 19,319
Obligations under capital leases - 675
Deferred credit 5,472 6,723
----------------------------------------------------------------------------
39,553 40,557

Shareholders' equity:
Share capital 65,190 47,593
Contributed surplus 6,050 4,639
Deficit (16,756) (17,771)
----------------------------------------------------------------------------
54,484 34,461

----------------------------------------------------------------------------
$ 94,037 $ 75,018
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------
2008 2007 2008 2007
----------------------------------------------------------------------------
Revenue $ 24,566 $ 16,312 $ 84,038 $ 66,169

Expenses:
Operating 18,307 12,376 62,564 50,680
Selling, general and
administrative 2,643 1,968 9,360 8,652
Stock-based compensation 315 282 1,167 1,294
Depreciation and amortization 2,301 2,799 8,420 10,817
Interest on long-term debt 215 523 1,193 1,680
Impairment loss on equipment - - 197 -
Loss on disposal of equipment 79 (1) 79 17
Foreign exchange (gain) loss (17) - (21) -
Other interest 56 43 229 79
----------------------------------------------------------------------------
23,899 17,990 83,188 73,219
----------------------------------------------------------------------------
Earnings (loss) before
other items 667 (1,678) 850 (7,050)
----------------------------------------------------------------------------
Other items:

Impairment loss on goodwill - 14,177 - 14,177
Impairment loss on intangible assets - 7,530 - 7,530
----------------------------------------------------------------------------
- 21,707 - 21,707
----------------------------------------------------------------------------

Earnings (loss)
before income taxes 667 (23,385) 850 (28,757)

Income taxes:
Current 6 383 103 392
Future (reduction) 934 (2,744) (268) (4,412)
----------------------------------------------------------------------------
940 (2,361) (165) (4,020)
----------------------------------------------------------------------------
Net earnings (loss) (273) (21,024) 1,015 (24,737)

Retained earnings (deficit),
beginning of period (16,483) 3,253 (17,771) 6,966

----------------------------------------------------------------------------
Retained earnings (deficit),
end of period $ (16,756) $(17,771) $(16,756) $(17,771)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net earnings (loss) per common
share:
Basic $ (0.01) $ (1.09) $ 0.04 $ (1.28)
Diluted $ (0.01) $ (1.09) $ 0.04 $ (1.28)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------
2008 2007 2008 2007
----------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net earnings (loss) $ (273) $(21,024) $ 1,015 $(24,737)
Depreciation and amortization 2,301 2,799 8,420 10,817
Future income taxes (reduction) 934 (2,744) (268) (4,412)
Stock-based compensation 315 282 1,167 1,294
Investment tax credit utilized - 446 97 446
Impairment loss on equipment - - 197 -
Loss on disposal of equipment 79 (1) 79 17
Impairment loss on goodwill - 14,177 - 14,177
Impairment loss on intangible assets - 7,530 - 7,530
----------------------------------------------------------------------------
3,356 1,465 10,707 5,132
Change in non-cash working
capital related to operating
activities 3,652 961 (5,320) 5,338
----------------------------------------------------------------------------
7,008 2,426 (5,387) 10,470
----------------------------------------------------------------------------

Financing:
Operating loan (3,430) - 1,335 -
Proceeds from long-term debt 3,500 (1,299) 23,500 5,667
Repayment of long-term debt (779) - (26,960) -
Repayment of obligations under
capital lease (443) (566) (2,094) (2,345)
Proceeds from issue of
share capital (net) - - 17,702 -
Purchase of shares under normal
course issuer bid (146) - (146) -
----------------------------------------------------------------------------
(1,298) (1,865) 13,337 3,322
----------------------------------------------------------------------------

Investing:
Acquisition of business - - - (375)
Acquisition of property and
equipment (7,681) (2,176) (22,323) (15,478)
Proceeds on disposal of property
and equipment 36 17 57 91
Change in non-cash working capital
related to investing activities 1,869 1,437 3,608 1,970
----------------------------------------------------------------------------
(5,776) (722) (18,658) (13,792)
----------------------------------------------------------------------------

Net change in cash (66) (161) 66 0

Cash, beginning of period 132 161 - 0

----------------------------------------------------------------------------
Cash, end of period $ 66 $ - $ 66 $ 0
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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