Canadian Sub-Surface Energy Services Corp.
TSX : CSE

Canadian Sub-Surface Energy Services Corp.

March 26, 2008 08:30 ET

Canadian Sub-Surface Energy Services Announces Q4 and Year-End 2007 Financial Results

CALGARY, ALBERTA--(Marketwire - March 26, 2008) - Canadian Sub-Surface Energy Services Corp. ("CanSub" or "the Company") (TSX:CSE) announced today its financial and operating results for the three and twelve month periods ended December 31, 2007.



Financial Highlights

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

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Three Three
months months Year Year
ended ended ended ended
Dec Dec Dec Dec
31, 2007 31, 2006 % 31, 2007 31, 2006 %
(unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Revenue 16,312 19,611 (17%) 66,169 73,352 (10%)
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Gross Margin 3,936 6,603 (40%) 15,489 24,207 (36%)
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Gross Margin % 24.1% 33.7% (29%) 23.4% 33.0% (29%)
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Cash Flow (1) 1,465 4,110 (64%) 5,132 15,636 (67%)
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EBITDA (1)(2) 1,968 4,360 (55%) 6,837 16,518 (59%)
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EBITDA (1)(2)
as a % of
revenue 12.1% 22.2% (45%) 10.3% 22.5% (54%)
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Net Earnings
(loss) (3) (21,024) 1,616 (1,401%) (24,737) 6,966 (455%)
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Net Earnings
(loss) per
share - basic ($1.09) $0.08 (1,463%) ($1.28) $0.45 (384%)
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Average
number of
common shares
outstanding
(in thousands) 19,324 18,861 2.5% 19,324 15,586 24.0%
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(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. Refer to the
section below titled "Reconciliation of Cash Flow and EBITDA to Net
Earnings".

(3) The net loss figures recorded in the Q4 2007 and Year ended December 31,
2007 periods include a one-time, non-cash charge of $21.7 million
related to impairment loss of goodwill and intangible assets.


Operational Highlights

Revenue during Q4 2007 was $16.3 million as compared to revenue of $19.6 million recognized during Q4 2006. EBITDA was $2.0 million during Q4 2007 bringing year to date EBITDA for calendar 2007 to $6.8 million. For 2006, EBITDA was $4.4 million in Q4 2006 and $16.5 million for the annual period. Financial results for the 2007 year were negatively impacted by low equipment utilization rates due primarily to the significant slow-down in natural gas drilling. The high natural gas storage levels in North America during 2007 resulted in continuing weakness in natural gas commodity prices prompting the reduction in natural gas related activity in the Western Canadian Sedimentary Basin ("WCSB"). Activity levels in the WCSB during Q4 2007 were further impacted by the Alberta government announcement that provincial royalty rates for oil and natural gas production would be increased commencing in 2009. As a result of this announcement, many oil and natural gas producers put drilling and completion programs on hold while they evaluated the economic impact of the new royalty regime.

The lower activity levels in the WCSB during 2007 were evidenced by a reduction of the total number of wells drilled (rig released) which dropped from 23,241 wells in calendar 2006 to 18,555 in calendar 2007 - a 20% decrease.

Due to the current industry slow-down, there has been increased pricing pressure on most of the services offered by CanSub. As a result, CanSub has competitively priced its services (depending on the service and geographic region) in order to keep equipment utilized and crews working. This reduced pricing has resulted in margin erosion, some of which has been offset by previously announced cost cutting measures and operational optimization.

To respond to the overall drop in activity levels, CanSub continues to optimize operations and conserve financial resources by:

- Moving equipment and manpower to areas with greater activity levels. During the fourth quarter, CanSub established a new hub in Fort Nelson (northeast British Columbia) and during the first quarter of 2008, established a new hub in Hinton, Alberta. In addition, during 2007 and through the first two months of 2008, CanSub moved equipment into areas of Saskatchewan which are mainly based around oil drilling and production activities. Oil related activity remains strong due to the continued strength in oil prices.

- Reviewing all expenses related to manpower, equipment and facilities. CanSub management continues to implement cost control measures in each of these areas to ensure operating expenses are minimized without affecting the ability to deliver quality service to the Company's clients. As announced previously, the Company estimates that these measures will result in annualized reductions in operating and overhead expenses of approximately $2.0 million.

- Curtailing capital expenditures on a go-forward basis. CanSub has minimal capital expenditures budgeted for calendar 2008. Planned expenditures are primarily comprised of: completion of one electric line unit (which went into operation during Q1 2008), purchase of certain equipment and storage facilities to comply with government regulations (primarily for the electric line service line) and various maintenance capital. CanSub currently has an optimal equipment mix at most of its operating hubs and is not planning further expansion of equipment fleets until there is evidence of an increase in drilling and completion activity levels. However, the Company continues to review business opportunities that make sense strategically to take advantage of current industry conditions.

Despite the industry slow-down, the Company's wireline division (which accounted for 63% of total CanSub revenue in calendar 2007) has been able to sustain reasonable utilization rates for its equipment due to its diversified service portfolio. In addition to services related to the completion of natural gas wells, this division also provides services related to oil wells, workovers of producing wells and abandonments. The Company's production testing division (which accounted for the remaining 37% of revenue in 2007) has a significant exposure to natural gas well drilling, and has experienced the greatest negative impact as a result of the industry slow-down.

During October 2007, the Alberta government announced royalty changes for conventional oil and gas production as well as oilsands production in the province. Under these changes, most of which are scheduled to take effect on January 1, 2009, there will be an overall net increase in royalties paid by producers for production from Alberta wells. As a result of the increased royalties in Alberta, it is anticipated that affected conventional oil and gas producers will shift investment dollars into the neighboring provinces of British Columbia and Saskatchewan. CanSub is well situated to take advantage of this change as the following Company hubs are located in or servicing areas in British Columbia and Saskatchewan:

- Estevan, Saskatchewan - 4 electric line ("E-line") units servicing the highly active oil basin of southeast Saskatchewan with some work in southwest Manitoba.

- Weyburn, Saskatchewan area - 7 production testing packages as well as a portion of the Company's well optimization group servicing southeast and south central Saskatchewan.

- Provost, Alberta - 1 E-line unit servicing east central Alberta as well as west central Saskatchewan (near the Lloydminister area).

- Medicine Hat, Alberta - 3 E-line units, 4 slickline units and 2 swabbing units servicing southeast Alberta and southwest Saskatchewan.

- Grande Prairie and Fairview, Alberta - 5 E-line and 6 slickline units servicing northwest Alberta and northeast British Columbia.

- Fort Nelson, British Columbia - 2 E-line units servicing northeast British Columbia.

During Q4 2007, the Company added 2 wireline units and 1 swabbing unit. Below is a summary of CanSub's equipment fleet at December 31, 2007.



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# of Wireline # of Swabbing # of Testing
Units Units packages
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Operating fleet at
Sept. 30 2007 42 9 61
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Additions to fleet
during Q4 2007 2 1 -
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Operating fleet at
December 31, 2007 (1)44 10 (2)61
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(1) Excludes two older electric line units that have been parked to reduce
costs. Included in the 44 wireline operating units are 22 E-line and 22
slickline units.

(2) Includes 52 major testing packages plus various other testing related
equipment (ie flow-back tanks, high pressure storage tanks, cold
separators) which equates to approximately 9 additional major testing
packages when fully utilized.


During February 2008, CanSub added an additional electric line unit to its operating wireline fleet, increasing this fleet to 45 units. There are no other operating equipment additions planned for 2008.

Canadian Sub-Surface Energy Services Corp.

Management's Discussion and Analysis

The following Management's Discussion and Analysis ("MD&A") is for the consolidated financial statements of Canadian Sub-Surface Energy Services Corp. ("CanSub" or "the Company") as at and for the three and twelve month periods ended December 31, 2007 and 2006. The consolidated financial statements and MD&A have been prepared taking into consideration information available as at March 24, 2008 and should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2007 and 2006.

Forward-looking statements

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

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

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

Internal corporate reorganization effective May 31, 2006

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

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

Comparative Information

Since the CanSub Group has been deemed the acquirer for accounting purposes, the comparative financial statements for the year ended December 31, 2006 include the combined financial results of the CanSub Group from January 1 to February 14, 2006 and then the results of the Company thereafter.

Business Units and Segmentation

The Company's operations are conducted through the partnership and consist of two main operating divisions: Wireline and Testing. The Wireline division is comprised primarily of wireline services (which include cased-hole electric line and slickline) and also includes swabbing and well optimization. The Testing division includes primarily natural gas production testing services. Prior to June 1, 2006, a portion of the electric line and slickline services in the Wireline division were conducted through three private owner-operators, who owned their equipment and employed the crews who worked on the units. One of the advantages of utilizing the owner-operators is that they represented the Company in areas where the Company did not operate. The Company realized average margins of approximately 18% on the revenues generated by the owner operator wireline units. On May 31, 2006, the Company acquired all of the business assets of these three owner operators.

Acquisition of Colter Production Services on May 31, 2006

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

Seasonality

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

Results of Operations

Revenues

The break-down of consolidated revenue between the Wireline and Testing divisions for the three and twelve month periods ended December 31, 2007 and 2006 are as follows:



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Three Three
months months Year Year
ended ended ended ended
Dec Dec Dec Dec
31, 2007 31, 2006 % 31, 2007 31, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Wireline 10,892 12,278 (11%) 41,867 46,494 (10%)
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Testing 5,420 7,333 (26%) 24,302 26,858 (10%)
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Consolidated 16,312 19,611 (17%) 66,169 73,352 (10%)
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Equipment utilization rates for both the Testing and Wireline divisions during Q4 2007 were lower than Q4 2006 reflecting more equipment in the WCSB combined with a reduced demand for oilfield services. Due to a continuing weakness in natural gas prices, oil and gas producers continued to defer natural gas drilling and completion projects. In addition, activity levels in Alberta during the fourth quarter were negatively impacted by the announcement of the new oil and gas royalty regime for producing oil and gas wells in Alberta. As a result of the lower equipment utilization rates, many of CanSub's services came under pricing pressure resulting in reduced revenues and margins.

Q4 2007 vs. Q4 2006

In Q4 2007, Wireline divisional revenue amounted to $10.9 million. Of that amount, $9.0 million was related solely to the wireline fleet (E-line and slickline units), which averaged 43 units in operation during the period. The remaining $1.9 million of revenue was attributed to swabbing and well optimization services. The wireline units completed approximately 1,555 jobs during the current quarter at an average per job revenue of approximately $5,794. This figure was lower than the per job revenue reported in Q3 2007 ($6,209 per job) as the more lucrative northern Alberta areas saw the largest activity declines in the months after the Alberta royalty announcement. In addition, during Q4 2007, there was further price discounting on services due to the continuing low equipment utilization.

In Q4 2006, Wireline divisional revenue amounted to $12.3 million. Of that amount, $10.4 million was attributed solely to the wireline fleet (E-line and slickline units) which averaged 35 units in operation. Swabbing and well optimization services comprised the remaining $1.9 million in revenue. The wireline units completed approximately 1,637 jobs at an average per job revenue of $6,467.

A significant portion of CanSub's wireline units that were added to the fleet over the past year have been working out of the Company's recently established or expanded northern Alberta operating hubs of Whitecourt, Grande Prairie and High Level. Work in these areas is generally billed out at higher rates to customers as wells are typically deeper and more complex. As a result, it would be expected that average per job wireline revenues would be higher in Q4 2007 as compared to Q4 2006. However, given the reduction in activity levels in the more lucrative northern Alberta areas during Q4 2007, combined with pricing discounts implemented during the third and fourth quarters, the per job revenue in Q4 2007 of $5,794 was approximately 10% lower than the per job revenue recognized in Q4 2006.

Testing division revenue in Q4 2007 of $5.4 million was generated from an in-service fleet of 61 testing packages. The Q4 2006 Testing revenue of $7.3 million was generated from an in-service fleet of 56 packages. Although the testing fleet has increased over the past year, lower equipment utilization combined with lower pricing resulted in the $1.6 million revenue decline. This division has seen the greatest impact from the industry slow-down as it is geared towards new natural gas well completions. Pricing of services in this division is expected to remain competitive until natural gas related activities in the WCSB recover.

Year ended December 31, 2007 vs year ended December 31, 2006

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 division revenue. During 2007, these units completed 5,985 jobs at a 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 ($3.1 million).

For the 2006 year, the fleet of E-line and slickline units (which averaged 33 units in operation) generated $40.6 million of the $46.5 million of wireline divisional revenue. These units completed 6,950 jobs at an average per job revenue of $5,847. The remaining $5.9 million of revenue in this division was generated from swabbing services ($2.9 million) and well optimization and other ($3.0 million).

As previously noted, CanSub's continued expansion into northern Alberta during 2007 gave rise to more lucrative work. However, average price increases realized from more northern area work were offset by the effects of pricing discounts given to clients in many of the Company's operating areas.

Testing division revenue for the 2007 year was $24.3 million generated from an average in-service fleet of 61 packages as compared to 2006 revenue of $26.9 million generated from an average in-service fleet of 44 packages. Although CanSub had a larger testing fleet in 2007, lower utilization rates combined with reduced pricing lead to the reduction in revenue.

Gross Margins (refer to Non-GAAP measures below)

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



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Three Three
months months Year Year
ended ended ended ended
Dec Dec Dec Dec
31, 2007 31, 2006 % 31, 2007 31, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
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Gross Margins:
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Wireline 3,074 4,622 (34%) 10,186 15,561 (35%)
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Testing 862 1,981 (56%) 5,303 8,646 (39%)
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Consolidated 3,936 6,603 (40%) 15,489 24,207 (36%)
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Gross Margin %:
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Wireline 28.2% 37.6% (26%) 24.3% 33.3% (27%)
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Testing 15.9% 27.0% (41%) 21.8% 32.2% (32%)
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Consolidated 24.1% 33.7% (28%) 23.4% 33.0% (29%)
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Consolidated gross margins for Q4 2007 were $3.9 million (24.1%) as compared to Q4 2006 margins of $6.6 million or 33.7%. Year over year margin percentages fell from 33.0% recognized in calendar 2006 to 23.4% recognized in calendar 2007. The erosion in margin percentage primarily reflects lower equipment utilization rates combined with more competitive pricing. In addition, set-up expenses associated with the establishment of new bases in northern Alberta and the new base in Fort Nelson, B.C had a negative impact on 2007 margins.

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

To counteract the effect of reduced pricing of many of CanSub's services, the Company has implemented the following to reduce operating costs, optimize operations and preserve margins:

- Negotiated discounts from suppliers

- Moved equipment to higher activity areas to increase utilization

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

- Identified niche, specialty service markets for both the wireline and testing divisons which has helped to increase equipment utilization.

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
Dec Dec Dec Dec
31, 2007 31, 2006 % 31, 2007 31, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
SG&A 1,968 2,243 (12%) 8,652 7,761 11%
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SG&A expenses were approximately 12% lower in Q4 2007 as compared to Q4 2006. This partially reflects the effects of cost cutting measures initiated during Q3 2007. SG&A expenses were 12% of sales in Q4 2007 as compared to 11% of sales in Q4 2006. CanSub's management continues to review all SG&A expenses in light of the current industry slow-down and make appropriate adjustments.

For calendar 2007, SG&A expenses were approximately 11% higher as compared to expenses recognized during calendar 2006. The year over year increase reflects the Company's increased staffing due to the large growth experienced during 2006 and the higher costs associated with operating as a public entity.

Stock-based compensation expense



----------------------------------------------------------------------------
Three Three
months months Year Year
ended ended ended ended
Dec Dec Dec Dec
31, 2007 31, 2006 % 31, 2007 31, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Stock-based
compensation
expense 282 273 3% 1,294 1,477 (12%)
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Stock-based compensation expense in Q4 2007 was in line with amounts recorded in Q4 2006.

For the 2007 year, stock-based compensation expense includes approximately $121,000 of expense associated with the re-pricing of stock options to non-insiders of the Company which was approved by the Company's Board during February 2007. See further discussion of the option re-pricing and other option information in the section below titled "Stock Options".

Stock-based compensation expense for calendar 2006 includes $567,000 associated with stock options that vested in the CanSub Group of companies just prior to the February 14, 2006 go-public transaction.

Depreciation and amortization expense



----------------------------------------------------------------------------
Three Three
months months Year Year
ended ended ended ended
Dec Dec Dec Dec
31, 2007 31, 2006 % 31, 2007 31, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Depreciation 2,166 1,563 39% 8,215 4,763 73%
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Amortization 633 718 (12%) 2,602 1,783 46%
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Total 2,799 2,281 23% 10,817 6,546 65%
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Depreciation expense (which relates to depreciation of the Company's property and equipment) amounted to $2.2 million during Q4 2007. The increase over the Q4 2006 expense amount reflects the higher property and equipment balance during the current quarter.

Depreciation expense for calendar 2007 of $8.2 million was significantly higher than the $4.8 million recognized for the 2006 year, reflecting much higher property and equipment balances for the full 2007 year. These higher balances resulted from the $35.3 million in net capital expenditures incurred during the 2006 year ($26.0 million from the Company's internal build program and an additional $9.3 million from the acquisitions of Colter Production Services and the three owner operators which closed in May 2006) combined with the net capital expenditures of $15.4 million in 2007.

Amortization expense (which relates to amortization of the Company's intangible assets) amounted to $0.6 million during Q4 2007 which was in line with the Q4 2006 amount. The majority of this expense relates to amortization of the $11.3 million of intangible assets acquired as part of the business acquisitions of Colter and the owner operators on May 31, 2006. For the 2007 calendar year, amortization expense was significantly higher then during 2006, as the intangibles acquired from the business acquisitions were amortized for only part of 2006.

Due to the impairment loss of the intangible assets recognized during Q4 2007 (see discussion below in section titled "Impairment loss on goodwill and intangible assets") , the intangible asset balances were reduced to nil on the balance sheet at December 31, 2007. As a result, there will be no future amortization expense from the intangible assets acquired during 2007 and prior years.

Interest expense



----------------------------------------------------------------------------
Three Three
months months Year Year
ended ended ended ended
Dec Dec Dec Dec
31, 2007 31, 2006 % 31, 2007 31, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Interest on long-
term debt 523 97 439% 1,680 472 256%
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Other interest 43 245 (82%) 79 430 (82%)
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Total interest 566 342 66% 1,759 902 95%
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Total interest expense for Q4 2007 of $0.6 million was 66% higher than the Q4 2006 interest expense of $0.3 million. The increase in 2007 primarily reflected a net increase in the average total debt balance (comprised of bank indebtedness, callable debt, long-term debt and capital leases) combined with higher interest rates.

For calendar 2007, total interest expense was approximately two times greater than interest expense recognized for the 2006 year as a result of significantly higher average debt balances during 2007. The increased total debt reflected the use of debt financing for CanSub's internal equipment build programs in 2006 and 2007 which amounted to approximately $41.3 million (2006 - net $25.9 million; 2007 - net $15.4 million). Equipment acquired as part of the May 2006 business acquisitions was financed through proceeds of an equity offering.

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).

For goodwill, a two-step impairment test was used. The first step is to identify if a potential goodwill impairment exists. The second step measures the amount of impairment loss to be recognized. These steps were performed as follows:

- Step 1 - identify if a potential impairment exists. The fair value of each of the Wireline and Testing reporting units was calculated (using a multiple of calendar 2007 EBITDA) and then compared with the carrying amounts of the related assets in these divisions, including goodwill. Since the carrying value of the assets for both reporting units exceeded the calculated fair values there was evidence that impairment existed.

- Step 2 - calculation of impairment loss amount. Several measurement methods were used to calculate the estimated fair value of goodwill including the comparison of the carrying values of assets to fair values of the reporting units for each of the Wireline and Testing divisions as noted in Step 1 above. In addition, the market capitalization of CanSub (based on the Company's share price at December 31, 2007) was compared to the book value of the Company (ie the value of shareholders' equity) to determine the value of goodwill that was attributed by the public markets. Based on these measurements, it was determined that goodwill had no value at December 31, 2007 and a full impairment charge was taken.

For intangible assets, an estimated fair value was calculated for these assets at December 31, 2007 and then compared to their respective carrying values. The method used to calculate the current fair values was the same calculation used to value the intangibles when they were first acquired (as part of business acquisitions, primarily during 2006) and involved estimating future cash flows generated for each class of intangible assets. As a result of these calculations, it was determined that the fair value of the intangible assets was minimal and therefore, the full carrying value of the intangibles at December 31, 2007 was impaired.

The conditions which precipitated the impairment of both goodwill and the intangible assets were as follows:

- weakness in natural gas commodity prices negatively impacting expectations of industry activity levels.

- the increased oil and gas production royalties recently announced by the Alberta government is expected to negatively impact activity levels in Alberta areas of the WCSB in the near term.

- upward cost pressures experienced by the industry adversely affecting operating margins.

These conditions have contributed to the decreased enterprise value of CanSub and the fair value of CanSub's operating segments. As such, goodwill and intangible asset impairment charges of $14.2 million and $7.5 million respectively were recognized. As a result of these impairment charges, the carrying value of both goodwill and intangible assets on the balance sheet at December 31, 2007 was nil.

Current tax expense (recovery)

For the year ended December 31, 2007, CanSub recognized a net current tax expense of $0.4 million. This expense was generated to utilize expiring ITC's of $0.4 million which will result in nil cash taxes payable for the 2007 calendar period.

Future income tax expense (reduction)

The Company recognized a future income tax reduction of $2.7 million in Q4 2007 bringing calendar 2007 future income tax reduction to $4.4 million. The future income tax expense (reduction) is typically impacted by net timing differences between amounts for tax and accounting and draw-downs of the deferred credit.

Net Earnings (loss)

The Company recorded a net loss in Q4 2007 of $21.0 million (negative $1.09 per share - basic and diluted) as compared to net earnings of $1.6 million ($0.08 per share - basic and diluted) for Q4 2006. For calendar 2007, the Company recorded a net loss of $24.7 million (negative $1.28 per share). The net loss figures recorded in the Q4 2007 and Year ended December 31, 2007 periods include a one-time, non-cash charge of $21.7 million related to impairment loss of goodwill and intangible assets.

Retained Earnings (deficit)

On November 13, 2006, the Company's shareholders approved the reduction of the accumulated deficit by $22.7 million which eliminated the Company's accumulated deficit balance and resulted in a retained earnings balance at December 31, 2006 of $7.0 million. This revised retained earnings figure reflects the cumulative earnings of CanSub since January 1, 2006, and in the opinion of the Company's management, is more representative of the performance of the Company since the February 14, 2006 transaction. At December 31, 2007, the Company's defict balance was $17.8 million.

Income Tax amounts

The Company had the following estimated tax amounts available at December 31, 2007 to apply against future taxable income: non-capital losses of $15.3 million and unclaimed scientific research and development expenditures ("SRED") of $9.4 million. In addition, the Company had approximately $1.5 million in investment tax credits which may be claimed against taxes otherwise payable for federal purposes and expire between 2008 and 2014. These tax amounts are subject to review and assessment by the taxation authorities.

Share Capital

There were no changes to Share Capital during calendar 2007 and to March 24, 2008. The number of common shares outstanding remained at 19.3 million.

Stock Options

During Q4 2007, the Company granted 44,500 options and forfeited 79,500 options for a net decrease of 35,000 options. At December 31, 2007 the Company had 1.642 million options outstanding.

During February 2007, the Company's Board of Directors approved the re-pricing of 405,500 options held by employees of the Company (excluding directors, officers, senior management and other insiders). The exercise prices of these options, which ranged from $4.49 to $7.80 per option were all reduced to $4.20. As a result of this re-pricing, an additional stock-based compensation expense of $200,000 will be recorded over the remaining vesting period of the related options. Of this amount, $121,000 of expense was recognized in calendar 2007. Due to this re-pricing, substantially all of the Company's outstanding options at December 31, 2007 had an exercise price of $4.20 which is equal to the price of the Company's shares issued as part of the February 14, 2006 go-public transaction. All options granted during 2007 were at exercise prices ranging from $4.20 to $4.40.

Liquidity and Capital Resources

The Company recorded positive cash flow from operations (before changes in non-cash working capital) of $1.5 million for Q4 2007 as compared to positive cash flow from operations of $4.1 million in Q4 2006. Cash flow from operations during calendar 2007 was $5.1 million as compared to $15.6 million for calendar 2006. The decrease in Cash flow in both periods primarily reflects the reduced revenues and margins in 2007 (see Revenue and Gross Margin analysis above).

As at December 31, 2007 the Company had working capital of $0.9 million and total long-term debt (i.e. long-term debt plus long-term portion of capital leases) of $20.0 million for a net debt position of $19.1 million. At December 31, 2007 the Company had drawn $23.2 million of its committed, revolving facility. The total credit under this facility is $44.0 million. The actual amount available at any one time is equal to 75% of marginable accounts receivable plus 50% of the net book value of property and equipment on the Company's balance sheet less assets pledged as security for capital lease liabilities and less certain computer equipment. This resulted in an actual available amount from this facility of approximately $31.2 million at December 31, 2007, or an additional $8.0 million of available funds to be drawn on the facility. However, amounts the Company is eligible to draw under the facility are subject to CanSub meeting all related facility covenants.

The committed, revolving facility can be used to finance working capital requirements, acquire capital assets and for business acquisitions. Under terms of the facility, the initial Revolving Term Date (ie the date at which the facility reverted to a three-year term loan) was scheduled to be on October 26, 2007. However, at CanSub's request, the Revolving Term Date was extended by the bank to June 30, 2008. The Company is entitled to request a one-year renewal past the June 30, 2008 date by giving the bank notice within 60 days prior to June 30. If the bank does not agree to this renewal, the balance outstanding on the facility will be capped and repaid in even principal plus interest amounts over a three-year period commencing on July 31, 2008.

At September 30, 2007, the Company was not in compliance with one of the debt covenants covering the revolving, committed facility which was based on the Company's debt levels as a multiple of trailing 12-month EBITDA. Subsequent to September 30, 2007, the bank provided CanSub with a waiver related to this particular covenant breach. The calculation of this covenant, which is done on a quarterly basis, has been amended by the bank for quarterly periods ended December 31, 2007 and March 31, 2008. At December 31, 2007 the Company was in compliance with this covenant (as amended) and also in compliance with all other required covenants. CanSub is currently in the process of renegotiating the terms of this committed, revolving facility in advance of the June 30, 2008 Revolving Term Date.

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. As was done in prior years, CanSub also has the option of financing capital asset and business acquisition programs from the proceeds of equity offerings. The Company's management continues to evaluate cost cutting measures as well as its capital expenditure programs in response to the current industry conditions.

Investing Activities

The Company's net capital expenditures (ie acquisitions net of proceeds from disposals) for property and equipment during Q4 2007 amounted to $2.2 million which brings year to date net capital expenditures to $15.4 million. Capital expenditures incurred during Q4 2007 related primarily to 2 new wireline units and 1 new swabbing unit placed into operation during the current quarter plus costs of certain auxiliary equipment.

The chart below outlines the calendar 2007 fleet additions. In addition to the new operating units, a portion of CanSub's capital expenditure program for 2007 was for the refurbishment of older equipment as well as certain auxiliary equipment.



----------------------------------------------------------------------------
# of Wireline # of Swabbing # of Testing
Units Units packages
----------------------------------------------------------------------------
Operating fleet at
December 31, 2006 35 8 61
----------------------------------------------------------------------------
Additions during
Q1 2007 6 - -
----------------------------------------------------------------------------
Additions during
Q2 2007 - 1 -
----------------------------------------------------------------------------
Additions during
Q3 2007 3 - -
----------------------------------------------------------------------------
Units parked during
Q3 2007 (2) - -
----------------------------------------------------------------------------
Additions during
Q4 2007 2 1 -
----------------------------------------------------------------------------
Operating fleet at
December 31, 2007 44 10 61
----------------------------------------------------------------------------


The 44 wireline units in operation at December 31, 2007 were comprised of 22 E-line units and 22 slickline units. In addition, there are 2 older E-line units that were parked at year end to reduce costs. One additional E-line unit was placed into operation during February 2008, which brings the total operating wireline fleet at March 24, 2008 to 45 units.

Based on the continuing industry slow-down, management has minimal capital expenditures planned for 2008.

Financing Activities

Financing activities during Q4 2007 consisted of a decrease in the Company's committed, revolving facility of $1.3 million and repayments of the Company's capital lease obligations totaling $0.6 million. For calendar 2007, financing activities consisted of a net increase in the committed, revolving facility of $5.7 million and capital lease repayments of $2.3 million.

Related Party Transactions

All related party transactions during Q4 2007 and the year ended December 31, 2007 were in the normal course of business at market rates. Material related party transactions are outlined in the notes to the audited December 31, 2007 financial statements.

Quarterly Financial Summary

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

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



----------------------------------------------------------------------------
Three months Three months Three months Three months
ended Dec 31 ended Sept 30 ended June 30 ended Mar 31
2007 2007 2007 2007
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Revenue 16,312 17,533 7,282 25,042
----------------------------------------------------------------------------
Cash Flow (1) 1,465 2,170 (3,370) 4,867
----------------------------------------------------------------------------
EBITDA (1)(2) 1,968 2,690 (3,010) 5,189
----------------------------------------------------------------------------
EBITDA (1)(2) as a
% of revenue 12.1% 15.3% (41.8%) 20.7%
----------------------------------------------------------------------------
Net Earnings (loss) (21,024) (830) (4,597) 1,714
----------------------------------------------------------------------------
Net Earnings (loss)
per share - basic ($1.09) ($0.04) ($0.24) $0.09
----------------------------------------------------------------------------
Net Earnings (loss)
per share - diluted ($1.09) ($0.04) ($0.24) $0.09
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Three months Three months Three months Three months
ended Dec 31 ended Sept 30 ended June 30 ended March
2006 2006 2006 31, 2006
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Revenue 19,611 20,625 10,714 22,402
----------------------------------------------------------------------------
Cash Flow (1) 4,110 5,002 (29) 6,553
----------------------------------------------------------------------------
EBITDA (1)(2) 4,360 5,228 175 6,757
----------------------------------------------------------------------------
EBITDA (1)(2) as a
% of revenue 22.2% 25.3% 1.6% 30.1%
----------------------------------------------------------------------------
Net Earnings (loss) 1,616 2,192 806 2,352
----------------------------------------------------------------------------
Net Earnings per
share - basic $0.08 $0.12 $0.05 $0.25
----------------------------------------------------------------------------
Net Earnings per
share - diluted $0.08 $0.12 $0.05 $0.24
----------------------------------------------------------------------------

(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. For Q1
2006, EBITDA is also adjusted for certain equipment lease expenses that
are included in operating expenses. Refer to the section below titled
"Reconciliation of Cash Flow and EBITDA to Net Earnings".

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


Commitments and obligations

See notes to the audited financial statements for the year ended December 31, 2007 for a summary of the Company's commitments and obligations.

Off balance sheet financing arrangements

Other than the vehicle, equipment and facility leases described in the commitments note in the audited financial statements for the year ended December 31, 2007, there are no material off balance sheet financing arrangements.

Use of estimates and assumptions

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

New accounting pronouncements

On January 1, 2007, the Company adopted the following sections of the Canadian Institute of Chartered Accountants ("CICA") Handbook: Section 1530 - "Comprehensive Income" and Section 3855 - "Financial Instruments - Recognition and Measurement". The comprehensive income standard requires a separate financial statement that captures items included in other comprehensive income but excluded from income in accordance with Canadian GAAP. The new financial instrument standards deal with the recording of financial instruments at fair value in the financial statements unless certain criteria are met allowing them to be recorded at cost or amortized cost.

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

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

Risks and Uncertainties

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

Evaluation of Disclosure Controls and Procedures

Management has designed disclosure controls and procedures to provide reasonable assurance that material information relating to the Company is made known to the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") on a timely basis in order for the Company to comply with its disclosure and financial reporting obligations and in order to safeguard assets. The CEO and CFO have concluded that the Company's disclosure controls and procedures, as at December 31, 2007 are designed and operating effectively in providing reasonable assurance that material information is accumulated and made known to them on a timely basis.

Evaluation of Internal Controls over Financial Reporting

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

The Company has assessed the design of its internal controls over financial reporting as at December 31, 2007. Based on this assessment, the Company's CEO and CFO have concluded that the Company's ICFR is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

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

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

Outlook

Weak natural gas prices during 2007 continued to have a negative impact on overall industry activity levels and equipment utilization rates. In addition, the new royalty regime announced by the Alberta government during October, 2007 may further reduce near term drilling activities, especially in Alberta. To deal with the current downturn, CanSub has implemented various cost cutting measures and continues to optimize operations corporately and at each operating hub. In addition, to conserve capital going forward, the Company has minimal capital expenditures planned in 2008.

Although the current competitive price environment has impacted the Company's margins, CanSub continues to see reasonable utilization rates in its largest divison - Wireline and related services. The services in this division are geared to oil and natural gas well completions as well as to activities related to existing, producing wells. Activity related to new and existing oil wells remains strong given the current, robust oil prices. The Testing division, which is involved primarily in natural gas well completion work, is still running at lower utilization rates than the prior year at this time but remains profitable even at reduced pricing.

The Company's management continues to closely monitor industry activity and will make further adjustments to operating costs and capital expenditures if activity levels during the next several quarters are lower than anticipated. Given the Company's strong client base, geographical spread across the WCSB and diversification of services, CanSub is positioned to respond to the industry turnaround, anticipated later in 2008.



RECONCILIATION OF CASH FLOW AND EBITDA TO NET EARNINGS

----------------------------------------------------------------------------
Three months Three months Year ended Year ended
ended Dec 31 ended Dec 31 Dec 31 Dec 31
2007 2006 2007 2006
In $000's (unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Net earnings (loss) (21,024) 1,616 (24,737) 6,966
----------------------------------------------------------------------------
Add back (deduct):
----------------------------------------------------------------------------
Depreciation and
amortization expense 2,799 2,281 10,817 6,546
----------------------------------------------------------------------------
Future income tax
expense (reduction) (2,744) 20 (4,412) (34)
----------------------------------------------------------------------------
(Gain) loss on disposal
of capital assets (1) (246) 17 (272)
----------------------------------------------------------------------------
Stock-based compensation
expense 282 273 1,294 1,477
----------------------------------------------------------------------------
Investment tax credit
utilized 446 - 446 -
----------------------------------------------------------------------------
Impairment loss on
goodwill and
intangible assets 21,707 - 21,707 -
----------------------------------------------------------------------------
Loss on settlement of
Class B preferred
share liability - 167 - 167
----------------------------------------------------------------------------
Non-Controlling interest - - - 786
----------------------------------------------------------------------------
Cash Flow (1) 1,465 4,110 5,132 15,636
----------------------------------------------------------------------------
Long-term and other
interest expense 566 342 1,759 902
----------------------------------------------------------------------------
Current tax expense
(recovery) 383 (92) 392 (92)
----------------------------------------------------------------------------
Utilization of
investment tax credit (446) - (446) -
----------------------------------------------------------------------------
Equipment lease
expenses included in
operating expenses (2) - - - 72
----------------------------------------------------------------------------
EBITDA (1) 1,968 4,360 6,837 16,518
----------------------------------------------------------------------------

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

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


NON-GAAP MEASURES

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


Financial Statements of

CANADIAN SUB-SURFACE ENERGY SERVICES CORP.

Years ended December 31, 2007 and 2006.



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

----------------------------------------------------------------------------
December 31, December 31,
2007 2006
----------------------------------------------------------------------------
Assets
Current assets:
Accounts receivable $ 13,531 $ 19,004
Deposits and other 888 2,346
Inventory 348 302
Income taxes receivable - 99
---------------------------------------------------------------------------
14,767 21,751
Property and equipment (note 6) 50,809 43,338
Future income tax asset (note 11) 9,442 5,476
Intangible assets (note 7) - 10,073
Goodwill (note 8) - 14,177
----------------------------------------------------------------------------
$ 75,018 $ 94,815
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 7,860 $ 7,556
Current portion of long-term debt (note 9) 3,862 487
Current portion of obligations under
capital leases (note 10) 2,091 2,278
Income taxes payable 27 7
---------------------------------------------------------------------------
13,840 10,328
Long-term debt (note 9) 19,319 17,027
Obligations under capital leases (note 10) 675 2,833
Deferred credit (notes 4 and 11) 6,723 6,723
----------------------------------------------------------------------------
40,557 36,911

Shareholders' equity:
Share capital (note 12) 47,593 47,593
Contributed surplus (note 12) 4,639 3,345
Retained earnings (deficit) (17,771) 6,966
----------------------------------------------------------------------------
34,461 57,904
Commitments (note 15)
----------------------------------------------------------------------------
$ 75,018 $ 94,815
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

On behalf of the Board:

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


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

----------------------------------------------------------------------------
Year ended December 31,
-------------------------------
2007 2006
----------------------------------------------------------------------------

Revenue $ 66,169 $ 73,352

Expenses:
Operating 50,680 49,145
Selling, general and administrative 8,652 7,761
Stock-based compensation 1,294 1,477
Depreciation and amortization 10,817 6,546
Interest on long-term debt 1,680 472
Other interest 79 430
Loss (gain) on disposal of equipment 17 (272)
---------------------------------------------------------------------------
73,219 65,559

----------------------------------------------------------------------------
Earnings (loss) before other items (7,050) 7,793

Other items:
Impairment loss on goodwill (note 8) 14,177 -
Impairment loss on intangible assets
(note 7) 7,530 -
Loss on settlement of Class B preferred
share liability - 167
----------------------------------------------------------------------------
21,707 167

Earnings (loss) before income taxes (28,757) 7,626
Income taxes (note 11):
Current (recovery) 392 (92)
Future (reduction) (4,412) (34)
----------------------------------------------------------------------------
(4,020) (126)

----------------------------------------------------------------------------
Earnings (loss) before non-controlling
interest (24,737) 7,752

Non-controlling interest - (786)

----------------------------------------------------------------------------
Net earnings (loss) (24,737) 6,966

Retained earnings, beginning of year 6,966 1,607

Purchase of non-controlling interest - 3,306

Cash and Class B preferred shares paid
to CanSub Group shareholders (note 1) - (27,566)

Application of deficit against share
capital - 22,653

----------------------------------------------------------------------------
Retained earnings (deficit), end of year $(17,771) $ 6,966
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Earnings (loss) per common share (note 13)
Basic $ (1.28) $ 0.45
Diluted $ (1.28) $ 0.44
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


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

----------------------------------------------------------------------------
Year ended December 31,
-------------------------------
2007 2006
----------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net earnings (loss) $(24,737) $ 6,966
Impairment loss on goodwill 14,177 -
Impairment loss on intangible assets 7,530 -
Depreciation and amortization 10,817 6,546
Future income taxes (4,412) (34)
Stock based compensation 1,294 1,477
Investment tax credit utilized 446 -
Loss (gain) on disposal of equipment 17 (272)
Loss on settlement of Class B preferred
share liability - 167
Non-controlling interest - 786
----------------------------------------------------------------------------
5,132 15,636
Change in non-cash working capital related
to operating activities (note 14) 5,338 (7,345)
---------------------------------------------------------------------------
10,470 8,291
----------------------------------------------------------------------------

Financing:
Increase in long-term debt 5,667 17,514
Repayment of obligations under capital
lease (2,345) (2,340)
Decrease in amounts due from related
parties - 174
Repayment of callable debt - (1,832)
Decrease in bank indebtedness - (4,924)
Repayment of notes payable - (1,266)
Repayment of long-term debt - (206)
Repayment of shareholders' loans - (803)
Increase in obligations under capital lease - 3,448
Decrease in loans receivable - 163
Net proceeds on issuance of common shares - 49,139
Proceeds from exercise of stock options - 810
Cash portion of payment to CanSub Group
shareholders (note 1) - (26,066)
---------------------------------------------------------------------------
3,322 33,811
----------------------------------------------------------------------------

Investing:
Acquisition of businesses (375) (16,795)
Acquisition of property and equipment (15,478) (26,017)
Cash acquired on business combination
(note 4) - 1,512
Proceeds from disposal of equipment 91 109
Change in non-cash working capital related
to investing activities (note 14) 1,970 (911)
---------------------------------------------------------------------------
(13,792) (42,102)
----------------------------------------------------------------------------

Net change in cash - -

Cash, beginning of year - -

----------------------------------------------------------------------------
Cash, end of year $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplementary cash flow information (note 14)
See accompanying notes to consolidated financial statements.



CANADIAN SUB-SURFACE ENERGY SERVICES CORP.

Notes to the Consolidated Financial Statements

(in thousands of dollars)

Years ended December 31, 2007 and 2006

1. Basis of presentation and nature of operations:

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

The 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.

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

For the comparative period ended December 31, 2006, the combined consolidated financial statements from January 1, 2006 up to the February 14, 2006 transaction date are the accounts of the CanSub Group. The non-controlling interest recorded on the income statement is attributed to a minority interest held outside the CanSub Group. For the period between the February 14, 2006 transaction date and December 31, 2006 these consolidated financial statements include the accounts of the Company.

CWC was incorporated on June 14, 1998 under the Business Corporations Act (Ontario). It was then continued under the Canada Business Corporations Act on January 13, 2004 and further continued under the Business Corporation's Act (Alberta) subsequent to the February 14, 2006 transaction. Just prior to the February 14, 2006 transaction, CWC was publicly traded.

The transaction between CWC and the CanSub Group can be summarized as follows:

- On December 30, 2005, CWC and the CanSub Group entered into an Arrangement Agreement which included the reorganization of CWC's share capital, a $34,000 financing and the acquisition of the CanSub Group.

- On February 14, 2006, CWC closed the $34,000 financing (net proceeds of $31,905 after deducting related commissions) through the issue of 8,095,237 Class A common shares at a price of $4.20 per share, and then completed the acquisition of the CanSub Group for a net purchase price (prior to adjustment) of $49,132. The initial purchase price consisted of the payment of $24,566 in cash and the remaining $24,566 in shares.

- The share component consisted of 5,491,905 Class A common shares and 357,143 Class B preferred shares (both share classes valued at $4.20 per share).

- The purchase price was subsequently increased by $1,500 to a total of $50,632 as a result of the purchase price adjustment clause contained in the Arrangement Agreement. The purchase price adjustment was paid in cash to the CanSub Group shareholders in the third quarter of 2006.

As part of the Arrangement Agreement, CWC changed its name to Canadian Sub-Surface Energy Services Corp. Shares of the Company commenced trading on the TSX on February 17, 2006.



Summary of purchase price paid by CWC for acquisition of CanSub Group
shares:

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

Initial cash consideration on February 14, 2006 $ 24,566
Purchase price adjustment 1,500
----------------------------------------------------------------------------
Total cash portion 26,066

Value of Class B preferred shares issued 1,500

----------------------------------------------------------------------------
Total consideration paid excluding Class A common shares 27,566

Value of Class A common shares issued 23,066

----------------------------------------------------------------------------
Total purchase price $ 50,632
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Since the CanSub Group was the deemed acquirer in the transaction, the cash and Class B preferred share consideration used to purchase all of the outstanding shares of the CanSub Group was treated as a share buy-back, with the $27,566 applied to reduce retained earnings.

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

2. Use of estimates:

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

3. Summary of significant accounting policies:

On January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530 "Comprehensive Income", Handbook Section 3855 "Financial Instruments - Recognition and Measurement" and Handbook Section 3861 "Financial Instruments - Disclosure and Presentation".

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

(a) Comprehensive income:

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

(b) Financial instruments:

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

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

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

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

(c) Principles of consolidation:

For the periods ended December 31, 2007 and December 31, 2006, these consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary and its wholly owned partnership. All significant intercompany balances and transactions have been eliminated.

(d) Inventory:

Inventory consisting of equipment and related parts held for resale is carried at the lower of cost, determined on a first in first out basis, and net realizable value.

(e) Property and equipment:

Property and equipment are carried at cost.

Depreciation has been calculated using the declining balance method over the estimated useful lives of the assets at the following annual rates:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Rate
----------------------------------------------------------------------------

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


(f) 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.

(g) 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 10 years
Patent pending technology 3 years
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(h) 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.

(i) 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.

(j) Revenue recognition:

The Company's services are provided based upon orders and contracts with its customers that include fixed or determinable prices on the basis of the services rendered method, with agreed upon daily or hourly rates plus recovery of certain costs. Revenue is recognized when services are rendered and only when collectibility is reasonably assured.

(k) Stock based compensation:

The Company has a stock based compensation plan as described in note 12. The Company estimates the fair value of stock options using the Black-Scholes valuation model.

Stock-based compensation expense, based on the estimated fair value of the award, is recognized as an expense on a straight-line basis over the vesting period of the option. Stock-compensation expense is initially credited to contributed surplus and transferred to common shares when the option is exercised. Consideration received on the exercise of stock options is also credited to common shares.

(l) 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 this 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.

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

4. Business acquisitions:

(a) Acquisition of Canada West Capital Inc. ("CWC"):

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



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


(b) Acquisition of the assets of Colter Production Services Inc. and three Owner operators:

On May 31, 2006, the Company completed the acquisitions of the business assets of Colter Production Services Inc. ("Colter" - a private production testing Company), and three Owner operators ("Owner operators" - all private wireline companies) (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). Commencing June 1, 2006 the revenues and earnings from Colter and the Owner operators are included in the Company's financial statements.

Prior to the acquisition of the Owner-operators, the Company had a business relationship with these entities which called for them to work exclusively for the Company. As a result of these arrangements, the Company recorded 100% of the revenues generated by the Owner-operators equipment and reimbursed the Owner-operators an average of 82% of those revenues. Such reimbursement was recorded in the Company's operating expenses.

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



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

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


(c) Acquisition of the assets of Sky-Hook Picker Services Inc.

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



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

Property and equipment $ 316
Intangible asset:
Customer relationships 59

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


5. Related party transactions:

Any amounts due from related parties are non-interest bearing, unsecured and have no specified terms of repayment. All transactions with related parties have occurred in the normal course of operations, are at arms-length terms and conditions and are measured at the exchange amount.

(a) For the years ended December 31, 2007 and 2006:

i) Legal fees of $100 (2006 - $491) were charged by a professional services firm in which one of the Company's directors is a partner.

ii) On November 13, 2006, the Company's shareholders approved the conversion of 991,044 Class B preferred shares to Class A common voting shares on a one-to-one basis. Directors and officers of the Company held 439,401 of these Class B preferred shares prior to conversion.



6. Property and equipment:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net book
December 31, 2007 Cost depreciation value
----------------------------------------------------------------------------

Trucks $ 11,163 $ 3,749 $ 7,414
Truck equipment 23,683 6,060 17,623
Field equipment 33,449 9,605 23,844
Furniture and office equipment 747 190 557
Computer hardware and software 2,002 770 1,232
Equipment under construction 139 - 139

----------------------------------------------------------------------------
$ 71,183 $ 20,374 $ 50,809
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net book
December 31, 2006 Cost depreciation value
----------------------------------------------------------------------------

Trucks $ 8,065 $ 1,955 $ 6,110
Truck equipment 16,814 3,704 13,110
Field equipment 26,736 6,080 20,656
Furniture and office equipment 348 82 266
Computer hardware and software 1,330 443 887
Equipment under construction 2,309 - 2,309

----------------------------------------------------------------------------
$ 55,602 $ 12,264 $ 43,338
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Included in property and equipment at December 31, 2007 are assets under capital leases with a total cost of $ 7,450 (December 31, 2006 - $7,663) and net book value of $ 5,241 (December 31, 2006 - $ 6,094).



7. Intangible assets:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net book
December 31, 2007 Cost amortization value
----------------------------------------------------------------------------

Customer relationships $ 3,832 $ 3,832 $ -
Non-compete agreements 7,483 7,483 -
Patent pending technology 760 760 -

----------------------------------------------------------------------------
$ 12,075 $ 12,075 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net book
December 31, 2006 Cost amortization value
----------------------------------------------------------------------------

Customer relationships $ 3,774 $ 441 $ 3,333
Non-compete agreements 7,483 1,091 6,392
Patent pending technology 760 412 348

----------------------------------------------------------------------------
$ 12,017 $ 1,944 $ 10,073
----------------------------------------------------------------------------
----------------------------------------------------------------------------


In conjunction with the impairment test performed on goodwill (note 8), the Company identified that the carrying value of intangible assets in both the Wireline and Gas Testing operating segments exceeded their fair value. Accordingly, an impairment charge of $7,530 has been recognized as an impairment loss on intangible assets in the results of operations for the current year.

8. Impairment loss on goodwill

The Company performed an impairment test on goodwill at December 31, 2007 which revealed that the carrying amounts of goodwill for both the Wireline and Gas Testing operating segments exceeded their fair value. The conditions that precipitated the impairment include a general decline in natural gas commodity prices, and a review of oil and gas royalties by the Government of Alberta, which reduced industry activity levels and demand for the Company's services resulting in lower operating margins. Accordingly, an impairment charge of $14,177 has been recognized as an impairment loss on goodwill in the results of operations for the current year.

9. Long-term debt:

The Company has a committed, revolving credit facility in the amount of $44,000 with a major Canadian chartered bank. The amount available at any one time is equal to 75% of marginable accounts receivable plus 50% of the net book value of property and equipment on the Company's balance sheet less assets pledged as security for capital lease liabilities and less certain computer equipment. However, amounts the Company is eligible to draw under the facility are subject to the Company meeting all related facility covenants. The facility is secured by:

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

(b) assignment of all risk insurance proceeds.

On September 17, 2007, at the Company's request, the bank extended the maturity date of the facility from October 26, 2007 to June 30, 2008 (the Revolving Term Date). The Company is entitled to request a one year renewal of the revolving facility by providing notice in writing to the bank at least 60 days prior to June 30, 2008. If the bank does not agree to this renewal, the balance outstanding on the revolving debt facility will be capped and the balance repaid over 36 months by monthly interest plus principal payments commencing one month from the Revolving Term Date.

Interest on the loan accrues at the bank's prime interest rate plus a variable rate that is based on certain financial performance ratios. At December 31, 2007, the Company's interest rate was the bank's prime rate plus 1.0% per annum.



----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, December 31,
2007 2006
----------------------------------------------------------------------------

Total $ 23,181 $ 17,514
Less: current portion 3,862 487

----------------------------------------------------------------------------
$ 19,319 $ 17,027
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Required principal repayments for the long-term debt (assuming the facility
is converted to a term loan on June 30, 2008) are as follows:

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

2008 $ 3,862
2009 7,728
2010 7,728
2011 3,863
----------------------------------------------------------------------------

10. Obligations under capital leases:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, December 31,
2007 2006
----------------------------------------------------------------------------

Total $ 2,766 $ 5,111
Less: current portion 2,091 2,278

----------------------------------------------------------------------------
$ 675 $ 2,833
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The capital lease obligations bear interest at rates ranging between 5.9% and 8.9% and are repayable in monthly principal installments of $181 plus interest. The obligations are secured by specific equipment. The estimated repayments required for the capital lease obligations subsequent to December 31, 2007 are as follows:



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

2008 $ 2,091
2009 665
2010 10
----------------------------------------------------------------------------

$ 2,766
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Company has a leasing credit facility available from a major chartered Canadian bank with a total limit of $6,000. At December 31, 2007, there was $2,469 drawn on this line (December 31, 2006 - $4,427).

11. 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:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year ended December 31,
-------------------------
2007 2006
----------------------------------------------------------------------------

Earnings (loss) before income taxes $ (28,757) $ 7,626
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Combined federal and provincial income tax rate 32.42% 32.76%

Expected income tax provision (9,323) 2,498

Non-deductible expenses related to write-down of
intangibles 3,022 -
Impact of tax rate changes on future tax expense 1,813 154
Non-deductible stock based compensation expense 420 484
Other non-deductible expenses 102 117
Reassessments of prior years (54) -
Change in deferred credit - (3,232)
Income tax recovery - (98)
Other - (49)

----------------------------------------------------------------------------
Income tax expense $ (4,020) $ (126)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, December 31,
2007 2006
----------------------------------------------------------------------------

Non capital losses and unclaimed scientific
research and development expenses $ 6,768 $ 6,747
Intangible assets 1,619 -
Investment tax credits 1,457 1,945
Capital lease obligation 818 1,605
Transaction costs 783 1,141

----------------------------------------------------------------------------
Total assets $ 11,445 $ 11,438
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Property, equipment $ 888 $ 2,891
Intangible assets - 2,454
Partnership income 601 -
Investment tax credits (inclusion in income) 514 617

----------------------------------------------------------------------------
Total liabilities $ 2,003 $ 5,962
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net future income tax asset $ 9,442 $ 5,476
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The Company has non-capital losses of $15,287 available to reduce future
taxable income. These losses expire as follows:

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

2008 $ 4,296
2009 3,220
2010 7,159
2014 272
2015 340

----------------------------------------------------------------------------
$ 15,287
----------------------------------------------------------------------------
----------------------------------------------------------------------------


In addition, the Company has the following: research and development costs of $9,385 which are available to reduce future taxable income and do not expire; capital losses of $3,500 which are available to reduce future capital gains and do not expire and investment tax credits of $1,457 which can be claimed against federal income taxes payable and expire between 2008 and 2014.The above amounts are subject to review and assessment by taxation authorities.

12. Share capital:

On February 13, 2006 the Company amended its articles of incorporation to alter its authorized capital by designating the following: an unlimited number of Class A voting shares, an unlimited number of Class B non-voting preferred shares, an unlimited number of Class C non-voting common shares and an unlimited number of preferred shares issuable in series. On June 20, 2007, the Company restated its articles of incorporation to cancel the class B non-voting preferred and Class C non-voting common share classes. The rights, privileges, restrictions and conditions are disclosed below for each class of shares.

(a) Common shares:

(i) Authorized:

Unlimited number of Class A voting common shares

(ii) Issued and outstanding:



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

Balance at December 31, 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 8,095,237 34,000
Share issue costs related to February 14, 2006
private placement - (2,095)
Increase in redemption price of CWC preferred
shares as part of the February 14, 2006
transaction - (443)
Issue of shares to former shareholders of CWC 373,689 1,569
Issue of shares pursuant to May 31, 2006 private
placement 2,533,333 19,000
Share issue costs related to May 31, 2006
private placement - (995)
Issue of shares as consideration for the May 31,
2006 asset acquisitions 1,838,534 13,161
Other transaction costs associated with private
placements of shares - (771)
Income tax benefit of transaction costs and
commissions related to private placements - 1,298
Issue of shares as payment for settlement of
Class B preferred share liability (note 5) 991,044 4,212
Application of deficit against share capital - (22,653)
----------------------------------------------------------------------------
Balance at December 31, 2007 and 2006 19,323,742 $ 47,593
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The 1,991 shares outstanding at December 31, 2005 relate to shares outstanding of the CanSub Group prior to the February 14, 2006 transactions with CWC. Since the CanSub Group was the deemed acquirer in the transaction with CWC, the purchase and cancellation of the 1,991 CanSub Group shares was recorded as a share buy-back for accounting purposes (see note 1).

On November 13, 2006, the Company's shareholders approved the application of $22,653 of deficit against Class A common share capital.

(b) Preferred Shares:

(i) Authorized:

Unlimited number of preferred shares, issuable in one or more series with rights and privileges to be determined by the Board of Directors.

(ii) Issued and outstanding at December 31, 2007 - nil (December 31, 2006 - nil).

(c) Stock options:

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

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

The Company calculates the fair value of its options using the Black-Scholes option pricing model. The following assumptions were used to determine the fair value of options on the date of grant:



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

Weighted average risk free interest rate 4.15%
Maximum life 5 years
Vesting period 3 years
Expected dividend $nil per share
Expected share price volatility 50%
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The average calculated fair value of options issued in 2007 was $1.64 per option using the Black-Scholes option pricing model. The stock based compensation expense of the Company for the years ending December 31, 2007 and 2006 was $1,294 and $1,477 respectively.



Following is a summary of the stock option transactions during 2007 and
2006:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31,
----------------------------------------------------------------------------
2007 2006
------------------------- --------------------------
Weighted Weighted
Number of average Number of average
Options exercise price Options exercise price
----------------------------------------------------------------------------

Class A common shares:

Outstanding at the
beginning of the year 1,548,750 $ 5.05 366,658 $ 2.21

Exercised as part of
the February 14, 2006
transaction with CWC - - (366,658) 2.21
Granted 359,250 4.22 1,689,250 5.06
Exercised - - - -
Forfeited (266,250) 4.20 (140,500) 5.25
Reduction in average
exercise price as a
result of February
20, 2007 re-pricing (0.77) -
----------------------------------------------------------------------------
Outstanding at the end
of the year 1,641,750 4.21 1,548,750 5.05
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Exercisable at the end
of the year 447,548 4.20 - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The 366,658 stock options outstanding at December 31, 2005 were all from the CanSub Group. Of this amount, 265,764 were fully vested at December 31, 2005 with the remaining 100,894 vested just prior to the February 14, 2006 transaction.

There were no options exercisable at December 31, 2006 as the first tranche of options issued as part of the February 14, 2006 transaction did not vest until February 14, 2007.

Details of the exercise prices and expiry dates of options outstanding at December 31, 2007 are as follows:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted
average Weighted
remaining average
Number life exercise
Exercise price outstanding (years) price
-------------- ------------ ---------- ---------

$ 3.45 5,000 3.96 $3.45
$ 4.20 1,581,750 3.45 $4.20
$ 4.40 34,500 4.46 $4.40
$ 4.80 15,000 3.73 $4.80
$ 5.80 5,500 3.71 $5.80
----------------------------------------------------------------------------
----------------------------------------------------------------------------


On February 20, 2007, the Company's board of directors approved a re-pricing of stock options held by certain employees of the Company (excluding directors, officers and other insiders). The exercise price of 405,500 options (such exercise prices ranging from $4.49 to $7.80) was reduced to $4.20. Stock based compensation expense of $200 related to this re-pricing is being recognized over the vesting period of these options.



(d) Class B non-voting preferred shares:

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

Balance at December 31, 2005 - $ -

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

Conversion of 4,437,307 preferred shares of CWC to
Class B shares on February 14, 2006 633,901 2,219

Increase in redemption price of CWC preferred
shares as part of the February 14, 2006
transaction - 443

Conversion of all outstanding Class B shares to
Class A common shares on a one for one basis on
November 13, 2006 (991,044) (4,162)
----------------------------------------------------------------------------
Balance at December 31, 2007 and 2006 - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Class B preferred shares that were issued during 2006 were non-voting, had a cumulative dividend of 2.5% per annum, and were convertible at the option of the holder to Class C non-voting common shares and had 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 had all the characteristics of debt and were classified as such on the balance sheet during 2006. The Class B preferred shares arose out of the Arrangement Agreement between the CanSub Group and CWC that was effective on February 14, 2006 and were all converted to Class C non-voting common shares on a one for one basis on November 13, 2006. On that same date, shareholders approved an amendment to the Company's articles which called for a subsequent conversion of these Class C non-voting common shares into Class A voting common shares (all on a one to one basis). As a result of this conversion, a loss on settlement of Class B preferred share liability of $167 was recorded in the statement of earnings in 2006. On June 20, 2007, the Company restated its articles of incorporation to cancel the class B non-voting preferred and Class C non-voting common share classes.



(e) Contributed surplus:

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

Contributed surplus at December 31, 2005 $ 1,868

Stock based compensation expense during 2006 1,477
----------------------------------------------------------------------------
Contributed surplus at December 31, 2006 3,345

Stock based compensation expense during 2007 1,294

----------------------------------------------------------------------------
Contributed surplus at December 31, 2007 $ 4,639
----------------------------------------------------------------------------
----------------------------------------------------------------------------


13. Per share amounts:

The weighted average number of common shares for the year ended December 31, 2007 was 19,323,742 (December 31, 2006 - 15,586,092).



Reconciliation of earnings per share and diluted earnings per share:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------

Net earnings (loss) available to common
shareholders $ (24,737) $ 6,966
Weighted average number of common
shares 19,323,742 15,586,092
Basic earnings (loss) per share $ (1.28) $ 0.45
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net earnings (loss) available to common
shareholders $ (24,737) $ 6,966
Weighted average number of common
shares 19,323,742 15,586,092
Dilutive effect of stock options - 98,806
Diluted weighted average number of
common shares 19,323,742 15,684,898
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Diluted earnings (loss) per share $ (1.28) $ 0.44
----------------------------------------------------------------------------
----------------------------------------------------------------------------


In the calculation of earnings per share for the year ended December 31, 2007, 1,641,750 options (2006 - 416,000 options) were excluded as the impact would be anti-dilutive.



14. Supplementary cash flow information:

Changes in non-cash working capital:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year ended
December 31,
-------------------------
2007 2006
----------------------------------------------------------------------------

Accounts receivable $ 5,473 $ (4,832)
Deposits and other 1,458 (1,944)
Accounts payable and accrued liabilities 304 214
Income taxes payable (recoverable) 119 (1,392)
Inventory (46) (302)

----------------------------------------------------------------------------
$ 7,308 $ (8,256)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Non-cash working capital change related to
operating activities $ 5,338 $ (7,345)

Non-cash working capital change related to
investing activities 1,970 (911)

----------------------------------------------------------------------------
$ 7,308 $ (8,256)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Interest paid $ 1,595 $ 902
Net cash taxes (received) paid $ (173) $ 1,287
----------------------------------------------------------------------------
----------------------------------------------------------------------------

15. Commitments:

(a) At December 31, 2007, the Company had the following annual commitments
under equipment operating lease agreements:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 $ 1,201
2009 373
2010 36
2011 15
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(b) At December 31, 2007, the Company had the following annual commitments
under office and warehouse lease agreements:

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

2008 $ 2,663
2009 2,494
2010 2,354
2011 2,322
2012 2,378
Thereafter 8,575
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(c) At December 31, 2007 the Company had commitments to purchase $500 of wireline, swabbing, production testing and related equipment. Delivery of these items is scheduled to occur in 2008.

16. Financial instruments:

(a) Fair value:

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

(b) Credit risk:

A substantial portion of the accounts receivable are with customers who are dependent upon the oil and gas industry, and are subject to normal industry credit risks. The Company's policy is to employ established credit approval practices and to closely monitor accounts receivable to mitigate credit risk.

(c) Interest rate risk:

The Company is exposed to interest rate risk to the extent that long-term debt and obligations under capital leases have variable interest rates.

17. 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.

18. Comparative information:

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

19. Segmented information:

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

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

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

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



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year ended
December 31, 2007
-----------------------------------------------
Gas
Wireline Testing Corporate Total
----------------------------------------------------------------------------

Revenue $ 41,867 $ 24,302 $ - $ 66,169
Operating expenses 31,681 18,999 - 50,680
----------------------------------------------------------------------------
10,186 5,303 - 15,489

Selling, general and
administrative - - 8,652 8,652
Stock-based compensation - - 1,294 1,294
Depreciation and
amortization 7,251 3,566 - 10,817
----------------------------------------------------------------------------
(5,274)

Property and equipment 35,873 14,936 - 50,809
Goodwill - - - -
Intangible assets - - - -
Capital expenditures
- property and equipment 13,010 2,784 - 15,794
Capital expenditures
- intangible assets 59 - - 59
Total assets 46,087 19,489 9,442 75,018
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year ended
December 31, 2006
-----------------------------------------------
Gas
Wireline Testing Corporate Total
----------------------------------------------------------------------------

Revenue $ 46,494 $ 26,858 $ - $ 73,352
Operating expenses 30,933 18,212 - 49,145
----------------------------------------------------------------------------
15,561 8,646 - 24,207

Selling, general and
administrative - - 7,761 7,761
Stock-based compensation - - 1,477 1,477
Depreciation and
amortization 4,404 2,142 - 6,546
----------------------------------------------------------------------------
8,423

Property and equipment 28,798 14,540 - 43,338
Goodwill 8,067 6,110 - 14,177
Intangible assets 5,495 4,578 - 10,073
Capital expenditures
- property and equipment 20,928 11,775 - 32,703
Capital expenditures
- intangible assets 4,916 6,340 - 11,256
Total assets 57,207 32,029 5,579 94,815
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

Contact Information

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