Deepwell Energy Services Trust
TSX : DWL.UN

Deepwell Energy Services Trust

March 28, 2008 23:59 ET

Deepwell Announces Annual and Quarterly Results

CALGARY, ALBERTA--(Marketwire - March 28, 2008) -

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES

Deepwell Energy Services Trust ("Deepwell" or the "Trust") is pleased to release its financial and operating results for the three-month period and year ended December 31, 2007.



Highlights for the reporting periods:
- Quarterly revenue of $3.7 million ($0.51 per unit), a decrease of
10 percent from the fourth quarter of 2006 due to weaker industry
activity levels;
- Full-year revenue of $14.1 million ($2.54 per unit) (Deepwell's
operations commenced on April 27, 2006 and no full-year comparisons
are possible);
- Gross margin of 53 percent of revenue for the year;
- Quarterly earnings before interest, taxes, depreciation and
amortization (EBITDA) of $0.9 million ($0.12 per unit), and full-year
EBITDA of $5.0 million ($0.89 per unit);
- Long-term debt of $4.8 million at year-end, down substantially from
$11.5 million at year-end 2006;
- Total 2007 distributions of $4.4 million or $0.80 per unit. From
inception to March 2007, Deepwell paid distributions of $0.0958;
since March 2007 Deepwell has maintained a monthly distribution rate
of $0.06 per unit.


Subsequent to the fiscal year-end, on February 19, 2008 Deepwell officially opened an oilfield waste management facility near Claresholm, Alberta, the Trust's first new greenfield plant. The Claresholm facility positions Deepwell in an expansive region of active oil and natural gas production not locally served by any other third-party waste management provider, increases Deepwell's overall waste management throughput capacity by more than one-third and is expected to contribute to substantial year-over-year growth in waste management activity, revenue and EBITDA.

In March 2008 Deepwell The Alberta Energy Resources Conservation Board (formerly the Alberta Energy and Utilities Board) upgraded the Rycroft facility approval to include the acceptance of the full range of Class Ib waste fluids and for custom treating third-party crude oil emulsions. The approval allows the Rycroft facility to earn additional revenues from treating a variety of Class Ib liquid waste streams and custom treating.

"We are proud of Deepwell's waste management facilities' safety and operating performance throughout 2007. Our financial results, while weaker than anticipated, reflected the overall weakness in the oil and gas service industry. Given our new Claresholm facility, the increased range of service offerings at Rycroft, and other growth initiatives, we are excited about our future prospects," stated Robert Dodds, Deepwell's President and CEO.

Deepwell is a Calgary, Alberta-based income trust focused exclusively on providing waste treatment and disposal services to the oil and natural gas industry in western Canada.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following Management's Discussion and Analysis (MD&A) of Deepwell Energy Services Trust (the "Trust") has been prepared taking into consideration information available to March 26, 2008 and should be read in conjunction with the Trust's audited consolidated financial statements as at and for the year ended December 31, 2007. This MD&A discusses operations and events for the year ended December 31, 2007. Unless otherwise noted, references to "2007" or the "year" in this MD&A refer to the year ended December 31, 2007, references to "2006" refer to the 247-day period ended December 31, 2006, references to "Q4/2007" or the "quarter" in this MD&A refer to the three months ended December 31, 2007, and references to "Q4/2006" refer to the three months ended December 31, 2006.

The Trust is an unincorporated investment trust governed by the laws of the Province of Alberta. The business of the Trust is conducted through its direct and indirect wholly owned subsidiaries, Deepwell Energy Services Commercial Trust, Deepwell Energy Services Ltd., and Deepwell Energy Services LP ("Deepwell LP"). The Trust and its subsidiaries (collectively "Deepwell") are based in Calgary, Alberta and were established to acquire and operate businesses that engage in oilfield waste management services. The principal undertaking of Deepwell is to provide a variety of services to oil and natural gas exploration and production companies in western Canada.

Forward-looking statements

Certain statements in this MD&A constitute "forward-looking" statements that involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Trust or Deepwell LP, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this MD&A, such statements use such words as "may", "will", "intend", "should", "expect", "believe", "plan", "anticipate", "estimate", "predict", "potential", "continue" or the negative of these terms or other similar terminology. These statements reflect current expectations regarding future events and operating performance and speak only as of the date of this MD&A.

Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements.

Although the forward-looking statements contained in this MD&A are based upon what management believes are reasonable assumptions, the Trust cannot assure investors that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this MD&A. The Trust does not assume any obligation to update or revise them to reflect new events or circumstances, except as required by applicable securities legislation.

Non-GAAP measures

The MD&A has been prepared in accordance with Canadian generally accepted accounting principles (GAAP). Certain supplementary information and measures not recognized under GAAP are also provided where management believes they assist the reader in understanding the Trust's results. These measures include:



- Earnings before interest, taxes, depreciation and amortization
(EBITDA); and
- Funds from operations, which refers to cash flow from operating
activities before changes in non-cash working capital.


These measures are identified and presented, where appropriate, together with reconciliations to the equivalent GAAP measure. However, they should not be used as an alternative to GAAP, because they may not be consistent with the calculations of other companies or Trusts.

2007 overview

For Deepwell, 2007 was characterized by achievement of positive operating cash flow during a significant downturn for the energy services industry in Alberta. Exploration and production companies curtailed drilling activity in the Western Canada Sedimentary Basin (WCSB) in response to low natural gas prices, low oil prices in the early part of the year, the significant strengthening of the Canadian dollar and uncertainty around the proposed royalty structure announced by the Government of Alberta in October 2007. In addition, the second quarter of 2007 saw a prolonged spring break-up in the WCSB, which was followed by unusually inclement weather - both of which led to more road bans than are typical.

Because the Trust's cash flow is more dependent on activity in the production of oil and natural gas (as opposed to exploration), Deepwell suffered a lesser impact than many energy services companies. During these challenging circumstances, Deepwell generated positive cash flow from operating activities, and executed several key growth initiatives in 2007.

Key growth initiatives:



- In June 2007, Deepwell received approval from the Alberta Energy and
Utilities Board (EUB, subsequently restructured and re-named the
Energy Resources Conservation Board (ERCB)) to construct and operate
the Trust's first greenfield oilfield waste management facility. This
facility is located near Claresholm, Alberta. Construction commenced
in July 2007 and the facility was completed and commenced revenue-
generating operations in late February 2008.
- The Trust completed a rights offering and private placement during
the second quarter of 2007, with total gross proceeds of $16,604,891,
positioning the Trust with a strong balance sheet to support future
growth.
- Deepwell added a second disposal well at its Rycroft facility in the
second quarter of 2007. This addition, coupled with Deepwell's
initiatives to enhance performance of the first well, have
significantly improved disposal capacity at Rycroft. During 2007,
Deepwell also made application for approval of Rycroft as an oilfield
waste management facility (WM). Rycroft was previously approved as an
injection facility (IF). Under the IF approval, Rycroft's services
were limited to disposal of produced water; as a WM facility Rycroft
will also be permitted to accept other, higher-margin waste streams
and will be permitted to offer custom treating of oil emulsions. The
ERCB approved Rycroft as a WM facility on March 17, 2008.


Strategy

Deepwell is committed to building value for its Unitholders through disciplined management and the implementation of its long-term strategy. The key aspects of Deepwell's strategy are summarized below.



- Focus on oilfield waste management: Deepwell currently operates
exclusively in the oilfield waste management business, and intends to
continue that focus. The oilfield waste management business in
Alberta has significant barriers to entry, which support the long-
term cash flow of current and future facilities.
- Growth: Deepwell is primarily focused on organic growth through
adding new facilities and increasing capacity and services provided
at existing facilities. Deepwell added capacity and services at
existing facilities in 2007, and completed a new oilfield waste
management facility near Claresholm, Alberta in the first quarter of
2008.
- Operational efficiency: Another key objective is to attain and
maintain efficient operations and a high standard of customer service
within a safe working environment. Deepwell received its provincial
Certificate of Recognition for health and safety in 2007 and had no
lost time incidents during the year.
- Environmental stewardship: Deepwell intends to meet or exceed
regulatory requirements and industry standards. Deepwell's facilities
are audited annually by regulatory bodies, and Deepwell has developed
innovations to enhance environmental stewardship at new and existing
facilities.


Selected financial information

The following is a summary of selected financial information that has been derived from, and should be read in conjunction with, the consolidated financial statements of the Trust.



Financial Highlights For the For the
twelve months period from
ended April 27 to
Dec 31, 2007 Dec 31, 2006
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Revenue $ 14,124,051 $ 9,647,020
Operating 6,635,001 4,594,714
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Gross Margin 7,489,050 5,052,306
Selling and administrative 2,518,213 1,409,031
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EBITDA 4,970,837 3,643,275
Depreciation, accretion and amortization 3,574,937 2,186,578
Financing fees 114,043 -
Unit-based compensation 815,117 251,432
Interest 590,491 359,740
(Gain) loss on sale of property and equipment (8,773) 34,295
Loss on write-off of property and equipment 367,702 -
Fire-related expenses 162,119 -
Future income tax recovery (87,201) (47,799)
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Net (loss) income (557,598) 859,029
Add:
Depreciation, amortization and accretion 3,574,937 2,186,578
Unit-based compensation 815,117 251,432
(Gain) loss on sale of property and equipment (8,773) 34,295
Loss on write-off of property and equipment 746,332 -
Future income tax recovery (87,201) (47,799)
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Funds from operations $ 4,482,814 $ 3,283,535
Changes in non-cash working capital (685,719) 575,718
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Cash flow from operating activities $ 3,797,095 $ 3,859,253
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-------------------------------------------------------------------------
Net (loss) income ($557,598) $ 859,029
Per unit, basic (0.10) 0.20
Per unit, diluted (0.10) 0.20
-------------------------------------------------------------------------
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EBITDA $ 4,970,837 $ 3,643,275
Per unit, basic 0.89 0.84
Per unit, diluted 0.89 0.84
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Funds from operations $ 4,482,814 $ 3,283,535
Per unit, basic 0.80 0.75
Per unit, diluted 0.80 0.75
-------------------------------------------------------------------------
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Distributions to Unitholders $ 4,440,462 $ 2,949,088
Per unit, basic 0.80 0.68
Per unit, diluted 0.80 0.68
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Gross margin as a percentage of revenue 53% 52%
Selling and administrative as a percentage
of revenue 18% 15%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 11,199,255 $ 6,808,996
Total assets, end of period $ 60,246,358 $ 54,491,681
Long-term debt, end of period $ 4,800,000 $ 11,500,000
Total long-term liabilities, end of period $ 4,883,116 $ 12,300,945
Trust units, end of period $ 56,229,626 $ 40,490,377
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Weighted average Trust units, basic 5,569,288 4,356,000
Weighted average Trust units, diluted 5,570,403 4,357,187
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Revenues for the year were $14,124,051, with a gross margin of $7,489,050 (53 percent of revenue), EBITDA of $4,970,837 (35 percent of revenue) and a net loss of $557,598. Revenues for the quarter were $3,650,736, with a gross margin of $1,709,520 (47 percent of revenue), EBITDA of $867,072 (24 percent of revenue) and a net loss of $270,611.

Net loss for the year was $0.10 per unit basic and diluted (2006 - net income per unit of $0.20 basic and diluted) and funds from operations for the year was $0.80 per unit basic and diluted (2006 - $0.75 basic and diluted). Distributions paid to unitholders for the year, including distributions to participants under the Trust's Distribution Reinvestment Plan (DRIP), were $4,440,462 or $0.80 per unit (2006 - $0.68 per unit).

In general, demand in the oilfield waste management business was weaker than previously, particularly in the most recent three quarters.

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Results of operations

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Due to the difficulty in comparing periods of different lengths, Deepwell has not compared the nominal differences in results between the 2007 and 2006 years, but has analyzed results on a percentage basis as appropriate.

Revenue

Revenues for the year were $14,124,051 (Q4/2007 - $3,650,736) comprised approximately 68 percent of processing and disposal fees and 32 percent of revenue from the sale of recovered oil (Q4/2007 - 64 percent and 36 percent, respectively). In 2007 oil sales as a percentage of total revenue declined from 40 percent in 2006 (Q4/2006 - 43 percent) due to reduced drilling activity, with a higher proportion of revenue coming from less oily production-related waste streams.

Revenue in the quarter was reduced from the same period in 2006 due to reduced industry activity. While the fourth quarter is traditionally strong, Q4/2007 remained softer with no improvement in revenue over the third quarter of 2007. Although more of Deepwell's volumes come from production-based activity, a portion of revenues is still sensitive to drilling and completion-related activity, which declined by 20 percent from Q4/2006 to Q4/2007. Factors in the decline in activity include weak prices for natural gas coupled with high exchange rates, the caution associated with this trend, and the overhang following the Government of Alberta's announcement on October 25, 2007 to increase royalties beginning in 2009.

During the first four months of the year, the Grande Cache facility's operating capabilities were limited due to required repairs as a result of the December 7, 2006 fire at the facility's waste receiving area. From the time the facility reopened, one week after the incident, until February 1, 2007, the facility was only capable of receiving waste transported in tanker trucks which could be offloaded directly into Deepwell's receiving tanks. On February 1, 2007 Deepwell resumed receiving waste loads from vacuum trucks, and used a temporary vacuum truck offloading system until the end of April 2007.

During the second and third quarters of 2007, Deepwell's revenues were negatively impacted by an unusually long period of spring breakup, followed by higher than normal rainfall. Other than the above noted limitations in the first four months at Grande Cache, all facilities operated effectively during 2007 and operational improvements and capital investments led to efficiencies and capacity increases which helped to offset industry weakness during the year.

Expenses

Operating expenses

Operating expenses were $6,635,001 for the year, and the relationship to revenues was generally consistent with management's expectations, with an operating margin of 53 percent for the year, compared with 52 percent in 2006. Operating expenses include $1,202,849 in oil credits repaid to customers ($380,504 for the quarter), which mitigates the impact of oil prices on Deepwell's revenues. Certain expenses, such as oil credits, trucking, and landfill expenses are activity-driven; however, a significant portion of expenses can be considered fixed.

Selling and administrative

Selling and administrative costs, which represent primarily the costs associated with the Trust's head office, senior management and public company costs, were $2,518,213 or 18 percent of revenue for the year (2006 - 15 percent). The increase in costs was due to higher public company, legal and consulting costs. The increased costs relate to the initial completion of annual regulatory requirements, internal activities related to the Trust's rights offering, internal staffing requirements as the Trust developed a proprietary revenue accounting system, staff vacancies in 2006 as the Trust recruited the full staff complement, and accrual of cash bonuses to senior management in 2007, as 2006 senior management bonuses were made in the form of unit options and included in unit-based compensation expense disclosed separately. A portion of the costs related to implementation of the revenue accounting system and initial completion of annual regulatory requirements are one-time costs, or higher than might be expected in future years.

Depreciation, amortization and accretion

Depreciation and accretion expense was $3,246,002 for the year (2006 - $1,911,783) and consisted of depreciation of fixed assets of $3,184,186 (2006 - $1,873,801) and accretion of $61,816 (2006 - $37,982). In 2007, amortization of intangible assets totalled $328,935 (2006 - $218,963) and consisted of the amortization of completions and contracts, customer relationships, and non-competition agreements.

Interest

Total cash interest expense for the year was $590,491 (2006 - $359,740), comprised of interest on long-term debt of $551,611 and interest on the Trust's operating loan of $38,880. Interest rates are floating, with a range from 0.125 percent to 1.4 percent over the lender's prime rate, depending on the Trust's ratio of consolidated funded debt to earnings before interest, taxes, depreciation, amortization, accretion, and unit-based compensation. Actual interest rates during the year ranged from 0.125 percent to 1.4 percent over the lender's prime rate.

Gain on sale of assets

During the year, Deepwell realized an $8,773 gain on the sale of railcar tanks, a plant truck and recovered insurance proceeds from an injection pump.

Fire-related expenses and losses

On December 7, 2006, a fire at the Grande Cache facility damaged the waste receiving area. The facility was shut down for one week until regulatory approval to re-open was received, and operations were limited until February 1, 2007 when a temporary waste receiving system was implemented. The facility operated to the end of April 2007 using the temporary system, while a new permanent receiving system was installed. The damaged equipment has been dismantled and removed and reconstruction is complete. Assets damaged in the incident include the waste receiving pit, solids treatment pad, a conveyor system used for waste separation, and miscellaneous piping and electrical components. During the process of restoring the facility to its full operating condition and subsequent to the release of the December 31, 2006 financial statements it was determined that efforts to restore the damaged assets were more extensive than anticipated and had taken on the nature of a replacement rather than a repair. As a result of the change in the nature of the restoration, the net book value of assets valued at $746,332 was written off, net of an accrued provision for insurance proceeds of $378,630.

Direct fire-related expenses of $162,119 were incurred primarily for emergency services, legal expenses, and other professional fees and these were recognized as expenses in the first quarter of 2007. No provision has been made for recovery of these direct fire-related costs through insurance although Deepwell is pursuing a claim. In the December 31, 2006 financial statements, all fire-related expenses incurred to date were reflected as insurance proceeds receivable. Subsequent to the December 31, 2006 financial statement date, indications from the insurer indicated less certainty as to the amount collectible, and in recognition of the decreased certainty of the amount collectible the full amount of costs have been applied to the current period as a change in estimate and any future insurance proceeds will be recorded against these expenses when the amounts have been received or collection is reasonably certain and estimable.

Income taxes

On June 22, 2007, the Specified Investment Flow-Through (SIFT) tax included in the Government of Canada's Bill C-52, received Royal Assent, creating a new 31.5 percent tax to be applied to distributions from certain income trusts and partnerships, including Deepwell, effective January 1, 2011. With the rate of reduction enacted on December 14, 2007, the new tax is to be applied to distributions at the tax rates of 29.5 percent and 28.0 percent effective January 1, 2011 and 2012 respectively.

Based on the amount of the Trust's existing temporary differences that are anticipated to reverse after January 1, 2011, the Trust expects a future income tax asset as at January 1, 2011. However, the future income tax asset is fully offset by a valuation allowance. The anticipated amount and timing of reversals of temporary differences will be dependent on the Trust's actual results, distributions and actual acquisition and disposition of assets and liabilities. As a result, a change in estimates or assumptions could materially affect the estimate of the future tax asset.

Distributions to Unitholders

Distributions paid to unitholders for the year, including distributions to participants under the DRIP, were $4,440,462 (2006 - $2,949,088). Actual cash distributions paid were $4,176,279 excluding non-cash distributions to participants in the DRIP. During 2007, upon review of Deepwell's opportunities for growth, the Trustees concluded that retention of more cash to provide capital for growth would be most appropriate and that a reduction in the cash distribution would provide greater financial flexibility to exploit Deepwell's high-return growth opportunities. As such, on March 19, 2007 announced that distributions would be changed to $0.06 per Trust unit per month (previously it was $0.0958 per Trust unit per month).



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2007 2006
-------------------------------------------------------------------------
Cash flows from operating activities $ 3,797,095 $ 3,859,253
Net (loss) income (557,598) 859,029
Actual cash distributions paid during
the period 4,176,279 2,949,088
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(Shortfall) excess of cash flows from
operating activities over cash
distributions paid (379,184) 910,165
Shortfall of net (loss) income over cash
distributions paid (4,733,877) (2,090,059)
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While the cash distributions to unitholders exceeded cash flows from operating activities in 2007, and exceeded net income in 2006 and 2007, the Trust does not believe that the distributions should be regarded as an economic return of capital, as the distributions were only slightly higher than cash flows from operating activities in 2007 and the distributions increased significantly in the last two quarters of 2007 as a result of units issued to fund the construction of Deepwell's Claresholm facility, and other growth initiatives. The Claresholm facility was not completed until February 19, 2008 and returns from this investment were not yet available to fund distributions in 2007. Deepwell's distributions have generally not been based upon net income, as net income includes a number of non-cash items such as depreciation, amortization, accretion, and unit-based compensation that do not affect the Trust's ability to make distributions to unitholders. Due to the addition of the Claresholm facility and other growth initiatives, the Trust does not anticipate that distributions will continue to exceed cash flow from operations for the foreseeable future. While the Trust does not currently anticipate that there will be a need to suspend distributions in the foreseeable future, the actual amounts of distributions paid by the Trust to the Unitholder will depend upon numerous factors, including profitability of operations, debt covenants and obligations, the availability and cost of acquisitions, fluctuations in working capital, the timing and amount of capital expenditures, applicable law and other factors beyond the control of Deepwell.

Investing activities

Net cash used in investing activities during the year was $9,015,279.

Capital expenditures

The Trust's capital expenditures for purchase of property and equipment for the year were $11,199,255.

During 2007, Deepwell invested $7,018,106 in the construction of a new oilfield waste management facility near Claresholm, Alberta. The Claresholm facility was completed in the first quarter of 2008 and opened for business on February 19, 2008. The Trust invested $1,094,283 to restore assets damaged in the December 2006 fire at Grande Cache including certain improvements which add to efficiency and vapour control at the waste receiving area. A further $1,075,308 was spent in adding a second well, and increased pump capacity at Deepwell's Rycroft facility. At Mayerthorpe, a total of $742,035 was invested in a new injection pumping system, filtration system, and increased tankage. The improvements are expected to reduce maintenance requirements, increase injection capacity, and improve oil recovery. The balance of costs relate primarily to investments in processing equipment, mobile equipment, future sites, IT and corporate capital costs.

Financial security deposits

During the year, letters of guarantee were secured to replace $1,433,474 in financial security deposits previously held by the EUB as security for abandonment and reclamation of oilfield waste management facilities.

Unitholders' equity

Rights offering and private placement

On July 9, 2007 Deepwell closed a private placement of 582,362 units for gross proceeds of $3,499,996. On July 31, 2007 the Trust completed a rights offering and issued 2,180,515 units for gross proceeds of $13,104,895. Combined gross proceeds of the offerings were $16,604,891 with expenses of $1,075,866 for total net proceeds of $15,475,066. The party to the private placement also agreed to provide a standby commitment to the rights offering; however, as a result of the strong response under the basic and additional subscriptions to the rights offering, no units were available for subscription by the standby purchaser under the standby commitment.

Proceeds were initially used to repay outstanding debt, which could be redrawn. The purposes of the offerings were to fund the estimated $9,000,000 construction cost of the oilfield waste management facility near Claresholm, Alberta, to fund improvements and expansions at existing facilities, to fund preliminary costs of future facilities and for general corporate purposes.

Trust unit option plan

As at December 31, 2007, a total of 506,971 options issued pursuant to the Trust's incentive unit option plan ("Option Plan") were outstanding. The options carry a five year term and, except for 73,800 options issued to executives during 2007 in lieu of a cash bonus for 2006 (vesting immediately), vest equally over a period of three years from the date of grant, The exercise price of each option is based upon the weighted average trading price for a period prior to the date of grant. The exercise price is adjusted downwards by 100% of the amount of distributions paid on outstanding Trust Units.

The fair value of options issued during the period was $2.71 (2006 - $3.81) and estimated using the Black-Scholes pricing model with the following assumptions: risk free interest rate of 4.25% (2006 - 4.25%); volatility of 35% to September 2007 and 45% to the end of the period (2006 - 35%). The impact of monthly distributions and corresponding changes in exercise price during the life of the options are assumed to be equal and offsetting, and so no provision is made in the pricing model for either factor.



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

Balance, beginning
of period 303,500 $ 8.81 - $ -
Granted 208,971 6.12 304,000 9.63
Expired/Cancelled (5,500) 9.27 (500) 10.26
Exercised - - - -
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Balance, end of period 506,971 $ 7.70 303,500 $ 9.63
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As such, the opening weighted average exercise prices has been adjusted by $0.82 (2006 - $nil) to reflect the decrease in exercise price for distribution over the year.



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Options outstanding Options exercisable
---------------------------------- ----------------------
Weighted Weighted Weighted
average average average
Exercise Number of contractual exercise Number of exercise
price options life price options price
---------- ---------- ----------- ---------- ---------- ----------

$ 6.12 206,971 4.64 $ 6.12 73,800 $ 6.12
$ 6.32 2,000 4.36 6.32 - -
$ 8.79 282,500 3.64 8.79 94,167 8.79
$ 9.10 14,500 3.76 9.10 4,833 9.10
$ 9.44 1,000 3.73 9.44 333 9.44
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506,971 4.04 $ 7.70 173,133 $ 7.66
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The Trust recorded unit-based compensation expense and contributed surplus of $815,117 during the period (2006 - $251,432).

Liquidity

Net cash provided by financing activities for the year was $5,148,787. The Trust realized $15,475,066 in net proceeds of its private placement and rights offering in July 2007. The Trust paid distributions to unitholders of $4,440,462 during the year of which $264,183 was realized in proceeds from its distribution reinvestment plan. During 2007, the Trust reduced its amount outstanding under long term debt by $6,700,000.

Credit facilities

The Trust renewed its existing credit facilities on May 31, 2007 with a Canadian chartered bank (the "credit facilities"), which consist of the following:

Demand loan

Under the credit facilities, the Trust has a $2,000,000 demand revolving operating loan. During the year interest ranged from the lender's prime rate plus 0.125 percent to 1.4 percent and this rate is dependent on the funded debt to EBITDA ratio. As of December 31, 2007 the borrowing base for the demand loan was at $1,212,863 and the amount drawn was $550,000.

Long-term debt

Under the credit facilities, the Trust has a $15,500,000, 364-day extendible revolving term loan committed to May 29, 2008. No set principal repayment has been established and the Trust has the ability to repay, borrow and repay again until the 364-day term expires. Interest ranges from the lender's prime rate plus 0.125 percent to 1.4 percent per annum. Interest is calculated monthly and paid in arrears. As at December 31, 2007 an aggregate of $4,800,000 is outstanding of which $933,333 (2006 - $nil) is current. The revolving period extends to May 29, 2008, at which time the credit facility is eligible for renewal. Should this renewal not be extended, the credit facility reverts to a three-year term with the monthly principal repayments commencing on June 26, 2008.

As security for the credit facilities, Deepwell LP granted lenders a security interest over all of its assets. In addition, the Trust and its subsidiaries guaranteed the indebtedness of Deepwell LP under the credit facilities with such guarantee being secured by all of the assets of each such guarantor. In respect of any proceeds resulting from the enforcement of the credit facilities or the aforementioned guarantees, the lenders, as creditors, will have a prior ranking claim relative to the Unitholders.

Interest rate risk

The operating loan and the extendible revolving term loan bear interest at a floating interest rate. Therefore, to the extent that the Trust borrows under these facilities the Trust is at risk to rising interest rates.

Contractual obligations, commitments and contingencies

The following table shows future contractual obligations by period:



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Payments by period Total 2008 2009-2010 2011-2012 Thereafter
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Long-term debt $4,800,000 $ 933,333 $3,200,000 $ 666,667 $ -
Commitments 559,267 164,577 302,986 91,704 -
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Total contractual
obligations $5,359,267 $1,097,910 $3,502,986 $ 758,371 $ -
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In addition to contractual obligations, the Trust's estimated costs of completion of the Claresholm Facility are $1,981,894 at December 31, 2007. The facility opened for business on February 19, 2008. The Trust has letters of guarantee in the amount of $2,126,896 (2006 - $nil) available, none of which have been drawn as of December 31, 2007.



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Quarterly information
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Quarter Quarter Quarter Quarter
ended ended ended ended
Dec 2007 Sep 2007 June 2007 March 2007
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Revenue $ 3,650,736 $ 3,513,654 $ 2,532,151 $ 4,427,510
Operating 1,941,216 1,584,126 1,190,437 1,919,222
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Gross Margin 1,709,520 1,929,528 1,341,714 2,508,288
Selling and
administrative 842,448 520,373 558,848 596,544
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EBITDA 867,072 1,409,155 782,866 1,911,744

Depreciation,
amortization and
accretion 838,528 915,875 897,865 922,669
Financing fees 114,043 - - -
Unit-based compensation 138,706 141,372 359,902 175,137
Interest 44,639 110,841 229,450 205,561
Loss (gain) on sale of
property and equipment 1,466 - (17,500) 7,261
Loss on write-off of
property and equipment - - - 367,702
Fire-related expenses - - - 162,119
Future income tax
recovery - - (62,651) (24,550)
-------------------------------------------------------------------------
Net (loss) income $ (270,310) $ 241,067 $ (624,200) $ 95,845
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net (loss) income
per Trust unit:
Basic ($0.04) $ 0.04 ($0.14) $ 0.02
Diluted ($0.04) $ 0.04 ($0.14) $ 0.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Weighted average
number of Trust units
outstanding
Basic 7,154,344 6,324,139 4,357,724 4,356,000
Diluted 7,154,344 6,327,260 4,357,744 4,356,000
-------------------------------------------------------------------------


Quarter Quarter 64 days
ended ended ended
Dec 2006 Sep 2006 June 2006
------------------------------------------------------------
Revenue $ 4,059,296 $ 3,808,795 $ 1,778,929
Operating 1,605,492 2,040,285 948,937
------------------------------------------------------------
Gross Margin 2,453,804 1,768,510 829,992
Selling and
administrative 730,354 448,788 229,889
------------------------------------------------------------

EBITDA 1,723,450 1,319,722 600,103

Depreciation,
amortization and
accretion 993,621 697,052 480,317
Financing fees - 15,588 -
Unit-based compensation 197,812 53,620 -
Interest 149,325 102,469 107,946
Loss (gain) on sale of
property and equipment 34,295 - -
Loss on write-off of
property and equipment - - -
Fire-related expenses - - -
Future income tax
recovery (47,799) - -
------------------------------------------------------------
Net (loss) income $ 396,196 $ 450,993 $ 11,840
------------------------------------------------------------
------------------------------------------------------------

Net (loss) income
per Trust unit:
Basic $ 0.09 $ 0.10 $ 0.00
Diluted $ 0.09 $ 0.10 $ 0.00
------------------------------------------------------------
------------------------------------------------------------

Weighted average
number of Trust units
outstanding
Basic 4,356,000 4,356,000 4,356,000
Diluted 4,357,187 4,477,793 4,356,000
------------------------------------------------------------


The Trust's business is seasonal with the first and fourth quarters traditionally being the two strongest quarters for the industry and the second quarter being the weakest. The underlying causes of the seasonality are variations in prevailing weather conditions, which in turn have effects on the ability to carry out field operations. While Deepwell's facilities remain open and accessible throughout the year, its customers are, at times, restricted from moving waste due to spring breakup or periods of rainfall. In the Grande Cache region restrictions also occur at certain times of the year in designated wildlife areas.

Financial instruments

All of the Trust's financial instruments as at December 31, 2007 relate to standard working capital and credit facility items. There are no significant differences between the carrying value of these financial instruments and their estimated fair values. There are no unusual off-balance sheet arrangements and the Trust does not use any financial instruments such as derivatives. Of the Trust's financial instruments, only accounts receivable represent credit risk, and management views the credit risk related to accounts receivable as minimal. The operating loan and the extendible revolving term loan bear interest at a floating interest rate. Therefore, to the extent that the Trust borrows under these facilities, the Trust is at risk to rising interest rates.

Outlook

In general Deepwell expects an improved year of business for the Trust amid another relatively weak year in the service/supply and exploration/production sectors of the oil and natural gas industry. Industry forecasts are almost unanimous in calling for flat to slightly lower industry capital expenditures (excluding the oil sands) and overall field activities in 2008. In addition some producers have announced they will redeploy capital outside Alberta in response to the provincial government's plan to increase oil and natural gas royalties in 2009. The first quarter of 2008 appears to have exceeded initial pessimistic forecasts, with higher rates of drilling and field activities amid natural gas prices at times exceeding US$9 per mmbtu on the Nymex and crude oil prices exceeding US$100 per bbl WTI. However, the balance of the year is still forecast to be relatively weak in the industry.

Within this industry context Deepwell foresees the opportunity to increase its annual revenue and EBITDA over 2007. Growth prospects are promising with the Claresholm facility now on-stream, a full year of increased injection well capacity at Rycroft, the anticipated approval to upgrade Rycroft to a waste management facility, which will enable the plant to process a higher-margin waste stream, and other initiatives for increasing capacities and improving efficiencies at existing plants. All of these point to higher waste management activity, revenue and EBITDA year-over-year. In furtherance of its long-term strategy for growth, Deepwell is pursuing approvals for a location to construct a new facility in 2009.

Critical accounting estimates

Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods. The most significant estimates relate to depreciation, amortization, asset retirement obligations, accretion, income taxes, unit-based compensation and recoverability of goodwill and intangibles. Actual results could differ from those estimates. The consolidated financial statements have, in management's opinion, been properly prepared using careful judgment with reasonable limits of materiality and within the framework of the Trust's accounting policies as disclosed in the Trust's consolidated financial statements.

Risks and uncertainties

Cyclicality of the oil and natural gas industry

The demand for oilfield services is largely dependent on the activity levels of oil and natural gas exploration and development companies. Industry conditions are influenced by numerous factors over which the Trust has no control, including: the level of oil and natural gas prices and production; expectations about future oil and natural gas prices; the cost of exploring for, producing and delivering oil and natural gas; the expected rates of declining production from maturing basins; the discovery of new oil and natural gas reserves; available pipeline and other oil and natural gas transportation capacity; weather conditions; global political stability, military actions, regulatory and economic conditions; the ability of oil and natural gas companies to raise capital; fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas; and technological advances in fuel economy and energy generation devices.

Oil and natural gas prices

The revenue, cash flow and earnings of the Trust are substantially dependent upon and affected by the level of activity associated with oil and natural gas exploration and production. Both short-term and long-term trends in oil and natural gas prices affect the level of such activity. Worldwide military, political and economic events, including initiatives by the Organization of Petroleum Exporting Countries, may affect both the demand for and the supply of oil and natural gas. Weather conditions, governmental regulation, levels of consumer demand, the availability of pipeline capacity and other factors beyond Deepwell's control may also affect the supply of and demand for oil and natural gas, leading to future price volatility.

Seasonal weather

In Canada, the level of activity in the oil and natural gas industry is influenced by seasonal weather patterns. Spring break-up during the second quarter of each year leaves many secondary roads temporarily incapable of supporting the weight of heavy equipment, which results in severe restrictions on the provision of energy services. The timing and duration of spring break-up are dependent on weather patterns and the duration of this period will have an impact on the level of business of the Trust.

Dependence on key personnel

The success of the Trust will likely continue to be dependent on the skills and expertise of the officers of the Trust. Deepwell does not currently carry "key man" insurance that would compensate the Trust for the loss of any senior executives.

Competition for human resources

During periods of high activity related to oil and natural gas exploration and development, demand for experienced and skilled employees increases. The success of the Trust is dependent upon the ability to retain the services of experienced and skilled employees and the ability to recruit and retain other key employees.

Reliance on major customers

It is estimated that the top 10 customers of Deepwell accounted for approximately 53 percent of revenue for the year, the largest customer accounting for 16 percent. Deepwell does not generally enter into long-term contracts with its customers and there can be no assurance that the current customers will continue their relationships with Deepwell.

Competition

Deepwell faces competition from a variety of competitors. Many of these competitors have strong financial, marketing and other resources. There can be no assurance that such competitors will not substantially increase the resources devoted to the development and marketing of oilfield services that compete with those of Deepwell or that new competitors will not enter the various markets in which Deepwell is active.

Operating risks and insurance

The business of Deepwell will be subject to hazards inherent in the oil and natural gas industry, such as equipment defects, malfunction and failures; accidental release; natural disasters which result in fires; vehicle accidents and explosions that can cause personal injury; loss of life; suspension of operations; damage to formations; damage to facilities; business interruption; and damage to or destruction of property, equipment and the environment. These risks could expose Deepwell LP to substantial liability for personal injury, wrongful death, property damage, pollution, and other environmental damages. The frequency and severity of such incidents will affect operating costs, insurability and relationships with customers, employees and regulators.

Management will monitor the activities of Deepwell LP for quality control and safety. However, there are no assurances that Deepwell LP's safety procedures will always prevent such damages. Although Deepwell maintains insurance coverage that management believes to be adequate and customary in the industry, there can be no assurance that such insurance will be adequate to cover such liabilities.

Environmental risks

The Canadian oil and natural gas industry is regulated by a number of federal and provincial governmental bodies and agencies under a variety of complex federal and provincial legislation that sets forth numerous prohibitions and requirements with respect to planning and approval processes related to land use, sustainable resource management, waste management, responsibility for the release of presumed hazardous materials, protection of wildlife and the environment and the health and safety of workers. Legislation provides for restrictions and prohibitions on the transport of dangerous goods and the release or emission of various substances, including substances used and produced in association with certain oil and natural gas industry operations. The legislation addresses various permits required for drilling, access road construction, camp construction, well completion, installation of surface equipment, air monitoring, surface and ground water monitoring in connection with these activities, waste management and access to remote or environmentally sensitive areas.

Deepwell is subject to a complex and increasingly stringent array of legal requirements and potential liabilities, including with respect to the ownership and management of property, the need to obtain and comply with permits and approvals, the health and safety of employees, and the handling, use, storage, disposal, intentional or accidental release, and transportation of certain substances, including hazardous materials and dangerous goods. Failure to comply with these requirements could expose Deepwell to substantial potential penalties. There can be no assurance that Deepwell will not be required, at some future date, to incur significant costs to comply with environmental laws, or that its operations, business, assets or cash flow will not be materially adversely affected by existing conditions or by the requirements or potential liability under current or future environmental laws.

Credit risk

All of the accounts receivable of Deepwell are with customers involved in the oil and natural gas industry whose revenues may be impacted by fluctuations in commodity prices. Collection of these receivables could be negatively influenced by any prolonged substantial reduction in oil and/or natural gas prices, which could have a material adverse effect on the financial results and cash flows of Deepwell.

Access to additional financing

Deepwell may find it necessary in the future to obtain additional debt or equity financing to support ongoing operations of Deepwell, to undertake capital expenditures or to undertake acquisitions or other business combination transactions. There can be no assurance that additional financing will be available to Deepwell when needed or on terms acceptable to Deepwell. The inability to raise financing to support ongoing operations or to fund capital expenditures or acquisitions could limit Deepwell's growth and may have a material adverse effect on the financial results and cash flows of Deepwell.

Capital expenditures

The timing and amount of capital expenditures by Deepwell will directly affect the amount of cash generated from operating activities. The cost of labour and equipment has escalated over the past several years.

Leverage and restrictive covenants

Deepwell has credit facilities which contain a number of financial covenants that require Deepwell to meet certain financial ratios and financial condition tests. Failure to comply with the obligations in the credit facilities could result in a default which, if not cured or waived, could result in a termination of distributions by Deepwell and would permit acceleration of the relevant indebtedness. If the indebtedness under the credit facilities were to be accelerated, there can be no assurance that the assets of Deepwell would be able to repay in full that indebtedness, which could result in the lenders realizing on the assets of Deepwell. There is no assurance that Deepwell will be able to refinance any or all of the credit facilities at their maturity dates on acceptable terms, or on any basis.

Uncertainty of cash distributions

The actual amounts of distributions paid by the Trust to the Unitholders will depend upon numerous factors, including profitability of operations, debt covenants and obligations, the availability and cost of acquisitions, fluctuations in working capital, the timing and amount of capital expenditures, applicable law and other factors beyond the control of Deepwell.

Government regulations

The Trust's operations are subject to a variety of Canadian federal, provincial and local laws, regulations and guidelines, including laws and regulations relating to health and safety, the protection of the environment, and taxation.

The planned changes in the structure of oil and natural gas royalties payable to the Province of Alberta, intended to commence in 2009, could impact the exploration and development activities of E&P companies and lower the demand for Deepwell's services.

Related-party transactions

There were no payments made to related parties in the 12 months ended December 31, 2007. During 2006, the Trust made payments in the amount of $318,954 for legal expenses to a partnership of which one of the Directors of the General Partner is a partner. These transactions were conducted in the normal course of operations, on commercial terms established and agreed to by the parties. As at December 31, 2006, $6,176 was outstanding in accounts payable and accrued liabilities.

On April 27, 2006, the Trust purchased all of the issued and outstanding shares of Deepwell Disposal Services Inc. (DDSI) in exchange for 356,000 Class B Trust Units valued at $3,560,000. Due to common management and directors, the Trust and DDSI were related parties at the time of the acquisition. The exchange amount was used for financial reporting purposes because the change in the ownership interests in the assets transferred was substantive, and estimated fair values of property, plant and equipment, intangibles and goodwill for both acquisitions were provided by an independent evaluator.

Accounting changes and pronouncements

On January 1, 2007, the Trust adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Sections 1530 "Comprehensive Income", Section 3251 "Equity", Section 3855 "Financial Instruments - Recognition and Measurement", Section 3865 "Hedges", and Section 3861 "Financial Instruments - Disclosure and Presentation".

Comprehensive Income - Section 1530 describes reporting and disclosure recommendations with respect to comprehensive income and its components. Comprehensive income is the change in Unitholders equity, which results from transactions and events from sources other than the Trust's Unitholders. These transactions and events include unrealized gains and losses resulting from changes in fair value of certain financial instruments. The adoption of this Section had no impact on the Trust as there have been no transactions resulting in other comprehensive income.

Equity and Comprehensive Income - On January 1, 2007, the Trust adopted Section 3251 of the CICA Handbook, "Equity", replacing Section 3250 "Surplus". It describes standards for the presentation of equity and changes in equity for a reporting period as a result of the application of Section 1530, "Comprehensive Income". The adoption of this Section had no impact on the Trust as there have been no transactions resulting in other comprehensive income.

Financial Instruments - Section 3855 prescribes when a financial asset, financial liability or non-financial derivative instrument is to be recognized on the balance sheet and at what amount, requiring fair value or cost-based measures under different circumstances. Under Section 3855, financial instruments must be classified into one of the following five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including derivatives, are measured in the balance sheet at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities which are measured at amortized cost. Subsequent measurement and changes in fair value will depend on their initial classification, as follows: held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net earnings; available-for-sale financial assets are measured at fair value with changes in fair value recorded in other comprehensive income until the investment is de-recognized or impaired at which time the amounts would be recorded in net earnings.

Under adoption of these new standards, the Trust designated its accounts receivable as loans and receivables, which are measured at amortized cost. The Trust's bank indebtedness, accounts payable and accrued liabilities, and long-term debt are classified as other financial liabilities, which are measured at amortized cost. The Trust has chosen to expense its debt transaction costs in the period incurred. For the year ended December 31, 2007, $114,043 of transaction costs were expensed. Other than these changes the adoption of the standard had no material impact on the Trust's consolidated financial statements.

Non-financial derivative instruments, including embedded derivatives, are to be recorded in the statement of income at fair value unless exempted because they are a part of normal purchase and sale activities. All changes in their fair value are recorded in earnings unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income. The Trust applied this accounting treatment for all embedded derivatives in host contracts active as of January 1, 2007. The Trust has determined it currently has no derivative or embedded derivative instruments and as such is not impacted by the change in accounting policy.

Hedges - Section 3855 expands the guidelines required by Accounting Guideline 13 (AcG-13) "Hedging Relationships". This Section describes when and how hedge accounting can be applied as well as the disclosure requirements. The adoption of this Section had no impact on the Trust as the Trust does not follow hedge accounting at this time.

Financial instruments - disclosure and presentation - Section 3861 requires entities to provide disclosures in their financial statements that enable users to evaluate the significance of financial instruments on the entity's financial position, performance and cash flows. Also this section enables users through disclosure to evaluate the nature and extent of our use of financial instruments, the business purposes they serve and the risks associated with the instruments and management policies for mitigating and managing those risks.

Capital disclosures, financial instruments disclosures and presentation - New CICA Handbook Sections have been issued which will require additional disclosure in the Trust's consolidated financial statements commencing January 1, 2008. Sections 1535 "Capital Disclosures" requires the disclosure of qualitative and quantitative information about the Trust's objectives, policies and processes for managing capital. Sections 3862 "Financial Instruments - Disclosures" and 3863 "Financial Instruments - Presentation" will replace Section 3861 to prescribe the requirements for presentation and disclosure of financial instruments. Handbook section 3031 "Inventories", which prescribes the recognitions, measurement, disclosure and presentation issues related to inventories, will become effective January 1, 2008. The Trust believes that the adoption of these standards will not have a material impact on the consolidated financial statements.

International financial reporting standards - The CICA plans to converge Canadian GAAP for public companies with International Financial Reporting Standards (IFRS) over a transition period with full convergence expected by January 1, 2011. The impact of the transition to IFRS on the Trusts' consolidated financial statements has not yet been determined.

Disclosure and internal controls

The Chief Executive Officer and the Chief Financial Officer evaluated the effectiveness of Deepwell's disclosure controls and procedures for the period ending December 31, 2007. This evaluation considered the functions performed by its Disclosure Committee, the review and oversight of all executive officers and the Board of Directors, as well as the process and systems in place for filing regulatory and public information. Deepwell's established review process and disclosure controls are designed to ensure that all required information, reports and filings required under Canadian securities legislation are properly submitted and recorded in accordance with those requirements over financial reporting as of December 31, 2007 pursuant to the requirements of Multilateral Instrument 52-109 of the Canadian Securities Administrators. The Trust engaged third-party consultants to assist with the design, documentation, and testing of original internal control systems, new proposed improvements, interim measures during the conversion and planned implementation on completion of the conversion. In light of management's review, and the results of findings by third-party consultants, Deepwell has concluded that the following weakness existed in the design of internal controls over financial reporting:



Entity controls

While the CEO and CFO of the Trust informally confirm with other
members of management that they have designed and implemented
adequate controls, no formal sub-certification process is in place.
Management has indicated their intent to implement a formal sub-
certification process for all direct reports to the CEO and the CFO
to be performed at least quarterly.

While the Trust has an insider trading and reporting policy, there is
no disclosure controls and procedures policy to ensure that all
disclosure obligations are met. The Board of Directors have indicated
their intent to adopt a disclosure controls and procedure policy to
be reviewed at least on an annual basis.


Notwithstanding the weaknesses identified, based on the evaluation performed, the CEO and CFO concluded that the design and operation of the Trust's disclosure controls and procedures were effective as at December 31, 2007 to ensure that information required to be disclosed by the Trust in reports filed under Canadian securities laws is gathered, recorded, processed, summarized and reported within the times specified under Canadian securities laws and is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosure as required under Canadian securities laws. Further, based on the Trust's mitigating procedures, the CEO and the CFO have satisfied themselves that the weaknesses identified have not resulted in material errors in the financial statements. Management and the Board of Directors are committed to transparency and completeness of financial reporting and disclosure.

The existence of the identified control weakness need not be interpreted as evidence of a lack of integrity, of unsound business practices or of unacceptable risks to an entity's shareholders and related parties. It should be noted that while Deepwell's principal executive officer and principal financial officer believe that Deepwell's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that Deepwell's disclosure controls and procedures or internal control over financial reporting will 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. Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



CONSOLIDATED FINANCIAL STATEMENTS OF

DEEPWELL ENERGY SERVICES TRUST

AS AT AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2007, AND AS AT AND
FOR THE PERIOD FROM APRIL 27, 2006 TO DECEMBER 31, 2006



DEEPWELL ENERGY SERVICES TRUST
CONSOLIDATED BALANCE SHEETS

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

Assets
Current assets:
Cash $ - $ 28,861
Accounts receivable 2,746,918 2,729,106
Inventory 219,991 80,205
Prepaid expenses and deposits 214,920 242,990
-------------------------------------------------------------------------
3,181,829 3,081,162

Property and equipment (Note 4) 46,982,025 39,565,606
Intangible assets (Note 5) 2,925,102 3,254,037
Goodwill 7,157,402 7,157,402
Financial security deposits - 1,433,474
-------------------------------------------------------------------------
$ 60,246,358 $ 54,491,681
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities
Current liabilities:
Bank indebtedness $ 40,537 $ -
Demand loan (Note 8a) 550,000 -
Accounts payable and accrued liabilities 3,631,316 3,538,986
Distributions payable 429,792 417,305
Current portion of long-term debt (Note 8) 933,333 -
-------------------------------------------------------------------------
5,584,978 3,956,291

Long-term debt (Note 8) 3,866,667 11,500,000
Future income taxes (Note 7) - 87,201
Asset retirement obligations (Note 9) 1,016,449 713,744
-------------------------------------------------------------------------
10,468,094 16,257,236
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Unitholders' Equity
Trust units (Note 6) 56,229,626 40,490,377
Contributed surplus (Note 6) 1,066,549 251,432
Deficit (7,517,911) (2,507,364)
-------------------------------------------------------------------------
49,778,264 38,234,445

-------------------------------------------------------------------------
$ 60,246,358 $ 54,491,681
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingencies (Note 12)

See accompanying notes to the consolidated financial statements.



DEEPWELL ENERGY SERVICES TRUST
CONSOLIDATED STATEMENTS OF (LOSS) INCOME, OTHER COMPREHENSIVE INCOME
AND ACCUMULATED DEFICIT

For the For the
twelve period from
months ended April 27 to
December 31, December 31,
2007 2006
-------------------------------------------------------------------------

Revenues $ 14,124,051 $ 9,647,020
-------------------------------------------------------------------------

Expenses
Operating 6,635,001 4,594,714
Selling and administrative 2,518,213 1,409,031
Depreciation and accretion 3,246,002 1,911,783
Amortization of intangible assets (Note 5) 328,935 218,963
Unit-based compensation (Note 6) 815,117 251,432
Interest on short-term debt 38,880 18,365
Interest on long-term debt 551,611 341,375
Amortization of deferred financing costs - 55,832
Financing fees 114,043 -
(Gain) loss on sale of
property and equipment (8,773) 34,295
Loss on write-off of property and equipment
(net of accrued insurance
proceeds) (Note 11) 367,702 -
Fire-related expenses (Note 11) 162,119 -
-------------------------------------------------------------------------
14,768,850 8,835,790

(Loss) income before taxes (644,799) 811,230

Future income tax recovery (Note 7) (87,201) (47,799)

-------------------------------------------------------------------------
Net (loss) income being comprehensive loss (557,598) 859,029

Deficit, beginning of period $ (2,507,364) $ -
Distributions to unitholders (Note 6) (4,452,949) (3,366,393)
-------------------------------------------------------------------------
Deficit, end of period $ (7,517,911) $ (2,507,364)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net (loss) income per trust unit:
Basic $ (0.10) $ 0.20
Diluted $ (0.10) $ 0.20
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Weighted average number
of trust units outstanding:
Basic (Note 6) 5,569,288 4,356,000
Diluted (Note 6) 5,570,403 4,357,187
-------------------------------------------------------------------------
-------------------------------------------------------------------------



DEEPWELL ENERGY SERVICES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the For the
twelve period from
months ended April 27 to
December 31, December 31,
2007 2006
-------------------------------------------------------------------------

Operating activities
Net (loss) income $ (557,598) $ 859,029

Non-cash items:
Depreciation and accretion 3,246,002 1,911,783
Amortization of financing fees - 55,832
Amortization of intangible assets 328,935 218,963
Future income tax recovery (Note 7) (87,201) (47,799)
Unit-based compensation (Note 6) 815,117 251,432
(Gain) loss on sale of
property and equipment (8,773) 34,295
Loss on write-off of property
and equipment (Note 11) 746,332 -
Change in non-cash working capital (685,719) 575,718
-------------------------------------------------------------------------
Cash flow from operating activities 3,797,095 3,859,253
-------------------------------------------------------------------------

Investing activities
Financial security deposits 1,433,474 (1,408,120)
Business acquisitions
(net of cash of $259,925) (Note 3) - (42,792,931)
Purchase of property and equipment (11,199,255) (6,808,996)
Proceeds on sale of
property and equipment 101,980 55,500
Change in non-cash
investing working capital 648,521 1,738,578
-------------------------------------------------------------------------
Cash flow from investing activities (9,015,280) (49,215,969)
-------------------------------------------------------------------------

Financing activities
Net proceeds from issuance of units 15,475,066 36,930,377
(Repayments to) proceeds
from long-term debt (6,700,000) 11,500,000
Proceeds from demand loan 550,000 -
Distributions paid to unitholders (4,176,279) (2,949,088)
Financing fees - (95,712)
-------------------------------------------------------------------------
Cash flow from financing activities 5,148,787 45,385,577
-------------------------------------------------------------------------

(Decrease) increase in cash (69,398) 28,861

Cash, beginning of period 28,861 -

-------------------------------------------------------------------------
(Bank indebtedness) cash, end of period $ (40,537) $ 28,861
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplementary information
Interest paid in cash $ 590,491 $ 359,740
-------------------------------------------------------------------------
-------------------------------------------------------------------------



DEEPWELL ENERGY SERVICES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 2007 TO DECEMBER 31, 2007
AND THE PERIOD FROM APRIL 27, 2006 TO DECEMBER 31, 2006

1. Nature of the Organization

Deepwell Energy Services Trust (the "Trust" or "Deepwell") is an open
ended un-incorporated investment trust governed by the laws of the
Province of Alberta and created pursuant to a Declaration of Trust
dated April 21, 2006. The principal undertaking of the Trust is to
engage in the oilfield waste management business indirectly through
its wholly owned subsidiary, Deepwell Energy Services LP ("Deepwell
LP") and its subsidiaries Deepwell Energy Services Commercial Trust
and Deepwell Energy Services Ltd. Deepwell LP provides oilfield waste
management services, including treating, processing and disposing of
oilfield wastes and custom treating of oil/water emulsions.

2. Significant Accounting Policies

(a) Basis of presentation

The consolidated financial statements have been prepared by
management in accordance with Canadian generally accepted accounting
principles and are reported in Canadian dollars. Management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the period. The most
significant estimates relate to depreciation, amortization, asset
retirement obligations, accretion, income taxes, unit-based
compensation and recoverability of goodwill and intangibles. Actual
results could differ from those estimates. The financial statements
have, in management's opinion, been properly prepared using careful
judgment with reasonable limits of materiality and within the
framework of the Trust's accounting policies as summarized below.

(b) Changes in Accounting Policies

On January 1, 2007, the Trust adopted the Canadian Institute of
Chartered Accountants ("CICA") Handbook Sections 1530 "Comprehensive
Income", Section 3251 "Equity", Section 3855 "Financial Instruments -
Recognition and Measurement", Section 3865 "Hedges", and Section 3861
"Financial Instruments - Disclosure and Presentation".

i. Comprehensive Income - Section 1530 describes reporting and
disclosure recommendations with respect to comprehensive income
and its components. Comprehensive income is the change in
Unitholders equity, which results from transactions and events
from sources other than the Trust's Unitholders. These
transactions and events include unrealized gains and losses
resulting from changes in fair value of certain financial
instruments. The adoption of this Section had no impact on the
Trust as there have been no transactions resulting in other
comprehensive income.

ii. Equity and Comprehensive Income - On January 1, 2007, the Trust
adopted Section 3251 of the CICA Handbook, "Equity", replacing
Section 3250 "Surplus". It describes standards for the
presentation of equity and changes in equity for a reporting
period as a result of the application of Section 1530,
"Comprehensive Income". The adoption of this Section had no
impact on the Trust as there have been no transactions
resulting in other comprehensive income.

iii. Financial Instruments - Section 3855 prescribes when a
financial asset, financial liability or non-financial
derivative instrument is to be recognized on the balance sheet
and at what amount, requiring fair value or cost-based measures
under different circumstances. Under Section 3855, financial
instruments must be classified into one of the following five
categories: held-for-trading, held-to-maturity, loans and
receivables, available-for-sale financial assets or other
financial liabilities. All financial instruments, including
derivatives, are measured in the balance sheet at fair value
except for loans and receivables, held-to-maturity investments
and other financial liabilities which are measured at amortized
cost. Subsequent measurement and changes in fair value will
depend on their initial classification, as follows: held-for-
trading financial assets are measured at fair value and changes
in fair value are recognized in net earnings; available-for-
sale financial assets are measured at fair value with changes
in fair value recorded in other comprehensive income until the
investment is de-recognized or impaired at which time the
amounts would be recorded in net earnings.

Under adoption of these new standards, the Trust designated its
accounts receivable as loans and receivables, which are
measured at amortized cost. The Trust's bank indebtedness,
accounts payable and accrued liabilities, and long-term debt
are classified as other financial liabilities, which are
measured at amortized cost. The Trust has chosen to expense its
debt transaction costs in the period incurred. For the year
ended December 31, 2007, $114,043 of transaction costs were
expensed. Other than these changes the adoption of the standard
had no material impact on the Trust's consolidated financial
statements.

Non-financial derivative instruments, including embedded
derivatives, are to be recorded in the statement of income at
fair value unless exempted because they are a part of normal
purchase and sale activities. All changes in their fair value
are recorded in earnings unless cash flow hedge accounting is
used, in which case changes in fair value are recorded in other
comprehensive income. The Trust applied this accounting
treatment for all embedded derivatives in host contracts active
as of January 1, 2007. The Trust has determined it currently
has no derivative or embedded derivative instruments and as
such is not impacted by the change in accounting policy.

iv. Hedges - Section 3855 expands the guidelines required by
Accounting Guideline 13 (AcG-13) "Hedging Relationships". This
Section describes when and how hedge accounting can be applied
as well as the disclosure requirements. The adoption of this
Section had no impact on the Trust as the Trust does not follow
hedge accounting at this time.

v. Financial instruments - disclosure and presentation - Section
3861 requires entities to provide disclosures in their
financial statements that enable users to evaluate the
significance of financial instruments on the entity's financial
position, performance and cash flows. Also this section enables
users through disclosure to evaluate the nature and extent of
our use of financial instruments, the business purposes they
serve and the risks associated with the instruments and
management policies for mitigating and managing those risks.

vi. Capital disclosures, financial instruments disclosures and
presentation - New CICA Handbook Sections have been issued
which will require additional disclosure in the Trust's
consolidated financial statements commencing January 1, 2008.
Sections 1535 "Capital Disclosures" requires the disclosure of
qualitative and quantitative information about the Trust's
objectives, policies and processes for managing capital.
Sections 3862 "Financial Instruments - Disclosures" and 3863
"Financial Instruments - Presentation" will replace Section
3861 to prescribe the requirements for presentation and
disclosure of financial instruments. Handbook section 3031
"Inventories", which prescribes the recognitions, measurement,
disclosure and presentation issues related to inventories, will
become effective January 1, 2008. The Trust believes that the
adoption of these standards will not have a material impact on
the consolidated financial statements.

vii. International financial reporting standards - The CICA plans to
converge Canadian GAAP for public companies with International
Financial Reporting Standards (IFRS) over a transition period
with full convergence expected by January 1, 2011. The impact
of the transition to IFRS on the Trusts' consolidated financial
statements has not yet been determined.

(c) Principles of consolidation

The consolidated financial statements include the accounts of the
Trust and its wholly owned subsidiaries: Deepwell Energy Services
Commercial Trust, Deepwell Energy Services Ltd. and Deepwell Energy
Services LP. All subsidiaries are directly or indirectly wholly owned
and their operations are fully reflected in the consolidated
financial statements. All inter-company transactions and balances
have been eliminated.

(d) Capitalization of costs

The Trust capitalizes all costs directly relating to plant
construction including carrying costs such as property taxes and
insurance specifically related to the project, and other direct
costs.

(e) Cash

Cash includes cash on hand, balances with banks including overdraft,
and cash held in trust.

(f) Inventory

Inventory consists of drilling fluids, oilfield supplies and crude
oil, all of which are valued at the lower of weighted average cost
and net realizable value. As of January 1, 2008, Deepwell will
replace the existing inventory accounting policy. The new policy
requires inventory to be valued on a first-in, first-out or weighted
average basis. The application of this standard is not expected to
have a material impact on the Trust's consolidated financial
statements.

(g) Property and equipment

Property and equipment is recorded at cost. Depreciation on additions
and disposals is prorated from the subsequent month of purchase or
disposal. Depreciation is provided at the following rates:

Assets Method Rate
------ ------ ----
Buildings Declining balance 4%
Tanks Declining balance 4%
Oilfield services equipment Declining balance 20%
Vehicles Declining balance 20%
Disposal wells Straight-line 5-20 years
Site improvements Declining balance 8%
Pipelines Declining balance 5%
Furniture and fixtures Declining balance 20%
Computer equipment Declining balance 30%
Leasehold improvements Straight-line 5 years

(h) Long lived assets

Management assesses the carrying value of long lived assets for
impairment when events or circumstances indicate that the carrying
value of those assets may not be recoverable. Such events or
circumstances include items such as an ongoing lack of profitability
and significant changes in technology. When an indication of
impairment is present the Trust tests for impairment by comparing the
carrying value of the asset to its net recoverable amount. Impairment
is recognized if the carrying value of the asset exceeds the sum of
the undiscounted cash flows expected to result from that asset. If
the carrying amount is greater than the net recoverable amount, the
asset is written down to its estimated fair value.

(i) Intangible assets

Intangible assets are comprised of values attributable to customer
relationships, certificates of approval or completion, and non-
competition agreements. The carrying value of these assets will be
assessed whenever an event or changes in circumstances indicate their
carrying value may not be recoverable. Amortization is provided at
the following annual rates:
Completions and contracts (5% - Straight line)
Non competition agreements (33% - Straight line)
Customer relationships (17% - Straight line)

(j) Goodwill

Goodwill is recognized when the total purchase price of a business
acquisition exceeds the fair value of the net identifiable assets
acquired and liabilities assumed of the acquired business. The
goodwill balance is assessed for impairment annually at year end or
as events occur that may result in impairment. To assess impairment,
the fair value of the Trust is compared to the respective book value.
If the fair value is less than the book value a second test is
performed to determine the amount of impairment. The amount of
impairment is measured by allocating the fair value of identifiable
assets and liabilities as if they had been acquired in a business
combination for a purchase price equal to their fair value to
determine the implied fair value of goodwill. If the goodwill
determined in this manner is less than the carrying value of
goodwill, an impairment loss is recognized in the period in which it
occurs. Goodwill is stated at cost less impairment and is not
amortized.

(k) Asset retirement obligation

The Trust recognizes as a liability the estimated fair value of the
future retirement obligations associated with property and equipment.
The fair value is capitalized and amortized over the same period as
the underlying asset. The Trust estimates the liability based on the
estimated costs to abandon and reclaim its ownership interest in all
wells and facilities and the estimated timing of the costs to be
incurred in future periods. This estimate is evaluated on a periodic
basis and any adjustment to the estimate is prospectively applied. As
time passes, the change in net present value of the future retirement
obligation is expensed through accretion. Retirement obligations
settled during the period reduce the future retirement liability.

(l) Revenue recognition

The Trust's services include the processing and separation of
oilfield waste, the disposal of oilfield waste water and the custom
treating of oil. Revenue is recorded in the period when treatment
services are provided or performed and when collection is reasonably
assured. Processing and disposal revenue are recorded at the time of
sale. Oil sales are recorded at the time of sale.

(m) Income taxes

The Trust is a taxable entity for purposes of the Income Tax Act
(Canada), and is only subject to statutory income taxes on taxable
income not distributed to unitholders. Bill C-52 Budget
Implementation Act, 2007 ("Bill C-52") was substantively enacted by
the Canadian government in June of 2007 and imposes a tax on certain
distributions from publicly traded specified income flow-through
trusts ("SIFT") and will apply to distributions made by the Trust to
its unitholders. The SIFT tax measures take effect January 1, 2011,
or earlier if the Trust exceeds certain permitted growth guidelines
established by the Canadian Department of Finance.

As a result of Bill C-52, the Trust must now recognize (on a
prospective basis) future income tax assets or liabilities on
"temporary differences" (differences between the accounting basis and
the tax basis of the assets and liabilities) in the Trust, unless
those temporary differences are expected to reverse before the SIFT
tax comes into effect.

The Trust is subject to certain provincial capital taxes and
corporate income taxes and follows the liability method of accounting
for income taxes. Under the liability method, future income tax
assets and liabilities are determined based on "temporary
differences", and are measured using the currently enacted, or
substantively enacted, tax rates and laws expected to apply when
these differences reverse. Income tax expense is the sum of the
Trust's provision for current income taxes and the difference between
opening and ending balances of the future income tax assets and
liabilities.

(n) Unit based compensation

The Trust has established a unit option plan for trustees, directors,
officers, employees and consultants. The Trust recognizes unit-based
compensation expense in the Consolidated Statement of Income for all
unit options granted based upon their fair value at the time of
grant. The fair value is determined using an accepted option pricing
model, with total compensation expense recognized over the period the
options vest. Consideration paid by the option-holder upon the
exercise of the options, together with the amount previously
recognized in contributed surplus, is recognized as an increase in
Trust Units.

(o) Income per unit

Basic net income per Trust Unit is computed by dividing net income by
the weighted average number of Trust Units outstanding during each
reporting period. Trust Units issued during the year and Trust Units
reacquired during the year are weighted for the portion of the year
that they were outstanding. Diluted net income per Trust Unit is
calculated using the treasury stock method.

3. Business acquisitions

On April 27, 2006, the Trust purchased all of the issued and
outstanding shares of Deepwell Disposal Services Inc. ("DDSI") in
exchange for 356,000 Class B Trust Units valued at $3,560,000.

On April 28, 2006, the Trust purchased the oilfield waste management
assets of Producers Disposal Services Ltd. ("PDS") and Rycroft
Disposal Well Inc. ("Rycroft") for cash consideration of $42,754,509.
The Trust acquired all of the assets of PDS and Rycroft excluding
security deposits held by the Alberta Energy and Utilities Board. The
Trust assumed the asset retirement obligations of PDS and Rycroft;
however the Trust was only responsible for those operating
liabilities accruing to PDS and Rycroft subsequent to March 31, 2006.

---------------------------------------------------------------------
Purchase Price PDS/Rycroft DDSI Total
---------------------------------------------------------------------
Cash $ 42,754,509 $ - $ 42,754,509
Transaction costs 241,279 57,068 298,347
---------------------------------------------------------------------
42,995,788 57,068 43,052,856
Trust Units issued - 3,560,000 3,560,000
---------------------------------------------------------------------
$ 42,995,788 $ 3,617,068 $ 46,612,856
---------------------------------------------------------------------
---------------------------------------------------------------------

The consolidated financial statements have been prepared using the
estimated fair values of assets and liabilities. Due to common
management and directors, the Trust and DDSI were related parties at
the time of the acquisition. The transaction was not in the normal
course of business and the exchange amount being that agreed to by
the parties, was used for financial reporting purposes because the
change in the ownership interests in the assets transferred is
substantive, and estimated fair values of property, plant and
equipment, intangibles and goodwill for both acquisitions were
provided by an independent evaluator.

Allocation of
Purchase Price PDS/Rycroft DDSI Total
---------------------------------------------------------------------
Cash $ - $ 259,925 $ 259,925
Working capital 1,823,356 (35,625) 1,787,731
Property and equipment 34,547,000 175,000 34,722,000
Intangible assets 3,160,500 312,500 3,473,000
Goodwill 4,135,200 3,022,202 7,157,402
Deposits - 25,354 25,354
Future income taxes - (135,000) (135,000)
Asset retirement
obligations (670,268) (7,288) (677,556)
---------------------------------------------------------------------
$ 42,995,788 $ 3,617,068 $ 46,612,856
---------------------------------------------------------------------
---------------------------------------------------------------------

4. Property and equipment

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

Accumulated Net
December 31, 2007 Cost depreciation book value
-------------------------------------------------------------------------
Disposal wells $ 28,705,932 $ 3,341,134 $ 25,364,798
Pipelines 3,458,236 230,977 3,227,259
Tanks 2,865,351 168,349 2,697,002
Oilfield service equipment 3,064,749 663,976 2,400,773
Site improvements 2,608,276 245,837 2,362,439
Future sites 8,258,067 - 8,258,067
Buildings 1,927,341 69,048 1,858,293
Computer equipment 597,051 113,101 483,950
Vehicles 297,658 68,488 229,170
Furniture and fixtures 118,073 27,301 90,772
Leasehold improvements 12,784 3,282 9,502
-------------------------------------------------------------------------
$ 51,913,518 $ 4,931,493 $ 46,982,025
-------------------------------------------------------------------------

Accumulated Net
December 31, 2006 Cost depreciation book value
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Disposal wells $ 28,122,383 $ 1,240,536 $ 26,881,847
Pipelines 3,152,585 103,490 3,049,095
Tanks 2,685,586 62,499 2,623,087
Oilfield service equipment 2,630,147 290,086 2,340,061
Site improvements 2,270,902 81,218 2,189,684
Future sites 1,009,241 - 1,009,241
Buildings 963,750 26,193 937,557
Computer equipment 246,023 25,303 220,720
Vehicles 229,411 25,385 204,026
Furniture and fixtures 106,185 7,775 98,410
Leasehold improvements 12,784 906 11,878
-------------------------------------------------------------------------
$ 41,428,997 $ 1,863,391 $ 39,565,606
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Included in future sites, are $8,222,166 (2006 - $1,009,241) in
capitalized costs for the Claresholm plant construction which have not
been subject to depreciation. Included in disposal wells, are $181,000
(2006 - $175,000) for the acquisition of the disposal wells which have
not been subject to depreciation. Depreciation and amortization will be
provided on these assets once the construction has been completed.

5. Intangible assets

-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated Net
December 31, 2007 Cost amortization book value
-------------------------------------------------------------------------
Completions and contracts $ 2,115,000 $ 150,208 $ 1,964,792
Customer relationships 1,310,000 371,023 938,977
Non competition agreements 48,000 26,667 21,333
-------------------------------------------------------------------------
$ 3,473,000 $ 547,898 $ 2,925,102
-------------------------------------------------------------------------
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Accumulated Net
December 31, 2006 Cost amortization book value
-------------------------------------------------------------------------
Completions and contracts $ 2,115,000 $ 68,750 $ 2,046,250
Non competition agreements 48,000 9,460 38,540
Customer relationships 1,310,000 140,753 1,169,247
-------------------------------------------------------------------------
$ 3,473,000 $ 218,963 $ 3,254,037
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Included in completion and contracts is $312,500 (2006 - $312,500) which
is not subject to amortization as the Claresholm facility is not yet
complete.

6. Unitholder's equity

(a) Class B Trust Units

The Trust is authorized to issue an unlimited number of Class B Trust
Units.

On April 27, 2006, the Trust issued 4,000,000 Class B Trust Units at a
price of $10.00 per Unit by way of private placement for gross proceeds
of $40,000,000. An aggregate of 161,670 Class B Trust Units were issued
to trustees of the Trust or, directors or officers of subsidiaries of the
Trust, directly or indirectly for proceeds of $1,616,700.

On April 27, 2006, the Trust acquired all the issued and outstanding
shares of Deepwell Disposal Services Inc. Consideration of $3,560,000 was
paid by the issuance of 356,000 Class B Trust Units at an ascribed value
of $10.00 per Unit.

Each Class B Unit was exchangeable into one Trust Unit on the earlier of
one day from the date of issuance of a receipt for a final prospectus
filed by the Trust on a public stock exchange, and August 28, 2006. If
The Trust's Units were not listed on a public stock exchange by
August 25, 2006, the Trust agreed to issue to each holder of Class B
Units an additional 0.10 of a regular Trust Unit. Pursuant to the Trust's
prospectus dated August 18, 2006, the Trust exchanged all outstanding
Class B Trust units on a one for one basis for Units of Deepwell Energy
Services Trust. Subsequent to the exchange of units, the Trust received
approval to list the Units for trading on the TSX, and the Units
commenced trading on the TSX on August 24, 2006 and the 0.10 of a regular
Trust Unit penalty was not made.

-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number Amount
-------------------------------------------------------------------------
Issued to settlor of the Trust 1 $ 10
Cancelled (1) (10)
Issued on business acquisition 356,000 3,560,000
Issued on private placement 4,000,000 40,000,000
Redemption of Class B Trust Units (4,356,000) (43,560,000)
-------------------------------------------------------------------------
December 31, 2006 - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------

There are no Class B units outstanding at December 31, 2007.

(b) Regular Trust Units

The Trust is authorized to issue an unlimited number of Regular Trust
Units.

On August 22, 2006, the Trust exchanged each outstanding Class B Trust
Unit on a one-for-one basis with regular Trust Units.

Trust Units are redeemable at any time at the option of the unitholder.
The redemption price is equal to the lesser of 90% of the average market
price for the 10 days immediately prior to the date the units were
tendered for redemption and the closing market price on the date the
units were tendered for redemption.

-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2007 December 31, 2006
Number Amount Number Amount
-------------------------------------------------------------------------
Balance, beginning
of period 4,356,000 $ 40,490,377 - $ -

Issued on redemption
of Class B units - - 4,356,000 43,560,000
Issued upon rights
offering July 9,
2007 2,180,515 13,104,895 - -
Issued upon private
placement July 31,
2007 582,362 3,499,996 - -
Issued from
Distribution
Reinvestment Plan
(DRIP) 44,323 264,184 - -
Trust unit issue
costs - (1,129,826) - (3,069,623)

-------------------------------------------------------------------------
Balance, end of
period 7,163,200 $ 56,229,626 4,356,000 $ 40,490,377
-------------------------------------------------------------------------
-------------------------------------------------------------------------

(c) Special Voting Rights

The Trust is authorized to issue an unlimited number of Special Voting
Units, which will enable the Trust to provide voting rights to holders of
any exchangeable shares that may be issued by any direct or indirect
subsidiaries of the Trust. Except for the right to vote, the Special
Voting Units do not confer any other rights. No Special Voting Units have
been issued since inception of the Trust.

(d) Trust Unit Options

The options carry a five year term and vest equally over a period of
three years from the date of grant. The exercise price of each option is
based upon the weighted average trading price for a period prior to the
date of grant. The exercise price is adjusted downwards by 100% of the
amount of distributions paid on outstanding Trust Units.

The fair value of options issued during the period was $2.71 (2006 -
$3.81) and estimated using the Black-Scholes pricing model with the
following assumptions: risk free interest rate of 4.25% (2006 - 4.25%);
volatility of 35% to September 2007 and 45% to the end of the period
(2006 - 35%). The impact of monthly distributions and corresponding
changes in exercise price during the life of the options are assumed to
be equal and offsetting, and so no provision is made in the pricing model
for either factor.


December 31, 2007 December 31, 2006
--------------------------- ---------------------------
Weighted Weighted
Number of average exer- Number of average exer-
options cise price options cise price
------- ------------ ------- -------------
Balance, beginning
of period 303,500 $ 8.81 - $ -
Granted 208,971 6.12 304,000 9.63
Expired/Cancelled (5,500) 9.27 (500) 10.26
Exercised - - - -
-------------------------------------------------------------------------
Balance, end of
period 506,971 $ 7.70 303,500 $ 9.63
-------------------------------------------------------------------------
-------------------------------------------------------------------------

As such, the opening weighted average exercise prices have been adjusted
by $0.82 (2006 - $nil) to reflect the decrease in exercise price for
distribution over the year.

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

Options outstanding Options exercisable
------------------------------ ---------------------
Weighted Weighted Weighted
Number average average Number average
of contrac- exercise of exercise
Exercise price options tual life price options price
-------------- ------- --------- -------- ------- ---------
$ 6.12 206,971 4.64 $ 6.12 73,800 $ 6.12
$ 6.32 2,000 4.36 6.32 -
$ 8.79 282,500 3.64 8.79 94,167 8.79
$ 9.10 14,500 3.76 9.10 4,833 9.10
$ 9.44 1,000 3.73 9.44 333 9.44
-------------------------------------------------------------------------
506,971 4.04 $ 7.70 173,133 $ 7.66
-------------------------------------------------------------------------
-------------------------------------------------------------------------

(e) Contributed surplus

-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2007 2006
-------------------------------------------------------------------------
Balance, beginning of period $ 251,432 $ -
Fair value attributed to unit-based
compensation 815,117 251,432
-------------------------------------------------------------------------
Balance, end of period $ 1,066,549 $ 251,432
-------------------------------------------------------------------------
-------------------------------------------------------------------------

(f) Distributions to unitholders

The Trust declares monthly distributions of cash to Unitholders of record
as at the close of business on each Distribution Record Date. Pursuant to
the declaration of trust, the Trust is required to pay to Unitholders the
net income of the trust determined pursuant to the provisions of the
Income Tax Act (Canada). Such distributions are recorded as reductions of
equity upon declaration of the distribution. During the period, the Trust
declared and paid distributions to the Unitholders in accordance with the
following schedules:

-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distribution
Record Payment per
Period date date Trust unit Amount
-------------------------------------------------------------------------
Jan 2007 Jan 31, 2007 Feb 15, 2007 $ 0.0958 $ 417,304
Feb 2007 Feb 28, 2007 Mar 15, 2007 0.0958 417,304
Mar 2007 Mar 31, 2007 Apr 13, 2007 0.0600 261,360
Apr 2007 Apr 30, 2007 May 15, 2007 0.0600 261,360
May 2007 May 31, 2007 Jun 15, 2007 0.0600 261,523
Jun 2007 Jun 30, 2007 Jul 14, 2007 0.0600 261,662
Jul 2007 Jul 31, 2007 Aug 15, 2007 0.0600 427,655
Aug 2007 Aug 31, 2007 Sep 14, 2007 0.0600 427,952
Sep 2007 Sep 30, 2007 Oct 15, 2007 0.0600 428,485
Oct 2007 Oct 31, 2007 Nov 15, 2007 0.0600 429,119
Nov 2007 Nov 30, 2007 Dec 15, 2007 0.0600 429,433
Dec 2007 Dec 31, 2007 Jan 15, 2008 0.0600 429,792
-------------------------------------------------------------------------
Distributions declared to unitholders during 2007 $ 4,452,949
-------------------------------------------------------------------------
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Distribution
Record Payment per
Period date date Trust unit Amount
-------------------------------------------------------------------------
Apr 28-30,2006 Apr 30, 2006 May 15, 2006 $ 0.0064 $ 27,953
May 2006 May 30, 2006 Jun 15, 2006 0.0958 417,305
Jun 2006 Jul 6, 2006 Jul 14, 2006 0.0958 417,305
Jul 2006 Jul 28, 2006 Aug 15, 2006 0.0958 417,305
Aug 2006 Aug 31, 2006 Sep 15, 2006 0.0958 417,305
Sep 2006 Sept 29, 2006 Oct 13, 2006 0.0958 417,305
Oct 2006 Oct 31, 2006 Nov 15, 2006 0.0958 417,305
Nov 2006 Nov 30, 2006 Dec 15, 2006 0.0958 417,305
Dec 2006 Dec 29, 2006 Jan 15, 2007 0.0958 417,305
-------------------------------------------------------------------------
Distributions declared to unitholders during 2006 $ 3,366,393
-------------------------------------------------------------------------
-------------------------------------------------------------------------

(g) Weighted average Trust units outstanding

December 31, 2007 2006
-------------------------------------------------------------------------
Basic 5,569,288 4,356,000
Diluted 5,570,403 4,357,187
-------------------------------------------------------------------------
-------------------------------------------------------------------------

In calculating diluted unit amounts for the year ended December 31, 2007,
the Trust excluded 303,000 (2006 - 16,000) options because the exercise
price was greater than the average market price during the year.

(h) Dividend re-investment plan

On April 10, 2007, the Trust adopted a distribution reinvestment plan
(the "DRIP"). The DRIP, to the extent that Unitholders participate, will
provide the Trust with additional cash for growth. The DRIP allows
eligible Unitholders of the Trust to direct that their cash distributions
be reinvested in additional Trust units. The cash distributions will be
re-invested at the discretion of Deepwell Energy Services Ltd.'s
management either by acquiring Trust units issued from treasury at
95 percent of the average market price (as defined in the DRIP) or by
acquiring Trust units at prevailing market prices.

7. Income taxes

On June 22, 2007, the Specified Investment Flow-Through (SIFT) tax
included in the Government of Canada's Bill C-52, received Royal Assent,
creating a new 31.5 percent tax to be applied to distributions from
certain income trusts and partnerships, including Deepwell, effective
January 1, 2011. With the rate of reduction enacted on December 14, 2007,
the new tax is to be applied to distributions at the tax rates of
29.5 percent and 28.0 percent effective January 1, 2011 and 2012
respectively.

Based on the amount of the Trust's existing temporary differences that
are anticipated to reverse after January 1, 2011, the Trust expects a
future income tax asset as at January 1, 2011. However, the future income
tax asset is fully offset by a valuation allowance. The anticipated
amount and timing of reversals of temporary differences will be dependent
on the Trust's actual results, distributions and actual acquisition and
disposition of assets and liabilities. As a result, a change in estimates
or assumptions could materially affect the estimate of the future tax
asset.

Future income tax recovery:

-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2007 2006
-------------------------------------------------------------------------
(Loss) income before taxes $ (644,799) $ 811,230
Combined federal and provincial income
tax rate 32.12% 32.49%
-------------------------------------------------------------------------
(207,109) 263,569
Increase (decrease) in income taxes resulting
from:
Change in tax status with enactment of
Bill C-52 (2,622,368) -
Non-taxable portion of Trust income (168,841) (313,509)
Changes in tax rate - (1,303)
Non-deductible items and other 100,933 3,444
Valuation allowance 2,810,184 -
-------------------------------------------------------------------------
Future income tax recovery $ (87,201) $ (47,799)
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Future income tax liability:

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

Future income tax assets:
-------------------------
Difference in tax and book value of the
Trust assets $ 2,215,677 $ -
Asset retirement obligation 284,661 1,593
Unit issuance costs 123,624 -
Operating losses of the subsidiary 315,130 46,399
-------------------------------------------------------------------------
2,939,091 47,992
Future income tax liabilities:
------------------------------
Difference in tax and book value of the
subsidiary's assets (128,907) (135,193)
Valuation allowance (2,810,184) -
-------------------------------------------------------------------------
Future income tax liability, end of period $ - $ (87,201)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The Trust has non-capital loss carry forwards from its subsidiary of
approximately $1,003,000. The expiration of the losses is as follows:

2013 $ 111,000
2014 229,000
2025 168,000
2026 178,000
2027 317,000

8. Credit facilities

The Trust renewed its existing credit facilities on May 31, 2007 with a
Canadian chartered bank (the "credit facilities") which consist of the
following:

(a) Demand loan

Under the credit facilities, the Trust has a $2,000,000 demand revolving
operating loan. During the period, interest ranged from the lender's
prime rate plus 0.125% to 1.400% and is dependent on the funded debt to
EBITDA ratio. As of December 31, 2007 the borrowing base for the demand
loan was at $1,212,863 (2006 - $1,808,000) and the amount drawn was
$550,000 (2006 - $nil).

(b) Long term debt

Under the credit facilities, the Trust has a $15,500,000, 364 day
extendible revolving term loan committed to May 29, 2008. No set
principal repayment has been established and the Trust has the ability to
repay, borrow and repay again until the 364 day term expires. Interest
ranges from the lender's prime rate plus 0.125% to 1.400% per annum.
Interest is calculated monthly and paid in arrears. As at December 31,
2007 an aggregate of $4,800,000 (2006 - $11,500,000) was outstanding of
which $933,333 (2006 - $nil) is current. The revolving period extends to
May 29, 2008, at which time the credit facility is eligible for renewal.
Should this renewal not be extended, the credit facility reverts to
three-year term with the monthly principal repayments commencing on
June 26, 2008.

As security for the credit facilities, Deepwell LP granted lenders a
security interest over all of its assets. In addition, the Trust and its
subsidiaries guaranteed the indebtedness of Deepwell LP under the credit
facilities with such guarantee being secured by all of the assets of each
such guarantor. In respect of any proceeds resulting from the enforcement
of the credit facilities or the above mentioned guarantees, the lenders,
as creditors, will have a prior ranking claim relative to the
Unitholders.

9. Asset retirement obligation

It is management's estimate that the remaining lives of the disposal
sites are approximately 20 years, at which time the cost to close and
reclamate the disposal sites will approximate $3,430,000. The discounted
cash flows required to retire the assets was determined using a credit
adjusted rate of 8.50% and an inflation rate of 2%. The accrued liability
for closure of the disposal sites is recognized over the estimated
remaining life of the assets. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived assets and
are depreciated over their estimated useful lives.

Changes in the asset retirement obligation balance are summarized below:

-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2007 2006
-------------------------------------------------------------------------
Asset retirement obligation, beginning
of period $ 713,744 $ -
Asset retirement obligation, upon acquisition - 675,762
New obligations 240,889 -
Accretion 61,816 37,982
-------------------------------------------------------------------------
Asset retirement obligation, end of period $ 1,016,449 $ 713,744
-------------------------------------------------------------------------
-------------------------------------------------------------------------

10. Financial Instruments

All significant financial assets and financial liabilities of the Trust
are either recognized or disclosed in the financial statements together
with other information relevant for making a reasonable assessment of
future cash flows, interest rate risk and credit risk.

(a) Fair value of financial instruments

The carrying values of the Trust's bank indebtedness, accounts
receivable, accounts payable and accrued liabilities approximate their
respective fair values due to their short term maturity. As the Trust's
revolving credit facility and long term debt bear interest at floating
market rates, the respective carrying values approximate fair value.

(b) Credit concentration

The Trust has a concentration of credit risk because substantially all
oil revenues are accumulated by the marketer, and paid in full the month
following receipt. The Trust manages this risk by entering into sales
contracts with credit worthy counterparties, reviewing its exposure to
individual entities on a regular basis, and delaying repayment of oil
credits beyond the settlement date.

(c) Interest rate risk

Interest rate risk is the risk that the value of a financial instrument
might be adversely affected by a change in the interest rates. Changes in
market interest rates may have an effect on the cash flows associated
with some financial assets and liabilities, known as cash flow risk, and
on the fair value of other financial assets or liabilities, known as
price risk. The Trust is exposed to interest rate risk with respect to
the utilization of floating rate credit facilities to finance operations.
The Trust has the option to renew these loans annually.

11. Fire-related expenses and losses

On December 7, 2006, a fire at the Grande Cache facility damaged the
waste receiving area. The facility was shut down for one week until
regulatory approval to re-open was received, and operations were limited
until February 1, 2007 when a temporary waste receiving system was
implemented. The facility operated to the end of April 2007 using the
temporary system, while a new permanent receiving system was installed.
The damaged equipment has been dismantled and removed and reconstruction
is complete. Assets damaged in the incident include the waste receiving
pit, solids treatment pad, a conveyor system used for waste separation,
and miscellaneous piping and electrical components. During the process of
restoring the facility to its full operating condition and subsequent to
the release of the December 31, 2006 financial statements it was
determined that efforts to restore the damaged assets were more extensive
than anticipated and had taken on the nature of a replacement rather than
a repair. As a result of the change in the nature of the restoration, the
net book value of assets valued at $746,332 was written off, net of an
accrued provision for insurance proceeds of $378,630.

Direct fire-related expenses of $162,119 were incurred primarily for
emergency services, legal expenses, and other professional fees and these
were recognized as expenses in the first quarter of 2007. No provision
has been made for recovery of these direct fire-related costs through
insurance although Deepwell is pursuing a claim. In the December 31, 2006
financial statements, all fire-related expenses incurred to date were
reflected as insurance proceeds receivable. Subsequent to the
December 31, 2006 financial statement date, indications from the insurer
indicated less certainty as to the amount collectible, and in recognition
of the decreased certainty of the amount collectible the full amount of
costs have been applied to the current period as a change in estimate and
any future insurance proceeds will be recorded against these expenses
when the amounts have been received or collection is reasonably certain
and estimable.

12. Commitments and contingencies

The Trust is committed to the following future minimum payments under
lease contracts for office space and two vehicles with varying expiration
dates.

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2008 $ 164,577
2009 163,024
2010 139,962
2011 91,704
Thereafter -
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$ 559,267
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The Trust has letters of guarantee in the amount of $2,126,896 (2006 -
$nil) available, none of which have been drawn as of year end.

13. Related party transactions

There were no transactions with related parties for the twelve months
ended December 31, 2007. During 2006, the Trust made payments in the
amount of $318,954 for legal expenses to a Partnership of which one of
the Trustees is a Partner. These transactions were conducted in the
normal course of operations, on commercial terms established and agreed
to by the parties. As at December 31, 2006, $6,176 was outstanding in
accounts payable and accrued liabilities.

Also see Note 3 for the Trust's purchase of all the issued and
outstanding shares of DDSI.

14. Subsequent events

The Trust declared a cash distribution for the period January 1, 2008 to
January 31, 2008 at $0.06 per unit to be paid on February 15, 2008.

The Trust declared a cash distribution for the period February 1, 2008 to
February 29, 2008 at $0.06 per unit to be paid on March 15, 2008.

15. Comparative figures

Certain of the comparative figures have been reclassified to conform to
the current year's financial statement presentation.


Additional information about the Trust is available at www.sedar.com and on the Trust's website at www.deepwellenergy.com

Certain statements in this press release constitute "forward- looking" statements that involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Trust or Deepwell LP, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors, including those discussed above, could cause actual results to differ materially from the results discussed in the forward-looking statements. Deepwell's forward-looking statements are expressly qualified in their entirety by this cautionary statement. Unless otherwise required by applicable securities laws, Deepwell does not intend nor does it undertake any obligation to update or review any forward-looking statements to reflect subsequent information, events, results or circumstances or otherwise.

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