Deepwell Energy Services Trust
TSX : DWL.UN

Deepwell Energy Services Trust

April 01, 2009 01:10 ET

Deepwell Announces Annual and Quarterly Results

CALGARY, ALBERTA--(Marketwire - April 1, 2009) -

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

Deepwell Energy Services Trust (TSX:DWL) ("Deepwell" or the "Trust") announces its results for the year ended December 31, 2008. The Trust had revenues of $18.7 million for 2008 and $3.9 million for 2008's fourth quarter. The Trust generated $5.4 million in EBITDA, or $0.75 per unit, and reported a net loss of $8.5 million ($1.18 per unit) for the year. In the fourth quarter, EBITDA was $0.9 million ($0.12 per unit) with a net loss of $1.0 million ($0.14). While these are disappointing results for 2008, the underlying business units continue to demonstrate solid operational performance.

Financial and Operating Summary

The following table below provides a summary of Deepwell's financial and operating results for the year ended December 31, 2008.



Quarter Quarter
Year Ended Year Ended Ended Ended
December December December December
31, 2008 31, 2007 % 31, 2008 31, 2007 %
(000's) (000's) Change (000's) (000's) Change
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Revenue 18,653 14,124 + 32% 3,925 3,651 + 8%
Operating
Expenses 10,755 6,635 + 62% 2,318 1,941 + 21%
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Operating Margin 7,898 7,489 + 5% 1,607 1,710 - 5%
Operating Margin % 42.5% 53.0% 41.0% 47.2%

G&A 2,543 2,518 - 722 842 - 12%
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EBITDA 5,355 4,971 + 8% 885 867 + 2%
Per Unit, Diluted 0.75 0.89 0.12 0.12

Restructuring
Expenses 1,202 - 364 -

Amortization 4,908 3,575 + 44% 1,723 1,021 + 70%

Impairment of
Goodwill 7,157 - - - -

Net Loss (8,511) (558) (996) (245)
Per Unit, Diluted (1.18) (0.10) (0.14) (0.03)
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Revenues for the year ended December 31, 2008 were $18.7 million (2007 - $14.1 million), up by 32% year over year. This increase is largely due to the addition of the Claresholm facility which commenced operations on February 19, 2008 and the Palko facility which was acquired on September 25, 2008.

Revenues for the fourth quarter of 2008 were $3.9 million (2007 Q4 - $3.6 million), up by 8% from the fourth quarter of 2007. While the Trust had more facilities operating, general oil field activity decreased in response to lower commodity prices, resulting in modest revenue growth in the fourth quarter of 2008.

Operating margins of 42% for the year ended December 31, 2008 were down from 53% in 2007. The decrease in margins is primarily attributable to underperformance of the Claresholm facility. The Palko facility has exceeded expectations, generating margins above Deepwell's averages. Deepwell's other facilities generated margins more consistent with their historical averages.

Operating margins for the fourth quarter were 41.0%, down from 47.2% in the previous year. Palko's strong contributions were more than the offset by poor performance at the Claresholm facility, lower oil prices and overall decreased oilfield activity within the Alberta market.

General & Administrative expenses experienced no meaningful changes year over year and remain at $2.5 million.

Earnings before interest, taxes, depreciation, amortization and restructuring costs (EBITDA) for the year ended December 31, 2008 was $5.35 million (2007 - $4.97 million). In the fourth quarter 2008 EBITDA amounted to $0.9 million (2007 Q4 - $0.9 million). On a per unit basis, EBITDA was flat year to year at $0.12, but down to $0.75 from $0.89 due to the issuance of additional units in the second half of 2007.

During the last half of 2008, the Trust underwent restructuring and incurred costs of $1.2 million (2007 - nil) which included severance and recruitment costs for executive changes as well as legal and consulting costs related to the Trust's planned conversion to a corporation. During the fourth quarter of 2008, the Trust incurred $0.4 million (2007 - nil) of restructuring costs, primarily associated with the conversion project. The Trust has elected to suspend further expenditures to complete the conversion in these difficult economic conditions.

Amortization for the year ended December 31, 2008 was $4.6 million (2007 - $3.2 million). Amortization for the fourth quarter of 2008 was $1.7 million (2007 Q4 - $1.0 million). During the fourth quarter, the Trust changed its methodology for amortization of investments in disposal wells to employ unit of production rather than the passage of time. This change in estimate has not resulted in meaningful changes in amortization rates. Increased amortization charges also reflect, the existence of two new facilities at year end and the termination of an un-pursued greenfield project.

As at December 31, 2008, the Trust has breached the financial covenant which requires a minimum consolidated equity position, excluding the equity invested in Palko, of $35,000,000. This breach was reported to the bank and negotiations have commenced in conjunction with the May 2009 refinancing. As no waiver has been obtained from the creditor and a further breach of covenants is possible prior to the finalization of the refinancing, the long term debt has been reclassified to current liabilities.

Deepwell presumes the tentative business environment from late 2008 will continue through 2009. Specifically, revenues will be hindered by an overall decrease in oilfield activity, difficult business credit conditions, low investor confidence and generally weak economic conditions. In this environment, the Trust will focus on the objectives of strengthening the balance sheet, operational efficiency, cost control, and cash preservation. Capital expenditures will be limited to those vital to existing operations. Revenues will be aggressively pursued while maintaining tight control over operations. Should there be an improvement in the economic environment; the Trust will be positioned to respond quickly.

Deepwell also announces the appointment of Susan McClinton as Chief Financial Officer of Deepwell Energy Services Ltd., the administrator of the Trust. Ms. McClinton has extensive experience in accounting and finance having served in similar roles for both private and public energy firms. Ms. McClinton succeeds Mr. Tarnowski who has elected to pursue other interests.

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 31, 2009 and should be read in conjunction with the Trust's audited consolidated financial statements as at and for the year ended December 31, 2008. This MD&A discusses operations and events for the year ended December 31, 2008 and unless otherwise noted, references to "2008" or the "year" in this MD&A refer to the year ended December 31, 2008, references to "2007" refer to the year ended December 31, 2007, references to "fourth quarter of 2008 or the "quarter" in this MD&A refer to the three months ended December 31, 2008, and references to "fourth quarter of 2007" refer to the three months ended December 31, 2007.

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") and through its 50 percent joint interest in Palko Energy Ltd. ("Palko"). The Trust and its subsidiaries are based in Calgary, Alberta and Palko is based in Midale, Saskatchewan (collectively "Deepwell"), 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 upstream oilfield water disposal and waste management 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, 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 are intended to identify forward-looking statements. Such forward looking statements include a statement regarding the promising future of Palko due to the likelihood of continued high levels of drilling activity and production are likely in the Bakken play. This statement is based on the assumptions that current activity will continue and that Palko will be able to capitalize on such activity. The risks are that drilling and production activity will not continue at high levels or that Palko will not be providing the required oilfield water disposal and waste management services, associated with such activity. These statements reflect current expectations regarding future events and operating performance and speak only as of the date of this document. The Trust's ability to continue as a going concern is dependent upon its future performance in light of these risks, many of which are beyond its control. It is also dependent upon its ability to renew its financing arrangements or obtain alternative financing.

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 document 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 document and the Trust does not assume any obligation to update or revise any forward-looking statements used in this document to reflect new events or circumstances, except as required by applicable securities legislation.

Non-GAAP measures

The financial information within 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:

- EBITDA, which refers to earnings before restructuring charges, unit-based compensation, interest & financing costs, taxes, depreciation, amortization, impairment of goodwill and taxes; and EBITDA per unit is calculated as EBITDA for the period divided by the weighted average trust units outstanding over the period; and

- Funds from operations, which refers to cash flow from operating activities before changes in non-cash working capital; and funds from operations per unit is calculated as funds from operations for the period divided by the weighted average trust units outstanding over the period.

These measures are identified and presented. Readers should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with GAAP as an indicator of the Trust's performance. The Trust's method of calculating these measures may differ from that of other organizations and, accordingly, may not be comparable with measures of other organizations.

Strategy

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

- Focus on oilfield waste management: Deepwell currently operates exclusively in the upstream oilfield waste management business, and intends to continue that focus. The oilfield waste management business in western Canada has significant barriers to entry, which support the long-term cash flow of current and future facilities.

- Growth: Deepwell is primarily focused on growth through acquisition of existing waste management companies or facilities, and by adding new facilities and increasing capacity and services provided at existing facilities.

- Operational efficiency: A key objective is to attain and maintain efficient operations and a high standard of customer service within a safe working environment.

- Environmental stewardship: Deepwell intends to meet or exceed regulatory requirements and industry standards. Deepwell's facilities are audited annually by regulatory bodies, and voluntarily by an industry safety association, and periodically by exploration and production companies. Deepwell has developed innovations to enhance environmental stewardship at new and existing facilities.

2008 Overview

2008 was a challenging year within in the oil and gas industry, with record high oil prices set in the early part of the year followed by a sharp decline in oil and gas prices during the second half of the year. The downturn within the industry, as well as that within worldwide financial markets, resulted in a significant decline in third quarter drilling activity. Deepwell experienced an increase in revenue due largely to the addition of the Claresholm facility in February 2008, the purchase of a 50 percent interest in Palko in September 2008 and higher average oil prices realized during the first three quarters of the year. Operating expenses increased by 62 percent - largely due to operating costs at the Claresholm facility and higher waste oil repayments, trucking and landfill charges during the year at all facilities. As a result of the increase in operating costs, operating margin was 42 percent for the year compared to 53 percent in 2007. Despite the current economic climate, the Trust continues to generate positive operating margins and is closely monitoring its operations to achieve operational efficiencies. During the year the Trust incurred significant internal and external costs in evaluating its structure. The costs incurred relating to these changes were reported as restructuring and included severance and recruitment costs for executive changes as well as legal and consulting costs related to the Trust's planned conversion to a public company. A charge to earnings to reflect the impairment of goodwill related to the Producer's Oilfield Services assets acquired in 2006, contributed to the net loss for the year in the amount of $8.5 million. The Trust paid distributions of $4.6 million in 2008 which was $0.61/unit over the year.

Key activities for the year:

- In February 2008, Deepwell completed construction and commenced operations of its Claresholm oilfield waste management facility located in southwest Alberta.

- In September 2008, Deepwell acquired a 50 percent joint interest in Palko Energy Ltd., which operates in the heart of the Bakken oil play in southeast Saskatchewan. This acquisition provides Deepwell with a strategic foothold in a new geographic region with a promising future due to continued high levels of drilling activity and the number of new producing wells brought on stream even in the current economic environment. Palko has a number of growth initiatives planned in 2009 to capitalize on this strong market.

- Deepwell incurred $1.2 million of internal and external restructuring costs during the year in order to lay the foundation for the future. Subject to unitholder approval, Deepwell is contemplating changing its structure from a trust to a public company.

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.



For the For the For the For the
twelve twelve three three
months ended months ended months ended months ended
Financial Highlights Dec 31, 2008 Dec 31, 2007 Dec 31, 2008 Dec 31, 2007

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Revenue $18,653,296 $14,124,051 $ 3,925,309 $ 3,650,736
Operating expenses 10,755,303 6,635,001 2,318,004 1,941,216
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Operating Margin 7,897,993 7,489,050 1,607,305 1,709,520
General and
administrative expenses 2,543,414 2,518,213 721,903 842,448
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EBITDA $ 5,354,579 $ 4,970,837 $ 885,402 $ 867,072
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Net loss $(8,510,656) $ (557,598) $ (996,074) $ (266,819)
Per unit, basic (1.18) (0.10) (0.14) (0.04)
Per unit, diluted (1.18) (0.10) (0.14) (0.04)
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EBITDA $ 5,354,579 $ 4,970,837 $ 885,402 $ 867,072
Per unit, basic 0.75 0.89 0.12 0.12
Per unit, diluted 0.75 0.89 0.12 0.12
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Funds from operations $ 3,720,740 $ 4,482,814 $ 546,956 $ 779,107
Per unit, basic 0.52 0.80 0.08 0.11
Per unit, diluted 0.52 0.80 0.08 0.11
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Distributions to
Unitholders $ 4,379,809 $ 4,452,949 $ 503,520 $ 1,288,342
Per unit, basic 0.61 0.80 0.07 0.18
Per unit, diluted 0.61 0.80 0.07 0.18
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Capital expenditures $ 4,910,433 $11,199,255 $ 224,327 $ 5,901,036
Total assets, end of
period $58,719,934 $60,246,358 $58,719,933 $60,246,358
Term loan, end of period $17,871,530 $ 4,800,000 $17,871,530 $ 4,800,000
Total liabilities, end
of period $21,488,287 $10,468,094 $21,488,287 $10,468,094
Trust unit equity, end
of period $56,386,571 $56,229,626 $56,386,571 $56,229,626
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Weighted average Trust
units, basic 7,181,459 5,569,288 7,196,858 7,153,886
Weighted average Trust
units, diluted 7,182,621 5,570,403 7,196,858 7,163,196
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Revenue for the year was $18.7 million (2007 - $14.1 million) with an operating margin of $7.9 million (42 percent) (2007 - $7.5 million and 53 percent), EBITDA of $5.4 million (29 percent) (2007 - $5.0 million and 35 percent), and a net loss of $8.5 million (2007 - $0.5 million). Revenue for the quarter was $3.9 million (2007 - $3.6 million), with an operating margin of $1.6 million (41 percent) (2007 - $1.7 million and 47%), EBITDA of $0.9 million (23 percent) (2007 - $0.9 million and 24 percent) and a net loss of $1.0 million (2007 - $0.2 million)

Included in the consolidated financial statements is Deepwell's 50 percent joint interest in Palko Energy Ltd. from the date of acquisition. Deepwell's proportionate share of revenue for this period was $0.6 million and operating margin $0.4 million (69 percent), respectively. EBITDA for the period was $0.4 million (57 percent). Palko operations have not experienced the rapid decline in activity that has occurred in other parts of western Canada.

Net loss for the year was $1.18 per unit basic and diluted (2007 - net loss of $0.10 per unit basic and diluted) and funds from operations for the year was $0.52 per unit basic and diluted (2007 - $0.83 basic and diluted). Distributions paid to unitholders for the year, were $4.6 million or $0.61 per unit (2007 - $4.5 million or $0.80 per unit).

A charge to earnings to reflect the impairment of goodwill, in the amount of $7.2 million related to the Producer's Oilfield Services assets acquired in 2006, contributed to the net loss for the year in the amount of $8.5 million.

During the fourth quarter of 2008, demand for oilfield waste management services in the Western Canadian Sedimentary Basin weakened due to the uncertainty in the oil and gas industry and the global downturn.

Results of operations

Revenue

Revenue for the year increased by $4.5 million (32 percent) to $18.7 million from $14.1 million in 2007. Fourth quarter revenue was $3.9 million compared to $3.7 million for the same period in 2007.



----------------------------------------------------------------------------
Three months ended Year ended
Dec 31, 2008 Dec 31, 2007 Dec 31, 2008 Dec 31, 2007
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Processing revenues $ 2,780,159 $ 2,350,226 $ 11,659,658 $ 9,570,823
Oil revenues 1,144,844 1,297,124 6,968,537 4,512,349
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Operational revenues 3,925,003 3,647,350 18,628,195 14,083,172
Interest income 306 3,386 25,101 40,879
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Consolidated revenues $ 3,925,309 $ 3,650,736 $ 18,653,296 $ 14,124,051
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Revenue for 2008 consisted of approximately 63 percent processing and disposal fees (2007 - 68 percent), and 37 percent revenue from sale of recovered oil (2007 - 32 percent). Processing and disposal revenue for the fourth quarter was approximately 71 percent of total revenue (2007 - 78 percent), while recovered oil revenue was 29 percent (2007 - 22 percent). In 2008 processing and disposal revenue increased to $11.7 million from $9.6 million in 2007 due to higher waste processing volumes. During 2008, oil revenue rose to $7.0 million from $4.5 million in 2007 as a result of higher average oil prices and increased volumes of oil recovered. Contributing to the increase in revenue was the commencement of operations of the new Claresholm facility late in the first quarter, however operating costs increased by a disproportionate amount.

Revenue for the fourth quarter increased 12 percent from $3.7 million in 2007 to $3.9 million in 2008 primarily due to an increase in recovered oil volumes. While the fourth quarter is historically a strong quarter, revenue decreased by $0.9 million or 19 percent to $3.9 million over the third quarter of 2008 due to the economic downturn. This decrease reflects the impact of lower oil prices and lower activity levels experienced in the fourth quarter.

Expenses

Operating expenses

Operating expenses increased by $4.1 million from $6.6 million in 2007 to $10.7 million in 2008, resulting in an operating margin of 42 percent for the year, compared with 53 percent in 2007. Operating expenses include $2.2 million (2007 - $1.2 million) in oil credits repaid to customers. Trucking costs increased 165 percent in 2008 reflecting increased shipments of oil and waste volumes and higher trucking rates. Operating costs in 2008 also increased with the opening of the Claresholm facility in February 2008.

For the fourth quarter of 2008, operating expenses were $2.3 million representing a 19 percent increase over the fourth quarter of 2007 primarily as a result of higher waste oil credits and maintenance activities carried out at the facilities.

General and administrative expenses

General and administrative expenses, comprised primarily of costs associated with the Trust's corporate office, including senior management and public company costs, were $2.5 million or 14 percent of revenue for the year (2007 - $2.5 million or 18 percent). General and administrative expenses for the fourth quarter were $0.7 million compared to $0.8 million for the same quarter in 2007.

Restructuring costs

During the last half of 2008, the Trust underwent restructuring and incurred costs of $1.2 million (2007 - nil) which included severance and recruitment costs for executive changes as well as legal and consulting costs related to the Trust's planned conversion to a public company. During the fourth quarter of 2008, the Trust incurred $0.4 million (2007 - nil) of restructuring costs, primarily associated with the conversion project. In light of the current economic situation, the Trust has elected to pause work in the conversion project and may recommence work when the situation allows.

Depreciation, amortization and accretion

Depreciation expense was $4.9 million for 2008 which was an increase of $1.3 million over 2007 primarily as a result depreciation expense relating to the Claresholm facility of $0.5 million and a fourth quarter charge of $0.4 million representing expenditures incurred in the development of the Clear Prairie disposal site that was abandoned in the quarter. Amortization of intangibles assets consists of the amortization of completions and contracts, customer relationships, and non-competition agreements that were acquired with the Producers Oilfield assets in 2006.

Goodwill

In the third quarter the Trust performed an annual assessment of the carrying value of goodwill. In view of the economic downturn within the oil and gas service sector and the decline in the trading value of the Trusts' units, management concluded that the carrying value of goodwill pertaining to the Producers Oilfield Services assets in the amount of $7.2 million was impaired and therefore charged $7.2 million to earnings As the Trust's investment in Palko is considered to be a separate reporting unit, a separate impairment test of the Palko goodwill was performed and no adjustment for impairment resulted.

Interest and financing costs

Financing charges include interest on short term and long term borrowings and fees incurred to refinance the Trust's credit facility with its bank. Financing charges increased modestly in 2008 ($0.7 million) over 2007 ($0.6 million) and substantially for the quarter 2008 - $0.3 million (2007 - $0.04 million). Interest rates are floating at the lender's prime rate plus 0.125 percent to 1.625 percent, based on the funded debt to EBITDA ratio, with any unused amounts subject to standby fees.

Income taxes

In 2007, Income Trust tax legislation was passed resulting in a two-tiered tax structure subjecting distributions to the federal corporate income tax rate plus a deemed 13 per cent provincial income tax at the Trust level commencing in 2011. On February 26, 2008 the Federal Government announced as part of the Federal budget that the provincial component of the tax on the Trust is to be calculated based on the general provincial rate in each province in which the Trust has a permanent establishment. This is the same way that a corporation would calculate its provincial tax rate. On February 1, 2009 the Minister of Finance tabled a Notice of Ways and Means which includes the proposed legislation for calculating the provincial tax rate. As the proposed rules were not substantively enacted as of December 31, 2008, the Trust has not reflected a reduced tax rate in the calculation of future income taxes in 2008.

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.

The Trust's net future income tax balances are comprised of the following:



2008 2007
-----------------------------
Future income tax assets:
Difference in tax and book value of Trust's
assets $ 3,013,388 $ 2,215,677
Asset retirement obligation 336,253 284,661
Unit issuance costs 121,536 123,624
Operating losses of a subsidiary 355,279 315,129
-----------------------------
3,826,456 2,939,091
Future income tax liabilities:
Difference in tax and book value of
subsidiary and joint venture assets (537,368) (128,907)
Valuation allowance (3,754,588) (2,810,184)
-----------------------------
$ (465,500) $ -
-----------------------------


The provision for future income taxes differs from the amount computed by
applying the combined federal and provincial tax rates to the loss before
taxes. The difference results from the following:

2008 2007
(Loss) before taxes $ (8,841,764) $ (644,799)
Combined federal and provincial income tax rate 29.5% 32.12%
-----------------------------
(2,608,320) (207,109)
Increase (decrease) in income taxes resulting
from:
Write off of Goodwill with no tax basis 2,111,434 -
Change in tax status with enactment of Bill
C-52 - (2,622,368)
Non-taxable portion of Trust's income (566,934) (168,841)
Non-deductible items and other (211,692) 100,933
Valuation allowance 944,404 2,810,184
-----------------------------
$ (331,108) $ (87,201)
-----------------------------
-----------------------------


The Trust has non-capital loss carry forwards from its subsidiary of
approximately $1,421,000. The expiration of the losses is as follows:

2013 111,000
2014 229,000
2025 168,000
2026 178,000
2027 297,000
2028 438,000
-------------
$ 1,421,000
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Funds from operations

Funds from operations, defined as cash flow from operations before changes in non-cash working capital, were $3.7 million for 2008 compared to $4.5 million for 2007 a decline of 17 percent due to restructuring costs of $1.2 million incurred in 2008. For the fourth quarter of 2008, funds from operations were $0.3 million, a decrease of $0.5 million from the same quarter in 2007, reflecting lower operating margins due to lower oil prices and restructuring costs.

Distributions to Unitholders

Distributions declared to unitholders for the year were $4.4 million (2007 - $4.5 million). Actual cash distributions paid were $4.7 million for 2008, compared to $4.2 million for 2007, excluding non-cash distributions to participants in the DRIP. Distributions paid to unitholders for the quarter were $0.5 million (2007 - $1.3 million).

In light of the current economic environment, the Trust suspended distributions in December 2008 to allow Deepwell to conserve cash, reduce its debt levels and position the Trust to capitalize on future growth opportunities as the economy improves. The suspension of distributions included the distribution that would have been declared to unitholders of record on December 31, 2008.

Investing activities

Cash used in investing activities during the year was $9.9 million compared to $9.0 million in 2007. The increase was primarily related to the purchase of Palko for $3.9 million after post-closing adjustments, as well as the purchase of property, plant and equipment and the completion of the Claresholm facility.

Capital expenditures

The Trust's capital expenditures for purchase of property, plant and equipment for the year were $4.9 million compared to $11.2 million in 2007, as most of the capital expenditures relating to the Claresholm facility were incurred in 2007. In addition to completing the Claresholm facility, other capital expenditures included additions or improvements to disposal wells, tanks, service equipment, site improvements, buildings and administrative assets totalling $1.8 million (2007 - $3.2 million)

Financial security deposits

Deepwell has issued letters of guarantee in the amount of $2.3 million (2007 - $2.1 million) to the EUB as security for abandonment and reclamation of oilfield waste management facilities.

Unitholders' equity

The Trust is authorized to issue an unlimited number of Trust units which carry the right to vote. Trust units are redeemable at any time at the option of the unitholder. The redemption price is equal to the lesser of 90 percent 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. As at March 31, 2009 there were 7,200,198 Trust units issued and outstanding.

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 by the Trust.

On April 10, 2007, the Trust established a distribution reinvestment plan (the "DRIP"). 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. 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.



----------------------------------------------------------------------------
For the year ended December 31, 2008 2007
Number Amount Number Amount
----------------------------------------------------------------------------
$ $
Balance, beginning of year 7,163,200 56,229,626 4,356,000 40,490,377
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 36,998 156,945 44,323 264,184
Trust unit issue costs - - - (1,129,826)
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$ $
Balance, end of year 7,200,198 56,386,571 7,163,200 56,229,626
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Trust unit option plan

As at December 31, 2008, a total of 206,004 options were outstanding (2007 - 506,971), pursuant to the Trust's incentive unit option plan ("Option Plan"). 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 percent of the amount of distributions paid on outstanding Trust units.

The fair value of unit options granted to employees and directors on or after August 22, 2006 is recognized as a compensation cost. During 2008, the Trust granted 29,000 options (2007 - 208,971). The fair value of options issued in the year was estimated using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 4.21 percent (2007 - 4.21 percent), volatility of 48 percent (2007 - 45 percent) and weighted average expected life of 4.27 years (2007 - 4.64). 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.

The Trust recognized $0.2 million (2007 - $0.8 million) of stock based compensation related to options that have been granted this year.



-----------------------------------------
-----------------------------------------
December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise Number of exercise
options price options price
-----------------------------------------
Balance, beginning of year 506,971 $ 7.00 303,500 $ 8.81
Granted 29,000 4.15 208,971 6.12
Expired/Cancelled (329,967) 6.87 (5,500) 9.27
Exercised - - - -
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Balance, end of year 206,004 $ 6.83 506,971 7.70
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As such, the opening weighted average exercise prices has been adjusted by $0.67 (2007 - $0.82) to reflect the decrease in exercise price for distribution over the year.

Liquidity

As at December 31, 2008, the Trust had a working capital deficit of $15.5 million (2007 - $2.4 million) and an accumulated deficit of $20.4 million (2007 - $7.5 million). Should the Trust be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due. The Trust's ability to continue as a going concern is dependent upon its ability to attain and maintain profitable operations and to continue to obtain financing from investors and its creditor sufficient to meet current and future obligations.

Cash provided by financing activities for the year was $8.2 million (2007 - $5.2 million) as a result of net borrowings on the long-term facility of $13.1 million offset by cash distributions paid in the amount of $4.7 million in 2008. In 2007, cash provided by financing activities of $5.2 million consisted of net proceeds from an issue of trust units of $15.5 million offset by repayments of long-term debt of $6.7 million and distributions of $4.2 million.

Credit facilities

The Trust renewed its existing credit facilities on September 19, 2008 with a Canadian chartered bank (the "credit facilities"). The facilities consisted of the following:

Extendible revolving operating loan

As at December 31, 2008, the Trust had a 364 day extendible revolving operating loan committed to May 28, 2009, bearing interest at the lender's prime rate plus 0.125 percent to 1.625 percent, based on the funded debt to earnings before interest, income taxes, depreciation and amortization ("EBITDA") ratio, with any unused amounts subject to standby fees. Drawings under this facility are repayable at May 28, 2009 unless extended by the bank. At December 31, 2008 the borrowing base for the demand loan was $1.5 million (2007 - $1.2 million). Due to the covenant breach at year end, no further drawings are available under this facility.

Extendible revolving term loan

As at December 31, 2008, the Trust had a three year extendible revolving term loan committed to May 28, 2009. If the loan is not extended by the bank for an additional 364 day period, monthly payments of $496,431 are required to be made on a non-revolving basis to May 28, 2012, The facility has a $5,000,000 sublimit for the issue of letters of guarantee/credit and bears interest at the lender's prime rate plus 0.125 percent to 1.625 percent, based on the funded debt to EBITDA ratio, with any unused amounts subject to standby fees. At the option of the Trust, this facility may be utilized by way of banker's acceptances up to 50 percent of the authorized credit available with interest calculated at lender's prime rate plus 1.125 percent to 2.4 percent based on the funded debt to EBITDA ratio. Due to the covenant breach at year end, no further drawings are available under this facility.

As at December 31, 2008, the Trust has breached the financial covenant which requires a minimum consolidated equity position, excluding the equity invested in Palko, of $35,000,000. This breach was reported to the bank and negotiations have commenced in conjunction with the May 2009 refinancing. As no waiver has been obtained from the creditor and a further breach of covenants is possible prior to the finalization of the refinancing, the long term debt has been reclassified to current liabilities.

Capital Resources

The Trust has no commitments for capital expenditures as at December 31, 2008. The Trust will be re-completing its disposal well at Grande Cache early in 2009.

Off-Balance Sheet Arrangements

The Trust has no off-balance sheet arrangements as at December 31, 2008.

Contractual obligations, commitments and contingencies



The following table shows future contractual obligations by period:

Payments by period Total 2009-2010 2011-2012
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Total contractual obligations $ 413,232 $ 321,528 $ 91,704
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Quarterly information

-------------------------------------------------
2008
-------------------------------------------------
Q4 Q3 Q2 Q1
-------------------------------------------------
Revenue $3,925,309 $ 4,861,607 $4,738,690 $5,127,690
Operating expenses 2,318,004 2,856,716 2,852,930 2,727,653
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Operating Margin 1,607,305 2,004,891 1,885,760 2,400,037
General and administrative 721,903 746,382 597,415 477,714
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EBITDA 885,402 1,258,509 1,288,345 1,922,323
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Net income (loss) $ (996,074) $(7,915,951) $ (271,385) $ 672,753
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Net income (loss) per
Trust unit:
Basic ($0.14) ($1.10) ($0.04) $0.09
Diluted ($0.14) ($1.10) ($0.04) $0.09
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Weighted average number of
Trust units outstanding
Basic 7,196,858 7,188,578 7,180,086 7,173,770
Diluted 7,196,858 7,193,174 7,184,666 7,173,770
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-------------------------------------------------
2007
-------------------------------------------------
Q4 Q3 Q2 Q1
-------------------------------------------------
Revenue $3,650,736 $3,513,654 $ 2,532,151 $ 4,427,510
Operating expenses 1,941,216 1,584,125 1,190,438 1,919,222
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Operating Margin 1,709,520 1,929,529 1,341,713 2,508,288
General and administrative 842,448 520,071 559,150 596,544
----------------------------------------------------------------------------
EBITDA 867,072 1,409,458 782,563 1,911,744
----------------------------------------------------------------------------
Net income (loss) $ (245,156) $ 215,614 $ (657,354) $ 129,298
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----------------------------------------------------------------------------
Net income (loss) per
Trust unit:
Basic $(0.03) $0.03 $(0.15) $0.03
Diluted $(0.03) $0.03 $(0.15) $0.03
----------------------------------------------------------------------------
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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
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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

The Trust's financial instruments include cash, accounts receivable, bank indebtedness, accounts payable and accrued liabilities, and debt. The carrying values of these financial instruments approximate their fair values due to their relatively short periods to maturity.

The Trust's risk management policies are established to identify and analyze the risks faced by the Trust, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Trust's activities. The Trust has exposure to credit risk, liquidity risk and market risk as a result of its use of financial instruments.

The Board of Directors has overall responsibility for the establishment and oversight of the Trust's risk management framework. The Board has implemented and monitors compliance with risk management policies.

Credit risk

Credit risk is the risk of financial loss to the Trust if a customer or counterparty to a financial instrument fails to meet its contractual obligations. A substantial portion of the Trust's accounts receivable is due from an oil marketer and is subject to normal industry credit risks. The purchaser of the Trust's oil is subject to credit review to minimize the risk of non-payment. As at December 31, 2008, the maximum credit exposure is the carrying amount of the accounts receivable and accruals of $2,919,425 (December 31, 2007 - $2,746,918).

The Trust's policy to mitigate credit risk associated with these balances is to establish relationships with large purchasers. The Trust historically has not experienced any significant collection issues with its marketers. The majority of the remaining receivable balances have been reviewed for collectability. The Trust provided an allowance of $38,324 for doubtful accounts during the year ended December 31, 2008. The Trust would only choose to write-off a receivable balance (as opposed to providing an allowance) after all reasonable avenues of collection had been exhausted.

Liquidity risk

Liquidity risk is the risk that the Trust will incur difficulties meeting its financial obligations as they are due. The Trust's approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and distressed conditions without incurring unacceptable losses or risking harm to the Trust's reputation.

As the Trust pursues additional opportunities, annual capital expenditure budgets will be prepared, regularly monitored and updated as considered necessary. The Trust monitors its cash flow monthly. The Trust's financial liabilities are comprised of accounts payable and accrued liabilities, operating loan, and long term debt. Accounts payable and accrued liabilities have an expected maturity of less than one year. As at December 31, 2008, the Trust has a working capital deficit of $15,560,039.

Market risk

Market risk consists of currency risk, commodity price risk and interest rate risk. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing returns. The Trust may use both financial derivatives and physical delivery sales contracts to manage market risks. All such transactions are conducted in accordance with a risk management policy as set out herein:

i) Currency risk

Foreign currency exchange rate risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in foreign exchange rates. All of the Trust's oil sales are denominated in Canadian dollars; however, the underlying market prices in Canada for petroleum are impacted by changes in the exchange rate between the Canadian and United States dollar. The Trust has not entered into any forward exchange rate contracts as at December 31, 2008.

ii) Commodity price risk

Commodity price risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas are impacted by world economic events that dictate the levels of supply and demand as well as the relationship between the Canadian and United States dollar, as outlined above. The Trust has not entered into any commodity contracts as at December 31, 2008.

iii) Interest rate risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Trust is exposed to interest rate fluctuations on its operating loan and long term debt for which the interest rate fluctuates based on the prime rate of interest. For the year ended December 31, 2008, if interest rates had been 1% higher with all other variables held constant, earnings for the period would have been $200,000 lower due to higher interest expense. An equal and opposite impact would have occurred had interest rates been lower by the same amounts. The Trust had no interest rate swap or financial contracts in place at December 31, 2008.

Outlook

For Deepwell, like most other companies, the last quarter of 2008 ended with many industry indicators turning negative. The overall economy was in decline, credit and equity markets were in turmoil, oil prices had declined significantly and drilling and completions activities were lower than they had been in both the previous quarter and from the previous year and the Alberta government announced its intention to implement a new royalty framework on January 1, 2009, under which it would take a larger royalty share of oil and natural gas revenues.

The Petroleum Services Association of Canada is predicting that only 13,500 wells will be drilled in Canada in 2009; a 21 percent decline from 2008 and a 46 percent decline from the peak drilling year of 2005. Canadian oil prices as measured by light oil postings in Edmonton declined from their peak level during 2008 of $151.43 per barrel to CDN$40.17 by December 31, 2008.

Even before the Alberta government's new royalty framework became effective on January 1, 2009, the movement of capital and infrastructure out of Alberta was starting to become evident in the provinces of British Columbia and Saskatchewan who have been experiencing larger than historical increases in drilling activity than Alberta. While British Columbia and Saskatchewan saw their drilling activities increase by 16.2 percent and 12.5 percent respectively in 2008 from 2007 levels, Alberta's drilling increased by only 4.7 percent. The Petroleum Services Association of Canada projects that Alberta will fall further behind these provinces in 2009 predicting its drilling activity will decline by 27 percent compared to Saskatchewan's 5 percent decline and British Columbia's 7 percent increase.

However, there have been a number of more promising developments recently that provides Deepwell with cautious optimism for 2009.

In November 2008, the Alberta government introduced incentives to encourage the drilling of wells between 1,000 and 3,500 meters below the surface. This new program has been designed, at least in part, to mitigate the impact of the new royalty framework introduced on January 1, 2009. In March 2009, the Alberta government announced additional incentives, including a drilling royalty credit of $200 per metre for conventional oil and natural gas wells, a reduced royalty rate for the first year of production on newly drilled wells and a $30 million fund for reclaiming abandoned oil and gas wells.

Since December 31, 2008, light oil prices at Edmonton have recovered by approximately 40 percent. As of March 29, 2009 the average price was $66.77 CND (Canadian par pricing at Edmonton) per barrel. The December 2009 futures price on the Nymex exchange at March 31, 2009 was US$57.51 per barrel and when adjusted for the then current foreign exchange rate of $0.7976 US per $1 Canadian, this price is equivalent to $72.10 Canadian per barrel.

Deepwell re-completed its disposal well at its Grande Cache facility early in 2009. The well, post-re-completion, is currently operating at a rate approximately 50 percent higher than it did on average through 2008. The additional injection capacity is being well received by customers in the area and the overall facility volumes began to increase immediately.

During 2009, Deepwell will focus on restructuring its credit facilities, improving the efficiency of its existing facilities as well as assisting Palko in the pursuit of growth initiatives it has identified.

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, valuation of accounts receivable, unit-based compensation and recoverability of goodwill and intangibles. Actual results may 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.

In light of the current financial instability, Deepwell has reviewed the method used and calculations of critical accounting estimates and in particular the impairment and obsolescence of its fixed assets, intangible assets and goodwill and the rates at which Deepwell depreciates fixed assets. Management believes the critical accounting estimates are reasonable under the current circumstances, including the impairment of goodwill as recorded in the third quarter of 2008 and the increased depreciation rates effective in the fourth quarter of 2008. Management has also assessed the valuation of the Trust's accounts receivable utilizing a variety of approaches including collection history, subsequent receipts and financial stability of the customer and believes its allowance is reasonable.

Risks and uncertainties

Capital Markets

As a result of the weakened global economic situation, Deepwell, along with all participants in the oil and gas service industries, is experiencing restricted access to capital and increased borrowing costs. The lending capacity of all financial institutions has diminished and risk premiums have increased independent of Deepwell's business and asset base. As future capital expenditures will be financed out of cash generated from operations, borrowings and possible future equity sales, Deepwell's ability to do so is dependent on, among other factors, the overall state of capital markets and investor demand for investments in the service industry and the Trust's securities in particular.

To the extent that external sources of capital become limited or unavailable or available on onerous terms, Deepwell's ability to make capital investments and maintain existing assets may be impaired, and its assets, liabilities, business, financial condition and results of operations may be materially and adversely affected as a result.

Current Global Financial Conditions

Current global financial conditions have been subject to increased volatility and numerous financial institutions have either gone into bankruptcy or have had to be rescued by government authorities. Access to public financing has been negatively impacted by both sub-prime mortgages and the liquidity crisis affecting the asset-backed commercially paper market. These factors may impact the ability of Deepwell to obtain equity or debt financing in the future and, if obtained, on favourable terms. If these increased levels of volatility and market turmoil continue, Deepwell's operations could be adversely impacted and the trading price of the Trust's Units could be adversely affected.

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.

The current financial instability has increased the uncertainty in the oil and natural gas industry, and the uncertainty in the oil and natural gas service industry in which Deepwell operates. In Alberta, the Trust operates in mature areas of oil and natural gas development and most of its services are for producing wells. In Saskatchewan, Palko is located in a developing area of oil and natural gas production that relies more on the water production from existing wells and development of new wells.

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.

The large fluctuations in oil and natural gas prices which have occurred during this financial crisis have resulted in fluctuations in Deepwell's revenues. Future changes in oil and natural gas prices could result in increases or decreases in total revenues and volumes processed through the Trust's facilities. Prolonged financial instability could result in oil and natural gas projects being deferred or cancelled limiting new revenue streams to service providers such as Deepwell 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 Trust's ability to attract and retain key officers and operational personnel.

Reliance on major customers

It is estimated that the top 10 customers of Deepwell accounted for approximately 43 percent of revenue for the year, the largest customer accounting for approximately 18 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. Deepwell continues to maintain a philosophy to attract and retain customers by offering superior and personal customer service.

Competition

Deepwell faces competition from a variety of competitors, many with 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. Deepwell monitors the competition changes and focuses on customer service to mitigate increased competition.

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 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 continue to be actively involved in the establishing policies and monitoring operations of Deepwell for quality control and safety. However, there are no assurances that Deepwell'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. To mitigate this risk, Deepwell employs a regulatory agent to monitor and plan strategies to address the changing regulatory environment.

The Canadian Federal Government has announced its intention to regulate greenhouse gases ("GHG") and other air pollutants. The Government is currently developing a framework that outlines its clean air and climate change action plan. As this federal program is under development, Deepwell LP is unable to predict the total impact of the potential regulations upon its business. It is possible that Deepwell LP's customers could face increases in operating costs in order to comply with GHG emissions legislation which could affect Deepwell's operations by reducing demand for its services.

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. Deepwell monitors collections closely in order to mitigate this risk.

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.

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, would permit acceleration of the relevant indebtedness. Since Deepwell is in default of its credit facility covenants as at reporting date, 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. Although Deepwell is actively negotiating with its lender, there is no assurance that Deepwell will be able to refinance any or all of the credit facilities 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. In order to preserve cash, the Trust has suspended distributions indefinitely and will continue to monitor the distribution situation.

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

During the year, the Trust made payments of $0.3 million for legal expenses to a partnership that employs one of Deepwell's board members.

Accounting changes and pronouncements

On January 1, 2008, the Trust adopted the new or revised Canadian accounting standards for inventory, capital disclosures, and financial instruments. Prior periods have not been restated. The adoption of these changes had no impact on the Trust's opening retained earnings.

Inventory

Section 3031 Inventories provides guidance on the measurement and disclosure of inventories. This section indicates that inventories should be measured at the lower of cost and net realizable value and provides guidance on the determination of cost. The cost of inventories shall be determined using the first-in, first-out or weighted average cost formula. The same cost formula must be used for all inventories having a similar nature and use to the entity.

Capital disclosures

Section 1535 Capital Disclosures specifies the disclosure of (i) an entity's objectives, policies, and processes for managing capital, (ii) quantitative data about what the entity regards as capital, (iii) whether the entity has complied with any capital requirements, and (iv) if it has not complied, the consequences of such non-compliance.

Financial instruments - presentation and disclosure

Section 3862 Financial Instruments - Disclosure and Section 3863 Financial Instruments - Presentation replace Section 3861 Financial Instruments - Disclosure and Presentation. The new standards revise and enhance disclosure requirements and place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks. Presentation requirements remain unchanged.

Financial instruments - reclassification of financial assets

In October 2008, the Accounting Standards Board of Canada ("AcSB") issued amendments to its standards dealing with reclassification of financial assets in response to similar amendments made by the International Accounting Standards Board ("IASB") in the context of the current financial market turmoil.

The amendments allow reclassification of financial assets out of the held-for-trading category (measured at fair value with gains and losses recognized immediately in net income) into the available-for-sale or held-to-maturity categories, in "rare circumstances." The latter two categories are subject to impairment testing, but income statement charges for impairment are recognized when impairment is considered "other than temporary." The financial assets that can be reclassified exclude derivatives and financial assets an entity has elected to include in the held-for-trading category. Assets qualifying for reclassification are mainly debt and equity investments that were originally classified as held for trading because they were acquired for the purpose of near-term sale.

The amendments are accompanied by extensive disclosure requirements to provide clear information to financial statement users and apply to reclassifications made on or after July 1, 2008. An entity is precluded from reclassifying a financial asset in accordance with the amendments before July 1, 2008. Any reclassification made on or after November 1, 2008 takes effect from the date of reclassification.

However, any reclassification before November 1, 2008 can take effect from July 1, 2008 or a subsequent date. Any reclassification of a financial asset in accordance with the amendments must not be applied retrospectively to reporting periods ended before July 1, 2008. An entity does not reclassify financial assets retrospectively in periods reported on in previously issued financial statements. The Trust did not reclassify any financial assets during 2008.

Future Accounting Standards

International financial reporting standards (IFRS)

In 2005, the AcSB announced that accounting standards in Canada are to converge with IFRS. The AcSB has indicated that Canadian entities will need to begin reporting under IFRS by the first quarter of 2011 with appropriate comparative data from the prior year. Under IFRS, the primary audience is capital markets and as a result, there is significantly more disclosure required, specifically for quarterly reporting. Further, while IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy which must be addressed. The Trust is currently developing a plan for adoption of IFRS.

Goodwill and intangible assets

In January 2008, Section 3064 Goodwill and Intangible Assets was issued to replace Section 3062 Goodwill and Other Intangible Assets and Section 3450 Research and Development Costs. In addition, Section 1000 Financial Statement Concepts and Accounting Guideline AcG 11 Enterprises in the Development Stage were amended. The new and amended material clarifies that costs may only be deferred when they relate to an item that meets the definition of an asset. The practice of matching revenues and expenses remains appropriate only for allocating the cost of an asset that is consumed in generating revenue over multiple reporting periods. Section 3064 provides extensive guidance on when expenditures qualify for recognition as intangible assets, aligns Canadian GAAP with IFRS and will be effective on January 1, 2009.

Business combinations and non-controlling interests

In January 2009, the AcSB issued Section 1582 Business Combinations, Section 1601 Consolidations and Section 1602 Non-controlling Interests. Section 1582 replaces Section 1581 Business Combinations and provides the Canadian equivalent to IFRS 3 Business Combinations. Section 1601 and Section 1602 replace Section 1600 Consolidated Financial Statements. Section 1602 provides the Canadian equivalent to International Accounting Standard ("IAS") 27 Consolidated and Separate Financial Statements, for non-controlling interests. These standards are effective January 1, 2011.

Disclosure and internal controls

NI 52-109 is focused on 1) disclosure controls and procedures 2) internal control over financial reporting.

Under the supervision and with the participation of the Trust's management, including the CEO and CFO, the Trust engaged third party consultants to perform an evaluation of the effectiveness of the design and operation of the Trust's disclosure controls and procedures as defined in National Instrument 52-109. The consultants assisted with the design, documentation, and testing of internal control systems, proposed improvements, and interim measures and provide general assistance in performing its evaluation. Based on that evaluation, the Trust's management, including the CEO and CFO, have concluded that the Trust's disclosure controls and procedures were designed to provide a reasonable level of assurance over disclosure of material information, and are sufficiently designed to provide reasonable assurance regarding the reliability of financial reporting and the presentation of financial statements for external purposes in accordance with GAAP, and are effective as of December 31, 2008.

The assessment for 2008 did not include Deepwell's newly acquired joint venture, Palko, which will be included in the 2009 assessment.

During the design and operating effectiveness assessment certain material weaknesses in internal controls over financial reporting were identified, as follows:

- Management is aware that there is a lack of segregation of duties due to the small number of employees dealing with general administrative and financial matters. However, management believes that at this time the potential benefits of adding employees to clearly segregate duties do not justify the costs associated with such increase; and

- Inherent in requiring a small number of employees dealing with general administrative and financial matters, there is inadequate review and approval of complex accounting transactions. Management plans to engage a third party firm to review such transactions on an ongoing basis.

The Trust believes that the weaknesses identified in its systems of internal control are mitigated through review of the Trust's financial statements by senior management, the audit committee of the board of directors, and by consulting with external experts. In addition, senior management is active in the Trust's day-to-day operations and in monitoring the Trust's financial reporting.


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, 2008 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.

ADDITIONAL INFORMATION

Additional information relating to the Trust, including the Trust's Annual Information Form, may be found under the Trust's profile on SEDAR at www.sedar.com.

CONSOLIDATED FINANCIAL STATEMENTS OF

DEEPWELL ENERGY SERVICES TRUST

December 31, 2008

Management's Report

To the Unitholders of Deepwell Energy Services Trust

The audited consolidated balance sheets of Deepwell Energy Services Trust as at December 31, 2008 and 2007 and the consolidated statements of operations, comprehensive loss and accumulated deficit, and cashflows for the years ended December 31, 2008 and 2007 have been prepared by management. It is management's responsibility to ensure that sound judgment, appropriate accounting principles and methods, and reasonable estimates have been used in the preparation of this information. Management also ensures that all information presented is consistent.

Management is also responsible for developing internal controls over the financial reporting process. Management believes the system of internal controls, review procedures and established policies provide reasonable assurance as to the reliability and relevance of the financial reports. Management also believes that the Trust's operations are conducted in conformity with the law and with a high standard of business conduct.

The Board of Trustees is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. The Board carries out this responsibility principally through the Audit Committee of the administrator. The Committee, which consists of non-management members, reviews the financial statements and annual report, and recommends them to the Board for approval. The Committee meets with management and external auditors to discuss internal controls, auditing matters, and financial reporting issues. External auditors have full and unrestricted access to the Audit Committee. The Committee also recommends a firm of external auditors to be appointed by the Unitholders.

Jay B. Simmons, President and CEO

Deepwell Energy Services Trust

Calgary, Alberta

March 31, 2009

Auditors' Report

To the Unitholders of Deepwell Energy Services Trust:

We have audited the consolidated balance sheets of Deepwell Energy Services Trust as at December 31, 2008 and 2007 and the consolidated statement of operations, comprehensive loss and deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly in all material respects, the financial position of the Trust as at December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

Grant Thornton LLP

Chartered Accountants

Calgary, Canada

March 30, 2009



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----------------------------------------------------------------------------
Deepwell Energy Services Trust
Consolidated Balance Sheets
As at December 31
----------------------------------------------------------------------------
----------------------------------------------------------------------------

2008 2007
-----------------------------------
Assets
Current assets:
Cash $ 746,078 $ -
Accounts receivable 2,919,425 2,746,918
Inventory 207,477 219,991
Prepaid expenses and deposits 384,645 214,920
-----------------------------------
4,257,625 3,181,829

Property, plant and equipment (Note 5) 49,847,709 46,982,025
Intangible assets (Note 6) 2,583,924 2,925,102
Goodwill (Note 7) 2,030,676 7,157,402
-----------------------------------
$ 58,719,934 $ 60,246,358
-----------------------------------
-----------------------------------

Liabilities
Current liabilities:
Bank indebtedness $ 343,417 $ 40,537
Accounts payable and accrued liabilities 1,527,023 3,631,316
Operating loan (Note 8) 50,000 550,000
Taxes payable 25,694 -
Current portion of long-term debt (Note 8) 3,475,020 933,333
Reclassified long-term debt (Note 8) 14,396,510 -
Distributions payable - 429,792
-----------------------------------
19,817,664 5,584,978

Long-term debt (Note 8) - 3,866,667
Future income taxes (Note 9) 465,500 -
Asset retirement obligations (Note 10) 1,205,123 1,016,449
-----------------------------------
21,488,287 10,468,094
-----------------------------------
Unitholders' Equity
Trust units (Note 11) 56,386,571 56,229,626
Contributed surplus (Note 11) 1,253,452 1,066,549
Deficit (20,408,376) (7,517,911)
-----------------------------------
37,231,647 49,778,264
-----------------------------------
$ 58,719,934 $ 60,246,358
-----------------------------------
-----------------------------------

Basis of presentation (Note 1),
Commitments (Note 16)
On behalf of the Board of Trustees:

(signed) "Jay B. Simmons" (signed) "Murray W. Montgomery"

---------------------------- --------------------------------
Jay B. Simmons, Trustee Murray W. Montgomery, Trustee

See accompanying notes to the consolidated financial statements


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----------------------------------------------------------------------------
Deepwell Energy Services Trust
Consolidated Statements of Operations,
Comprehensive Loss & Deficit
For the years ended December 31
----------------------------------------------------------------------------
----------------------------------------------------------------------------

2008 2007
-----------------------------------
Revenue $ 18,653,296 $ 14,124,051
Operating expenses 10,755,303 6,635,001
-----------------------------------
Operating margin 7,897,993 7,489,050
-----------------------------------

Expenses
General and administrative 2,543,414 2,518,213
Restructuring costs (Note 12) 1,202,981 -
Unit-based compensation (Note 11) 186,903 815,117
Interest and financing costs 730,966 704,534
Depreciation and accretion 4,567,429 3,246,002
Amortization of intangible assets (Note 6) 341,178 328,935
Loss (gain) on sale of property and
equipment 9,484 (8,773)
Impairment of goodwill (Note 7) 7,157,402 -
Fire-related expenses - 529,821
-----------------------------------
16,739,757 8,133,849
-----------------------------------

Loss before income taxes (8,841,764) (644,799)

Income tax reduction (Note 9)
Current 300,108 -
Future 31,000 87,201
-----------------------------------
331,108 87,201
-----------------------------------

Net loss and comprehensive loss for the
year (8,510,656) (557,598)

Deficit, beginning of year (7,517,911) (2,507,364)
Distributions to unitholders (Note 11) (4,379,809) (4,452,949)
-----------------------------------

Deficit, end of year $ (20,408,376) $ (7,517,911)
-----------------------------------
-----------------------------------

Net loss per Trust unit, basic and
diluted:
Basic $ (1.18) $ (0.10)
Diluted $ (1.18) $ (0.10)
Weighted average number of Trust units
(Note 11)
Basic 7,181,459 5,569,288
Diluted 7,182,621 5,570,403

See accompanying notes to the consolidated financial statements


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Deepwell Energy Services Trust
Consolidated Statements of Cash Flows
For the years ended December 31
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2008 2007
-----------------------------------
Operating activities
Net loss $ (8,510,656) $ (557,598)
Non-cash items
Depreciation and accretion 4,567,429 3,246,002
Amortization of intangible assets 341,178 328,935
Impairment of goodwill (Note 7) 7,157,402 -
Future income tax reduction (Note 9) (31,000) (87,201)
Unit-based compensation (Note 11) 186,903 815,117
Loss (gain) on sale of property and
equipment 9,484 (8,773)
Loss on write-off of property and
equipment - 746,332
-----------------------------------
3,720,740 4,482,814
Change in non-cash working capital
(Note 13) (1,253,519) (685,719)
-----------------------------------
Cash provided by operating activities 2,467,221 3,797,095
-----------------------------------

Investing activities
Financial security deposits - 1,433,474
Business acquisition (Note 4) (3,978,265) -
Expenditures on property, plant and
equipment (4,910,433) (11,199,255)
Proceeds on sale of property, plant and
equipment 28,813 101,980
Change in non-cash working capital
(Note 13) (1,083,012) 648,521
-----------------------------------
Cash used in investing activities (9,942,897) (9,015,280)
-----------------------------------

Financing activities
Issue of Trust units (net of costs) - 15,475,066
Increase in bank indebtedness 302,880 40,537
Advances (repayments) of long-term debt
(Note 8) 13,071,530 (6,700,000)
(Repayment) advances of operating loan (500,000) 550,000
Distribution payments (4,652,656) (4,176,279)
-----------------------------------
Cash flow from financing activities 8,221,754 5,189,324
-----------------------------------

Increase (decrease) in cash 746,078 (28,861)
Cash, beginning of year - 28,861
-----------------------------------
Cash, end of year $ 746,078 $ -
-----------------------------------
-----------------------------------

Supplementary information
Cash interest paid $ 721,304 $ 590,491
Cash taxes paid $ 75,000 $ -

See accompanying notes to the consolidated financial statements


Deepwell Energy Services Trust
Notes to Consolidated Financial Statements
For the year ended December 31, 2008


1. Nature of the organization and basis of presentation

Deepwell Energy Services Trust (the "Trust" or "Deepwell") is an open-ended unincorporated investment Trust governed by the laws of the Province of Alberta and created pursuant to a Declaration of Trust dated April 21, 2006. Deepwell provides water disposal and oilfield waste management services, including treating, processing and disposing of oilfield wastes and custom treating of oil/water emulsions.

These consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the payment of liabilities in the ordinary course of business. As at December 31, 2008, the Trust had a working capital deficit of $15,560,039 (2007 - $2,403,149) and an accumulated deficit of $20,408,376 (2007 - $7,517,911). This deficit is due to significant capital expenditures and accumulated operating losses which are not expected to be recurring. Of the working capital deficit at December 31, 2008, $14,396,510 is related to long term debt that has been reclassified to current due to a covenant violation (Note 8b). The Trust is considering various alternatives to remedy any future shortfall in capital. The Trust may deem it necessary to raise capital through equity markets, debt markets or other financing arrangements. There is no assurance this capital will be available.

The ability of the Trust to continue as a going concern will depend on achieving and maintaining profitable operations and may also depend on raising additional financing sufficient to meet all obligations. Although in the opinion of Management, the use of the going concern assumption is appropriate, there can be no assurance that any steps Management is taking will be successful. These consolidated financial statements do not reflect adjustments in the carrying values of the assets and liabilities, expenses and the balance sheet classifications that would be used if the going concern assumption were not appropriate (Note 8). Such adjustments could be material.

These consolidated financial statements include the accounts of the Trust, it's wholly owned subsidiary Deepwell Energy Services LP ("Deepwell LP"), Deepwell LP's subsidiaries Deepwell Energy Services Commercial Trust and Deepwell Energy Services Ltd. and its joint interest investment in Palko Energy Ltd. ("Palko") after the elimination of intercompany transactions and balances.

2. Significant accounting policies

These consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles in Canada. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes including the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. These 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 significant accounting policies summarized below:

a) Cash

Cash includes cash on hand and bank balances (overdrafts).

b) Prepaids

Prepaid expenses consist of deposits and prepaid annual fees which are amortized over the term of the related payment.

c) Inventory

Inventory consists of drilling fluids, oilfield supplies and crude oil, all of which are valued at the lower of cost and net realizable value. Cost includes all costs of purchase, processing costs, and other costs incurred in bringing the inventories to their present location and condition. Cost is determined on a weighted average basis.

d) Property, plant and equipment

Property, plant and equipment are initially recorded at cost. Depreciation is provided using methods and rates intended to depreciate the cost of equipment over the estimated useful lives. Depreciation is provided at the following rates:



Assets Method Rate
----------------------------------------------------------------------------
Plant and equipment Declining balance 10 - 30%
Disposal wells Unit of production cubic metres used of the
remaining capacity
Administrative Declining balance 20 - 30%
Leasehold improvements Straight-line 5 years


Plant and equipment includes buildings, site improvements, pipelines, tanks and mobile equipment.

e) Long lived assets

Long lived assets consist of property, plant, and equipment and are measured and depreciated as described in the applicable accounting policy. Management assesses the carrying value of long lived assets for impairment at least annually or 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 there is an indication of impairment, 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.

f) 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 is assessed annually or whenever an event or changes in circumstances indicate their carrying value may not be recoverable. Amortization is provided at the following annual rates:



Assets Method Rate
----------------------------------------------------------------------------
Completions and contracts Straight line 5%
Non competition agreements Straight line 33%
Customer relationships Straight line 17%


g) Goodwill

Goodwill is recognized when the total purchase price of a business acquisition exceeds the fair value of the net identifiable assets and liabilities of the acquired business. The goodwill balance is assessed for impairment annually or when an event or circumstance occurs that more likely than not reduces the fair value of a reporting unit below its carrying amount. To assess impairment, the fair value of a reporting unit is compared to its carrying value including goodwill. When the carrying value of the reporting unit exceeds its fair value, the fair value of the reporting unit's goodwill is compared with its carrying value to determine the amount of the impairment loss.

h) Asset retirement obligation

Asset retirement costs and liabilities associated with site restoration and abandonment of long-lived assets are initially measured at a fair value which approximates the cost a third party would incur in performing the tasks necessary to retire such assets. Such costs are capitalized as part of the cost of property and equipment and amortized to expense through depreciation over the life of the asset. The change in the liability due to the passage of time is measured by applying an interest method of allocation to the opening liability and is recognized as an increase in the carrying value of the liability and an expense. The expense is recorded as accretion expense in the statement of operations. A change in the liability resulting from revisions to either the timing or the amount of the original estimate of undiscounted cash flows is recognized as an increase or decrease in the carrying amount of the liability, with an offsetting increase or decrease in the carrying amount of the associated asset.

i) Financial instruments

All financial instruments, including all derivatives, are required to be recognized on the balance sheet initially at fair value. Subsequent measurement of all financial assets and liabilities except those held-for-trading and available for sale are measured at amortized cost determined using the effective interest rate method. Held-for-trading financial assets are measured at fair value with changes in fair value recognized in earnings. Available-for-sale financial assets are measured at fair value with changes in fair value recognized in comprehensive income and reclassified to earnings when derecognized or impaired.



The Trust has classified its financial assets and liabilities as follows:

Held-for-trading Loans and receivables Other liabilities
----------------------------------------------------------------------------
Cash Accounts receivable Accounts payable and accrued
liabilities
Operating loan & long term debt &
bank indebtedness


j) Comprehensive loss

Comprehensive loss is the change in shareholders' equity during a period from transactions and other events and circumstances from non-owner sources and includes unrealized gains and losses on financial assets classified as available-for-sale. The Trust has reported a statement of comprehensive loss combined with the statement of operations. When related amounts are recorded, a new category for accumulated other comprehensive income will be presented in the shareholders' equity section of the balance sheet.

k) 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 collectability is reasonably assured. Processing and disposal revenue are recorded at the time of completion of services. Oil sales are recorded at the time of delivery.

l) Future income tax

Income taxes in the Trust's corporate subsidiary have been accounted for under the asset and liability method of accounting for future taxes. Under this method, future income tax assets and liabilities are recorded based on temporary differences between the carrying amount of balance sheet items and their corresponding tax bases. In addition, the future benefits of income tax assets, including unused tax losses, are recognized, subject to a valuation allowance, to the extent that it is more likely than not that such future benefits will ultimately be realized. Future income tax assets and liabilities are measured using enacted tax rates and laws expected to apply when the tax liabilities or assets are to be either settled or realized.

m) Transaction costs

Transaction costs directly attributable to the acquisition or issue of financial instruments classified as other financial liabilities are expensed in the period incurred.

n) Unit based compensation

The Trust has established a unit option plan for Trustees, directors, officers, employees and consultants. Unit-based compensation expense is based on the estimated fair value of options granted at the time of the grant. The fair value is recognized as unit based compensation with a corresponding increase to contributed surplus over the vesting period of the options. Upon the exercise of the options, consideration paid together with the amount previously recognized in contributed surplus is recorded as an increase in Trust units. In the event that vested options expire, previously recognized compensation expense associated with such unit options is not reversed. In the event that unvested options are cancelled, previously recognized compensation expense associated with such stock options is reversed.

o) Proportionate consolidation

Deepwell accounts for its joint interest investment in Palko using the proportionate consolidation method whereby the Trust's proportionate share of assets, liabilities, revenues and expenses have been recorded in these financial statements from the closing date of the purchase on September 25, 2008. Use of the proportionate consolidation method is appropriate as Palko is jointly controlled by Deepwell through its 50% interest with other non-related parties hold the remaining 50% interest.

p) Income per unit

Basic net income per unit is computed by dividing net income by the weighted average number of units outstanding during the reporting period. Diluted net income per unit is calculated using the treasury stock method which assumes that any proceeds obtained on the exercise of options would be used to purchase units at the average price during the period. The effect of anti-dilutive options is not included in the calculation of diluted net income per unit.

q) Use of estimates

The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

In particular, significant estimates include those related to revenue recognition, the valuation of inventory, the realization of future income taxes, the valuation of goodwill and other intangible assets, unit based compensation, valuation of property and equipment, and asset retirement obligations. Accounts receivable are stated after evaluation as to their collectability and an appropriate allowance for doubtful accounts is provided where considered necessary. Amounts recorded for depreciation of property and equipment and asset retirement obligations are based on estimates of useful lives and future costs to abandon and reclaim wells and facilities. Amounts related to the fair value of unit options are based on estimates of unit price volatility, risk-free interest rate and expected lives of options.

By their nature, these estimates and related future cash flows are subject to measurement uncertainty, and the impact on the financial statements of future periods could be material. These assumptions are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.

3. Changes in accounting policies

On January 1, 2008, the Trust adopted the new or revised Canadian accounting standards for inventory, capital disclosures, and financial instruments. Prior periods have not been restated. The adoption of these changes had no impact on the Trust's opening retained earnings.

a) Inventories

Section 3031 Inventories provides guidance on the measurement and disclosure of inventories. This section indicates that inventories should be measured at the lower of cost and net realizable value and provides guidance on the determination of cost. The cost of inventories shall be determined using the first-in, first-out or weighted average cost formula. The same cost formula must be used for all inventories having a similar nature and use to the entity.

b) Capital disclosures

Section 1535 Capital Disclosures specifies the disclosure of (i) an entity's objectives, policies, and processes for managing capital, (ii) quantitative data about what the entity regards as capital, (iii) whether the entity has complied with any capital requirements, and (iv) if it has not complied, the consequences of such noncompliance.

c) Financial instruments - presentation and disclosure

Section 3862 Financial Instruments - Disclosure and Section 3863 Financial Instruments - Presentation replace Section 3861 Financial Instruments - Disclosure and Presentation. The new standards revise and enhance disclosure requirements and place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks. Presentation requirements remain unchanged.

d) Financial instruments - reclassification of financial assets

In October 2008, the Accounting Standards Board of Canada ("AcSB") issued amendments to its standards dealing with reclassification of financial assets in response to similar amendments made by the International Accounting Standards Board ("IASB") in the context of the current financial market turmoil. The amendments allow reclassification of financial assets out of the held-for-trading category (measured at fair value with gains and losses recognized immediately in net income) into the available-for-sale or held-to-maturity categories, in "rare circumstances." The latter two categories are subject to impairment testing, but income statement charges for impairment are recognized when impairment is considered "other than temporary." The financial assets that can be reclassified exclude derivatives and financial assets an entity has elected to include in the held-for-trading category. Assets qualifying for reclassification are mainly debt and equity investments that were originally classified as held for trading because they were acquired for the purpose of near-term sale. The amendments are accompanied by extensive disclosure requirements to provide clear information to financial statement users and apply to reclassifications made on or after July 1, 2008. An entity is precluded from reclassifying a financial asset in accordance with the amendments before July 1, 2008. Any reclassification made on or after November 1, 2008 takes effect from the date of reclassification.

However, any reclassification before November 1, 2008 can take effect from July 1, 2008 or a subsequent date. Any reclassification of a financial asset in accordance with the amendments must not be applied retrospectively to reporting periods ended before July 1, 2008. An entity does not reclassify financial assets retrospectively in periods reported on in previously issued financial statements. The Trust did not reclassify any financial assets during 2008.

e) Future accounting standards

International Financial Reporting Standards ("IFRS")

In 2005, the AcSB announced that accounting standards in Canada are to converge with IFRS. The AcSB has indicated that Canadian entities will need to begin reporting under IFRS by the first quarter of 2011 with appropriate comparative data from the prior year. Under IFRS, the primary audience is capital markets and as a result, there is significantly more disclosure required, specifically for quarterly reporting. Further, while IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy which must be addressed. The Trust is currently developing its IFRS conversion plan and is evaluating the effect of the new standard on its consolidated financial statements.

Goodwill and intangible assets

In January 2008, Section 3064 Goodwill and Intangible Assets was issued to replace Section 3062 Goodwill and Other Intangible Assets and Section 3450 Research and Development Costs. In addition, Section 1000 Financial Statement Concepts and Accounting Guideline AcG 11 Enterprises in the Development Stage were amended. The new and amended material clarifies that costs may only be deferred when they relate to an item that meets the definition of an asset. The practice of matching revenues and expenses remains appropriate only for allocating the cost of an asset that is consumed in generating revenue over multiple reporting periods. Section 3064 provides extensive guidance on when expenditures qualify for recognition as intangible assets, aligns Canadian GAAP with IFRS and will be effective on January 1, 2009.

Business combinations and non-controlling interests

In January 2009, the AcSB issued Section 1582 Business Combinations, Section 1601 Consolidations and Section 1602 Non-controlling Interests. Section 1582 replaces Section 1581 Business Combinations and provides the Canadian equivalent to IFRS 3 Business Combinations. Section 1601 and Section 1602 replace Section 1600 Consolidated Financial Statements. Section 1602 provides the Canadian equivalent to International Accounting Standard ("IAS") 27 Consolidated and Separate Financial Statements, for non-controlling interests. These standards are effective January 1, 2011.

4. Acquisition of Palko Energy Ltd.

On September 25, 2008, Deepwell Energy Services Ltd. acquired a 50% joint interest in Palko Energy Ltd ("Palko"), based out of Midale, Saskatchewan for net cash consideration of $3,978,265. Palko currently operates one facility which provides treatment, processing and disposal of oilfield waste to customers in south eastern Saskatchewan. The operating results of Palko are proportionately consolidated effective the closing date of the transaction. The amount of the consideration paid and the fair value of Deepwell's proportionate share of the assets acquired and liabilities assumed were:



Cash consideration $ 5,271,530
Acquisition costs 202,036
--------------
Total consideration 5,473,566
Cash acquired (1,495,301)
--------------
Net cash consideration $ 3,978,265
--------------
--------------

Allocation of purchase price
Net working capital $ 71,786
Capital assets
- Disposal well 2,050,000
- Oilfield service equipment 429,551
Goodwill 2,030,676
Asset retirement obligation (107,248)
Future income tax liability (496,500)
--------------
$ 3,978,265
--------------
--------------

As at December 31, 2008, Deepwell's proportionate share of Palko's results
are as follows:

Current assets $ 1,217,187
Long term assets 4,524,655
--------------
5,741,842

Current liabilities 1,373,737
Long term liabilities 574,920
--------------
1,948,656

Revenue $ 620,029
Expenses (381,517)
Income tax recovery 331,108
--------------
Net income 569,620

Cashflows from operating activities $ 375,428
Cashflows used in investing activities (124,651)
--------------
250,777


5. Property, plant and equipment

2008
Cost Accumulated Net Book
Depreciation Value
------------------------------------------
Disposal wells $ 32,505,220 $ 5,211,638 $ 27,293,582
Pipelines 3,957,782 448,777 3,509,005
Oilfield service equipment & tanks 12,443,596 1,922,055 10,521,541
Site improvements 4,692,492 725,087 3,967,405
Buildings 3,925,080 236,570 3,688,510
Administrative 1,324,390 456,724 867,666
------------------------------------------
$ 58,848,560 $ 9,000,851 $ 49,847,709
------------------------------------------
------------------------------------------

2007
Cost Accumulated Net Book
Depreciation Value
------------------------------------------
Disposal wells $ 28,705,932 $ 3,341,134 $ 25,364,798
Pipelines 3,458,236 230,977 3,227,259
Oilfield service equipment & tanks 5,930,100 832,325 5,097,775
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
Administrative 1,025,566 212,172 813,394
------------------------------------------
$ 51,913,518 $ 4,931,493 $ 46,982,025
------------------------------------------
------------------------------------------


During the year ended December 31, 2008, the Trust capitalized $235,395 related to the asset retirement obligation of property and equipment. In February 2008, construction of the Claresholm facility was completed and the facility became operational at which time depreciation on the facility commenced. The vast majority of the future sites category at December 31, 2007 relates to construction costs incurred prior to opening the Claresholm facility. As at December 31, 2008, the Trust completed a review and determined that no impairment of long-lived assets existed.



6. Intangible assets

2008
Cost Accumulated Net Book
Amortization Value
------------------------------------------
Completions and contracts $ 2,115,000 $ 252,576 $ 1,862,424
Customer relations 1,310,000 593,833 716,167
Non-competition agreements 48,000 42,667 5,333
------------------------------------------
$ 3,473,000 $ 889,076 $ 2,583,924
------------------------------------------
------------------------------------------

2007
Cost Accumulated Net Book
Amortization Value
------------------------------------------
Completions and contracts $ 2,115,000 $ 150,208 $ 1,964,792
Customer relations 1,310,000 371,023 938,977
Non-competition agreements 48,000 26,667 21,333
------------------------------------------
$ 3,473,000 $ 547,898 $ 2,925,102
------------------------------------------
------------------------------------------


7. Goodwill
2008 2007
----------------------------------
Balance, beginning of year $ 7,157,402 $ 7,157,402
Acquisition (Note 4) 2,030,676 -
Impairment of goodwill (7,157,402) -
----------------------------------
Balance, end of year $ 2,030,676 $ 7,157,402
----------------------------------
----------------------------------


At December 31, 2008, goodwill represents the excess of total purchase price over the net identifiable assets and liabilities on the Palko acquisition. As the Trust's investment in Palko is considered to be a separate reporting unit, a separate impairment test of the Palko goodwill was performed and no adjustment for impairment resulted. At December 31, 2007, goodwill consisted of excess purchase price on the acquisition of the Producers Oilfield Services assets in 2006. During the year ended December 31, 2008, the Trust performed an assessment of the carrying value of goodwill. In view of the economic downturn within the oil and gas service sector and the recent decline in the trading value of the Trust's units, management concluded that the carrying value of goodwill pertaining to the Producers Oilfield Services assets in the amount of $7,157,402 was impaired and; therefore, was charged to earnings.

8. Credit facilities

The Trust renewed its existing credit facilities on September 19, 2008 with a Canadian chartered bank (the "credit facilities"), which consist of the following at December 31:



a) Extendible revolving operating loan

2008 2007
----------------------------------
Facility limit $ 2,000,000 $ 2,000,000
Outstanding drawings 50,000 550,000


As at December 31, 2008, the Trust had a 364 day extendible revolving operating loan committed to May 28, 2009, bearing interest at the lender's prime rate plus 0.125 percent to 1.625 percent, based on the funded debt to earnings before interest, income taxes, depreciation and amortization ("EBITDA") ratio, with any unused amounts subject to standby fees. Drawings under this facility are repayable at May 28, 2009 unless extended by the bank. At December 31, 2008 the borrowing base for the demand loan was $1,485,424 (2007 - $1,212,863). Due to the covenant breach at year end, no further drawings are available under this facility.

b) Extendible revolving term loan

As at December 31, 2008, the Trust had a three year extendible revolving term loan committed to May 28, 2009. If the loan is not extended by the bank for an additional 364 day period, monthly payments of $496,431 are required to be made on a non-revolving basis to May 28, 2012, The facility has a $5,000,000 sublimit for the issue of letters of guarantee/credit and bears interest at the lender's prime rate plus 0.125 percent to 1.625 percent, based on the funded debt to EBITDA ratio, with any unused amounts subject to standby fees. $2,276,502 in letters of guarantee has been issued under this facility. At the option of the Trust, this facility may be utilized by way of banker's acceptances up to 50 percent of the authorized credit available with interest calculated at lender's prime rate plus 1.125% to 2.625% based on the funded debt to EBITDA ratio. Due to the covenant breach at year end, no further drawings are available under this facility.



Annual principal repayments required over the term of this loan are as
follows:

2009 $ 3,475,020
2010 5,957,177
2011 5,957,177
2012 2,482,156
--------------

$ 17,871,530
--------------
--------------


As at December 31, 2008, the Trust has breached the financial covenant which requires a minimum consolidated equity position, excluding Palko, of $35,000,000. This breach was reported to the creditor and negotiations have commenced in conjunction with the May 2009 refinancing. As no waiver has been obtained from the creditor and a further breach of covenants is possible prior to the finalization of the refinancing, the long term debt has been reclassified to current liabilities.

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 will have a prior ranking claim relative to the units. Additionally, the shares of Palko Energy Ltd. held by Deepwell Energy Services Ltd. are pledged as security under the credit facilities.

9. Income taxes

In 2007, Income Trust tax legislation was passed resulting in a two-tiered tax structure subjecting distributions to the federal corporate income tax rate plus a deemed 13 per cent provincial income tax at the Trust level commencing in 2011. On February 26, 2008 the Federal Government announced as part of the Federal budget that the provincial component of the tax on the Trust is to be calculated based on the general provincial rate in each province in which the Trust has a permanent establishment. This is the same way that a corporation would calculate its provincial tax rate. On February 1, 2009 the Minister of Finance tabled a Notice of Ways and Means which includes the proposed legislation for calculating the provincial tax rate. As the proposed rules were not substantively enacted as of December 31, 2008, the Trust has not reflected a reduced tax rate in the calculation of future income taxes in 2008.

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.



The Trust's net future income tax balances are comprised of the following:

2008 2007
----------------------------------
Future income tax assets: $ $
Difference in tax and book value of
Trust's assets 3,013,388 2,215,677
Asset retirement obligation 336,253 284,661
Unit issuance costs 121,536 123,624
Operating losses of a subsidiary 355,279 315,129
----------------------------------
3,826,456 2,939,091
Future income tax liabilities:
Difference in tax and book value of
Subsidiary and joint venture assets (537,368) (128,907)
Valuation allowance (3,754,588) (2,810,184)
----------------------------------
$ (465,500) $ -
----------------------------------
----------------------------------

The provision for future income taxes differs from the amount computed by
applying the combined federal and provincial tax rates to the loss before
taxes. The difference results from the following:

2008 2007
----------------------------------
(Loss) before taxes $ (8,841,764) $ (644,799)
Combined federal and provincial income tax
rate 29.5% 32.12%
----------------------------------------------------------------------------
(2,608,320) (207,109)
Increase (decrease) in income taxes
resulting from:
Write off of Goodwill with no tax basis 2,111,434 -
Change in tax status with enactment of
Bill C-52 - (2,622,368)
Non-taxable portion of Trust's income (566,934) (168,841)
Non-deductible items and other (211,692) 100,933
Valuation allowance 944,404 2,810,184
----------------------------------
$ (331,108) $ (87,201)
----------------------------------
----------------------------------

The Trust has non-capital loss carry forwards from its subsidiary of
approximately $1,421,000. The expiration of the losses is as follows:

2013 111,000
2014 229,000
2025 168,000
2026 178,000
2027 297,000
2028 438,000
--------------
$ 1,421,000
--------------
--------------

10. Asset retirement obligation

The following table presents the reconciliation of the carrying amount of
the obligation associated with the retirement of the Trust's property and
equipment:

2008 2007
----------------------------------
Balance, beginning of year $ 1,016,449 $ 713,744
Acquisition 107,248 240,889
Revisions (12,008) -
Accretion 93,434 61,816
----------------------------------
Balance, end of year $ 1,205,123 $ 1,016,449
----------------------------------
----------------------------------

The following significant assumptions were used to estimate the December 31,
2008 asset retirement obligation:

Undiscounted cash flows $ 4,500,000 3,430,000
Discount rate 8.5% 8.5%
Inflation rate 2% 2%
Weighted average expected timing of cash
flows 20 years 20 years


11. Unitholders' equity

a) Authorized

The Trust is authorized to issue an unlimited number of 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 percent 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.

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.

On April 10, 2007, the Trust established a distribution reinvestment plan (the "DRIP"). 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. 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.



b) Issued

Trust units

2008 2007
Number Amount Number Amount
-----------------------------------------------
Balance, beginning of year 7,163,200 $ 56,229,626 4,356,000 $ 40,490,377
Issued upon rights offering
July 9, 2007 (i) - - 2,180,515 13,104,895
Issued upon private placement
July 31, 2007 (ii) - - 582,362 3,499,996
Issued from Distribution
Reinvestment Plan 36,998 156,945 44,323 264,184
Trust unit issue costs - - - (1,129,826)
-----------------------------------------------
Balance, end of year 7,200,198 $ 56,386,571 7,163,200 $ 56,229,626
-----------------------------------------------
-----------------------------------------------


i) On July 9, 2007, the Trust completed an issuance of 2,180,515 rights at $6.01 per right for total proceeds of $13,104,895.

ii) On July 31, 2007, the Trust completed a private placement of 582,362 units at $6.01 per unit for total proceeds of $3,499,996.

Special Voting Rights

No Special Voting Units have been issued since inception of the Trust.

c) Trust unit options

The Trust has established a unit option plan for its directors, officers, employees and consultants. Pursuant to this plan, the Trust is authorized to reserve for issuance up to 10% of its Trust units outstanding from time to time. Options expire five years from the date of grant and vest over periods as determined by the board of Directors at the time of grant.

The initial total fair value of the options granted during the year ended December 31, 2008 was estimated to be $62,616 (2007 - $566,311). The fair value of options issued during the year was estimated using the Black-Scholes pricing model with the following assumptions: risk free interest rate of 4.21% (2007 - 4.25%); volatility of 48% (2007 - 45%).

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.



2008 2007
Weighted Weighted
average average
Number of exercise Number of exercise
options price options price
-----------------------------------------
Balance, beginning of year 506,971 $ 7.70 303,500 $ 8.81
Granted 29,000 4.15 208,971 6.12
Expired/Cancelled (329,967) 6.87 (5,500) 9.27
-----------------------------------------
Balance, end of year 206,004 $ 6.83 506,971 $ 7.70
-----------------------------------------
-----------------------------------------


As such, the weighted average exercise prices have been adjusted by $0.67
(2007 - $0.82) to reflect the decrease in exercise price for distribution
over the year.

Options Outstanding Options Exercisable
Weighted Weighted
Weighted Average Average Average
Exercise Remaining Exercise Exercise
Price Quantity Contractual Life Price Quantity Price
----------------------------------------------------------------------------
$4.15 29,000 4.27 $4.15 - $ -
$5.45 57,504 3.71 $5.45 19,174 $5.45
$5.65 1,000 3.35 $5.65 334 $5.65
$8.43 15,000 2.75 $8.43 10,000 $8.43
$8.12 103,500 2.64 $8.12 68,996 $8.12
----------------------------------------------------------------------------
206,004 3.18 $6.83 98,504 $7.62
----------------------------------------------------------------------------
----------------------------------------------------------------------------


d) Contributed surplus

2008 2007
----------------------------
Balance, beginning of year $ 1,066,549 $ 251,432
Unit-based compensation expense 186,903 815,117
----------------------------
Balance, end of year $ 1,253,452 $ 1,066,549
----------------------------
----------------------------


e) Cash distributions

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 year, the Trust declared and paid distributions to the unitholders in accordance with the following schedule:



2008 2007
----------------------------------------------------------------------------

Period Distribution per Distribution Distribution per Distribution
Trust unit amount Trust unit amount
----------------------------------------------------------------------------
January $ 0.06 $ 430,112 $ 0.096 $ 417,304
February 0.06 430,268 0.096 417,304
March 0.06 430,426 0.060 261,360
April 0.06 430,564 0.060 261,360
May 0.06 430,682 0.060 261,523
June 0.06 430,805 0.060 261,662
July 0.06 430,974 0.060 427,655
August 0.06 431,144 0.060 427,952
September 0.06 431,315 0.060 428,485
October 0.06 431,540 0.060 429,119
November 0.01 71,979 0.060 429,433
December - - 0.060 429,792
--------------- --------------
$ 4,379,809 $ 4,452,949


Effective December 19, 2008 the Trust announced the indefinite suspension of
distribution payments.

f) Per unit amounts

2008 2007
--------------------------
Basic 7,181,459 5,569,288
Diluted 7,182,621 5,570,403


In calculating diluted unit amounts for the year ended December 31, 2008, the Trust excluded 247,404 (2007 - 303,000) units because the exercise price was greater than the average market price during the year.

12. Restructuring costs

For the year ended December 31, 2008, $1,202,981 was incurred for employee severance, recruitment, legal, and professional costs associated with the Trust's pending conversion to a corporation.



13. Change in non-cash working capital

2008 2007
-----------------------------
Accounts receivable $ (172,507) $ (17,812)
Inventory 12,514 (139,786)
Prepaid expenses and deposits (169,725) 28,070
Accounts payable and accrued liabilities (2,104,293) 92,330
Taxes payable 25,694 -
Working capital acquired 71,786 -
-----------------------------
$ (2,336,531) $ (37,198)
-----------------------------
-----------------------------


The change in non-cash working capital has been allocated to the following
activities:

2008 2007
-----------------------------
Operating $ (1,253,519) $ (685,719)
Investing (1,083,012) 648,521
Financing - -
-----------------------------
$ (2,336,531) $ (37,198)
-----------------------------
-----------------------------


14. Capital management

The Trust's objective when managing capital is to maintain a flexible capital structure which will allow it to execute acquisitions and any capital expenditure programs. The Trust seeks to maintain a balance between the level of long-term debt and unitholders' equity to ensure access to capital to fund growth and working capital given the cyclical nature of the oilfield services sector.

The Trust considers its capital structure to include working capital, debt, and unitholders' equity. The Trust monitors capital based on annual funds from operations and acquisition opportunities, for which budgets are updated as necessary and are reviewed and periodically approved by the Trust's Board of Directors.

The Trust manages its capital structure and makes adjustments by continually monitoring its business conditions including the current economic conditions, the risk characteristics of the Trust's assets, the depth of its investment opportunities, current and forecasted net debt levels, current and forecasted commodity prices and other facts that influence commodity prices and funds from operations.

The Trust has externally imposed capital requirements as governed by the credit facilities through the maintenance of certain bank covenants, in particular, the funded debt to EBITDA, as defined in note 8, covenant. For the purposes of this covenant, funded debt consists of the current and long-term portions of bank debt, operating loan advances and commitments at the balance sheet date. A one time allowance was granted for certain items incurred in the third quarter of 2008 of $1,550,000. The targeted ratio of funded debt to EBITDA is 2.50:1 with a maximum limit under the bank covenant of 2.75:1. The Trust was in compliance with this covenant as at December 31, 2008.

The Trust has amended its' capital management strategy in response to the covenant breach as discussed in notes 1 and 8. As well, the Trust suspended distributions indefinitely in December 2008.

15. Financial instruments and financial risk management

The Trust's financial instruments include cash, accounts receivable, bank indebtedness, accounts payable and accrued liabilities, and debt. The carrying values of these financial instruments approximate their fair values due to their relatively short periods to maturity.

The Trust's risk management policies are established to identify and analyze the risks faced by the Trust, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Trust's activities. The Trust has exposure to credit risk, liquidity risk and market risk as a result of its use of financial instruments.

This note presents information about the Trust's exposure to each of the above risks and the Trust's objectives, policies and processes for measuring and managing these risks. Further quantitative disclosures are included throughout these financial statements. The Board of Directors has overall responsibility for the establishment and oversight of the Trust's risk management framework. The Board has implemented and monitors compliance with risk management policies.

a) Credit risk

Credit risk is the risk of financial loss to the Trust if a customer or counterparty to a financial instrument fails to meet its contractual obligations. A substantial portion of the Trust's accounts receivable is due from an oil marketer and is subject to normal industry credit risks. The purchaser of the Trust's oil is subject to credit review to minimize the risk of non-payment. As at December 31, 2008, the maximum credit exposure is the carrying amount of the accounts receivable and accruals of $2,919,425 (December 31, 2007 - $2,746,918).

The Trust's policy to mitigate credit risk associated with these balances is to establish relationships with large purchasers. The Trust historically has not experienced any significant collection issues with its marketers. The majority of the remaining receivable balances have been reviewed for collectibility. The Trust provided an allowance of $38,324 for doubtful accounts during the year ended December 31, 2008. The Trust would only choose to write-off a receivable balance (as opposed to providing an allowance) after all reasonable avenues of collection had been exhausted.



As at December 31, 2008, the Trust considers its receivables to be aged as
follows:

Current $ 888,309
Past due by less than 90 days 1,456,523
Past due by more than 90 days 574,593
--------------
$ 2,919,425
--------------
--------------


b) Liquidity risk

Liquidity risk is the risk that the Trust will incur difficulties meeting its financial obligations as they are due. The Trust's approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and distressed conditions without incurring unacceptable losses or risking harm to the Trust's reputation.

As the Trust pursues additional opportunities, annual capital expenditure budgets will be prepared, regularly monitored and updated as considered necessary. The Trust monitors its cash flow monthly. The Trust's financial liabilities are comprised of accounts payable and accrued liabilities, operating loan, and long term debt. Accounts payable and accrued liabilities have an expected maturity of less than one year. Amounts owing under the operating loan and the long term debt is disclosed in note 8. As at December 31, 2008, the Trust has a working capital deficit of $15,560,039 as discussed in note 1.

c) Market risk

Market risk consists of currency risk, commodity price risk and interest rate risk. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing returns. The Trust may use both financial derivatives and physical delivery sales contracts to manage market risks. All such transactions are conducted in accordance with a risk management policy as set out herein:

i) Currency risk

Foreign currency exchange rate risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in foreign exchange rates. All of the Trust's oil sales are denominated in Canadian dollars; however, the underlying market prices in Canada for petroleum are impacted by changes in the exchange rate between the Canadian and United States dollar. The Trust has not entered into any forward exchange rate contracts as at December 31, 2008.

ii) Commodity price risk

Commodity price risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas are impacted by world economic events that dictate the levels of supply and demand as well as the relationship between the Canadian and United States dollar, as outlined above. The Trust has not entered into any commodity contracts as at December 31, 2008.

iii) Interest rate risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Trust is exposed to interest rate fluctuations on its operating loan and long term debt for which the interest rate fluctuates based on the prime rate of interest. For the year ended December 31, 2008, if interest rates had been 1% higher with all other variables held constant, earnings for the period would have been $200,000 lower due to higher interest expense. An equal and opposite impact would have occurred had interest rates been lower by the same amounts. The Trust had no interest rate swap or financial contracts in place at December 31, 2008.



16. Commitments

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

2009 $ 173,620
2010 147,909
2011 91,704
-----------
$ 413,233
-----------
-----------


17. Related party transactions

During the year ended December 31, 2008, the Trust made payments in the amount of $333,607 (2007 - nil as the partner was not a board member in 2007) for professional services to a partnership in which one of Deepwell's board members is a partner. These transactions were conducted in the normal course of operations, on commercial terms established and agreed to by the parties.

The Trust also received management fees for certain management services for its joint venture in the amount of $1,250,000 (2007 - nil) and provided certain assets and other services at cost in the amount of $44,950 (2007 - nil). These amounts have been proportionately eliminated upon consolidation.

18. 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 Energy Services 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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