Deepwell Energy Services Trust
TSX : DWL.UN

Deepwell Energy Services Trust

November 14, 2008 19:46 ET

Deepwell Announces Financial Results for the Three Months and Nine Months Ended September 30, 2008

CALGARY, ALBERTA--(Marketwire - Nov. 14, 2008) - Deepwell Energy Services Trust ("Deepwell" or the "Trust") (TSX:DWL.UN) is pleased to release its financial and operating results for the three-month and nine-month periods ended September 30, 2008. Deepwell continues to work on improvements to its performance in the third quarter of 2008.

Highlights of the third quarter:

- Appointment of a new executive team including Bob Ritchie, President and Chief Executive Officer, Greg Tarnowski, Vice-President Finance and Chief Financial Officer, Brian Johnson, Vice-President Business Development and Don Johnson, Vice-President Operations. The Team has been selected to execute the Trust's new growth mandate to more aggressively expand its operations.

- Acquisition of a 50 percent joint interest in Palko Energy Ltd. ("Palko"), a water disposal business operating in the Bakken oil play in southeast Saskatchewan, for net cash consideration of $3.96 million.

- Third quarter revenue of $4.86 million, representing an increase of 38 percent over the same quarter in 2007.

- Quarterly earnings before internal restructuring charges, unit-based compensation, interest, taxes, depreciation, amortization, and write-down of goodwill (EBITDA) of $1.26 million representing a decline of 11 percent from the third quarter of 2007.

- A write-down of goodwill of $7.16 million was recorded, based on an impairment evaluation at quarter end.

- A loss of $7.92 million compared to net income of $0.22 million for the same quarter in 2007, due primarily to the write-down of goodwill referenced above.

- Cash distributions to unitholders of $0.18 per unit for the quarter ($0.06 per unit per month).

The third quarter results, while challenged by the oil and natural gas industry slowdown, remained relatively strong. The Claresholm oilfield waste management facility, which opened in the first quarter of 2008, continues to show operational improvement with significant increases in volumes of waste handled at the facility and has now achieved positive EBITDA.

Despite higher reported revenues in the third quarter of 2008 as compared to the same quarter in 2007, EBITDA and funds from operations were lower mainly due to higher operating expenses, primarily trucking costs and higher general and administrative expenses pursuant to executing Deepwell's new growth strategy.

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

Forward-looking statements

Certain statements in this document 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 document, 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 the likelihood that more drilling activity and production is likely in the Bakken play, that the Trust's client base will continue drilling activity, that drilling and completion activities in the Western Canada sedimentary basin will accelerate over time and that such activities will require the development of additional oilfield water disposal and waste management services. These statements are based on the assumptions that market prices for oil and natural gas and equity markets and credit markets will become less volatile, that the shift to non-conventional oil and gas resources will continue and that increased activity will require additional oilfield water disposal and waste management services. The risks are that oil or natural gas prices will decrease or remain volatile, that the market will remain volatile, that the shift to non-conventional oil and gas will not continue and that any increased drilling and production activity will not require additional oilfield water disposal and waste management services.These statements reflect current expectations regarding future events and operating performance and speak only as of the date of this document.

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. 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.

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 November 13, 2008 and should be read in conjunction with the Trust's unaudited interim consolidated financial statements as at and for the three and nine months ended September 30, 2008. This MD&A discusses operations and events for the three and nine months ended September 30, 2008. Unless otherwise noted, references to the "quarter" or "current quarter" refer to the three months ended September 30, 2008. References to "2008" or the "year" or "year-to-date" refer to the nine months ended September 30, 2008. References to "third quarter of 2007" or "same period last year" or "same period of 2007" refer to the three months ended September 30, 2007. References to "2007" or the "prior year" refer to the nine months ended September 30, 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 equity 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 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 the likelihood that more drilling activity and production is likely in the Bakken play, that the Trust's client base will continue drilling activity, that drilling and completion activities in the Western Canada sedimentary basin will accelerate over time and that such activities will require the development of additional oilfield water disposal and waste management services. These statements are based on the assumptions that market prices for oil and natural gas and equity markets and credit markets will become less volatile, that the shift to non-conventional oil and gas resources will continue and that increased activity will require additional oilfield water disposal and waste management services. The risks are that oil or natural gas prices will decrease or remain volatile, that the market will remain volatile, that the shift to non-conventional oil and gas will not continue and that any increased drilling and production activity will not require additional oilfield water disposal and waste management services.These statements reflect current expectations regarding future events and operating performance and speak only as of the date of this MD&A.

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

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

Non-GAAP measures

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

- EBITDA, which refers to earnings before internal restructuring charges, unit-based compensation, interest, taxes, depreciation, amortization, and write-down of goodwill. 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. 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, where appropriate, together with reconciliations to the equivalent GAAP measure. 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, and Deepwell has developed innovations to enhance environmental stewardship at new and existing facilities.

Selected financial information

The following table below provides selected financial information that has been derived from, and should be read in conjunction with, the interim consolidated financial statements of the Trust.



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Three Three Nine Nine
months months months months
ended ended ended ended
Sept 30, Sept 30, Sept 30, Sept 30,
2008 2007 2008 2007
(restated) (restated)
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Revenue $ 4,861,607 $3,513,654 $ 14,727,987 $ 10,473,315
Operating expenses 2,856,716 1,584,125 8,437,299 4,693,785
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Gross Margin 2,004,891 1,929,529 6,290,688 5,779,530
General and
administrative
expenses 746,382 520,071 1,821,511 1,675,765

EBITDA 1,258,509 1,409,458 4,469,177 4,103,765
Internal
restructuring
charges 748,171 - 839,010 -
Depreciation,
accretion
and amortization 979,964 906,330 3,182,484 2,669,483
Financing fees - 35,000 22,910 92,380
Unit-based
compensation 94,226 141,673 336,165 676,111
Interest 186,407 110,841 426,041 545,852
Loss on sale or
disposal of
property and
equipment 858 - 12,316 (10,239)
Loss on write-off of
property and
equipment - - - 367,702
Impairment of
goodwill 7,157,402 - 7,157,402 -
Fire-related
expenses - - - 162,119
Future income tax
recovery - - - (87,201)
Current income tax 7,432 - 7,432 -
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Net income (loss) (7,915,951) 215,614 (7,514,583) (312,442)

Non-cash items:
Depreciation,
amortization and
accretion 893,792 824,096 2,926,151 2,422,782
Amortization of
intangible assets 86,172 82,234 256,333 246,701
Impairment of
goodwill 7,157,402 - 7,157,402 -
Financing fees - - - 39,880
Unit-based
compensation 94,226 141,673 336,165 676,111
Loss on sale or
disposal
of property and
equipment 858 - 12,316 (10,239)
Loss on write-off of
property and
equipment - - - 746,332
Future income tax
recovery - (87,201)
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Funds from
operations $316,499 $1,263,617 $3,173,784 $3,721,924
Changes in non-cash
working capital 137,915 (606,991) (1,273,649) (728,092)
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Cash flow from
operating
activities $454,414 $656,626 $1,900,135 $2,993,832
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Net income (loss) ($7,915,951) $215,614 ($7,514,583) ($312,442)
Per unit, basic
and diluted (1.10) 0.03 (1.05) (0.06)
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EBITDA $1,258,509 $1,409,458 $4,469,177 $4,103,765

Per unit, basic
and diluted 0.17 0.22 0.62 0.82
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Funds from
operations $316,499 $1,263,617 $3,173,784 $3,721,924
Per unit, basic
and diluted 0.04 0.20 0.44 0.74
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Distributions
to Unitholders $1,293,434 $1,284,092 $3,876,289 $3,164,607

Per unit, basic
and diluted 0.18 0.20 0.54 0.63
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Gross margin as
a percentage of
revenue 41% 55% 43% 55%
General and
administrative
expenses as
percentage of
revenue 15% 15% 12% 16%
EBITDA as a
percentage of
revenue 26% 40% 30% 39%
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Capital
expenditures $915,923 $2,846,290 $ 4,686,106 $ 5,298,219
Total assets,
end of period $ 60,967,069 $ 55,349,356 $ 60,967,069 $55,349,356
Long-term debt,
end of period $ 16,871,530 $0 $ 16,871,530 $0
Total long-term
liabilities,
end of period $ 16,691,153 $760,106 $ 16,691,153 $760,106
Trust unit
equity, end of
period $ 56,357,672 $ 56,175,472 $ 56,357,672 $56,175,472
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Weighted
average Trust
units, basic 7,188,578 6,324,139 7,188,578 5,015,016
Weighted average
Trust units,
diluted 7,193,174 6,327,260 7,192,047 5,015,143
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Third quarter 2008 overview

Deepwell generated revenue of $4,861,607 for the third quarter of 2008, an increase of $1,347,953 or 38 percent over the same period in 2007. Operating costs were $2,856,716 for the quarter compared to $1,584,125 in the third quarter of 2007, the increase being primarily due to higher trucking charges and increased oil repayments to exploration and production clients. Gross margin decreased to 41 percent in the third quarter of 2008 from 55 percent during the same period in 2007 due to operating costs increasing by a greater amount than revenue. General and administration costs were $746,382 in the quarter compared to $520,071 in the third quarter of 2007 due to higher staffing costs to accommodate growth. EBITDA declined by 11 percent in the third quarter of 2008 to $1,258,509 from $1,409,458 for the same period in 2007. This decrease in EBITDA is a direct result of higher operating costs, and general and administrative costs. During the current quarter, the Trust incurred internal restructuring costs of $748,171 ($839,010 year-to-date), which included staff recruitment and other employee costs, legal and professional fees. Funds from operations for the third quarter of 2008 decreased by $947,118 from the same period in 2007 to $316,499 due to a lower operating margin, higher general and administrative expenses, and internal restructuring costs. During the quarter, the Trust recognized a non-cash impairment of goodwill in the amount of $7,157,402 relating to the acquisition of the Producers Oilfield assets in 2006 - Deepwell's founding acquisition.

The net loss for the quarter was $1.10 per unit on a basic and diluted basis compared to net income of $0.03 per unit on a basic and diluted basis in the same period of 2007. Funds from operations for the quarter were $0. 04 per unit on a basic and diluted basis compared to $0.20 per unit on a basic and diluted basis for the same quarter of 2007.

During the quarter, the Trust had net drawdowns on its credit facility of $6,871,530 and incurred interest expense at a rate of approximately 5.625 percent. At September 30, 2008 the Trust's available capacity on its short-term credit facilities was approximately $2,000,000 and on its long-term credit facility was approximately $1,200,000. For the current quarter, distributions to unitholders were maintained at $0.06 per unit per month. Total distributions paid to unitholders for the quarter, including distributions to participants under the Trust's Distribution Reinvestment Plan (DRIP), were $1,293,434 or $0.18 per unit compared to $0.20 per unit in the third quarter of 2007. The DRIP allows eligible Unitholders of the Trust to direct that their cash distributions be reinvested in additional Trust units. The cash distributions will be re-invested at the discretion of Deepwell Energy Services Ltd.'s management either by acquiring Trust units issued from treasury at 95 percent of the average market price (as defined in the DRIP) or by acquiring Trust units at prevailing market prices.

Results of operations

Revenue

Revenues for the current quarter were $4,861,607 compared to $3,513,654 in the third quarter of 2007, an increase of 38 percent. During the current quarter, 64 percent of revenues were from processing and disposal fees, and 36 percent were from the sale of recovered oil, compared to 78 percent and 22 percent, respectively, for the same period in 2007. Processing revenues of $3,105,368 for the current quarter increased by 14 percent from third quarter 2007 processing revenues of $2,731,574. Increased volumes received in the current quarter were a result of the higher activity levels and especially oilfield waste volumes and oil for custom treating.

Year-to-date revenues were $14,727,987 compared to $10,473,315 for the prior year, an increase of 41 percent. The Claresholm facility provided additional capacity which was not available in 2007 and increased throughput during the quarter even though the facility was operating below expected levels.

Expenses

Operating expenses

Operating expenses were $2,856,716 for the quarter compared to $1,584,125 in the third quarter of 2007, yielding an operating margin of 41 percent for the quarter compared to 55 percent in the third quarter of 2007. The increase in direct operating expenses was predominantly due to the addition of the Claresholm facility as well as trucking and landfill costs, which increased along with processing costs related to higher volumes of oil for custom treating and solid wastes. Year-to-date operating expenses were $8,437,299 compared to $4,693,785 for 2007. The year-to-date operating margin declined to 43 percent in 2008 from 55 percent in 2007.

Earnings before internal restructuring charges, unit-based compensation, interest, taxes, depreciation, amortization, and write-off of goodwill.

Quarterly earnings before internal restructuring charges, unit-based compensation, interest, taxes, depreciation, amortization and write-off of goodwill (EBITDA) of $1,258,509 represented an 11 percent decline from the third quarter of 2007. This decrease in EBITDA was a direct result of higher operating costs, and general and administrative expenses.

General and administrative expenses

General and administrative expenses, which represent costs associated with the Trust's head office, senior management and public entity costs, were $746,382 or 15 percent of revenue for the quarter compared to $520,071 or 15 percent of revenue in the third quarter of 2007. The year-to-date general and administrative expenses were $1,821,511 or 12 percent of revenues compared to $1,675,765 or 16 percent of revenues in 2007. The increase in general and administrative expenses reflects general inflation plus additional staff training, other employee costs and professional fees.

Internal Restructuring Charges

During the third quarter of 2008, the Trust incurred restructuring costs of $748,171 ($839,010 year-to-date) which include staff recruitment, other employee costs, legal and professional costs. In 2007, no internal restructuring costs were incurred.

Depreciation, amortization and accretion

Depreciation, amortization and accretion expense was $979,964 for the quarter compared to $906,330 for the third quarter of 2007. The expense consisted of depreciation of fixed assets of $873,923 ($808,642 in the third quarter of 2007), accretion of $19,869 ($15,454 in the third quarter of 2007) and amortization of intangible assets of $86,172 ($82,234 in the third quarter of 2007). Amortization of intangible assets consisted of the amortization of certificates of approvals and contracts, customer relationships, and non-competition agreements. The increase in depreciation expense resulted from the completion of the Claresholm facility in the first quarter of 2008. The year-to-date depreciation, amortization and accretion expense was $3,182,484 compared to $2,669,483 in 2007.

Goodwill

During the quarter, 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 was impaired and therefore the Trust wrote-off the opening balance in goodwill of $7,157,402.

Interest

Total cash interest expense for the quarter was $186,407 compared to $110,841 for the third quarter of 2007 reflecting increased bank financing. Cash interest expense was comprised of $181,195 of interest on long-term debt ($99,606 in the third quarter of 2007) and interest on the Trust's operating loan of $5,212 ($11,235 in the third quarter of 2007). Year-to-date interest costs were $426,041 compared $545,852 in 2007. Interest rates are floating, with a range from 0.125 percent to 1.625 percent over the lender's prime rate, depending on the Trust's ratio of consolidated funded debt to earnings before interest, taxes, depreciation, amortization, accretion, and unit-based compensation as defined in the credit facility. Actual interest rates during the quarter ranged from 0.125 percent to 1.625 percent over the lender's prime rate.

Funds from operations

Funds from operations for the third quarter of 2008 were $316,499, a decrease of $947,118 from the same quarter in 2007, reflecting lower gross margins and higher general and administrative expenses, internal restructuring costs and interest expense. Year-to-date funds from operations were $3,173,784 compared to $3,721,924 in 2007, reflecting internal restructuring charges in 2008 with higher interest costs in 2007.

Distributions to unitholders

Distributions declared to unitholders for the quarter, including distributions to participants under the DRIP, were $1,293,434 ($1,284,092 in the third quarter of 2007). Actual cash distributions paid were $1,249,823 ($1,175,223 in the third quarter of 2007) excluding non-cash distributions to participants in the DRIP. Distributions were higher period-over-period due to the larger number of units outstanding in the current period.



----------------------------------------------------------------------------
For the three
months ended, Three months ended Nine months ended
Sept 30 Sept 30, 2008 Sept 30, 2007 Sept 30, 2008 Sept 30, 2007
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Cash flows from
operating
activities $ 454,414 $ 656,626 $ 1,900,135 $ 2,993,832
Net income
(loss) (7,915,951) 215,614 (7,514,583) (312,442)
Actual cash
distributions
paid during the
period (1,249,312) (1,008,400) (3,746,720) (3,013,494)
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Excess
(shortfall) of
cash flows from
operating
activities over
cash
distributions
paid (794,898) (351,774) (1,846,585) (19,662)
Shortfall of
net income
(loss)
over cash
distributions
paid $ (9,165,771) $ (959,609) $ (11,262,826) $ (3,337,120)
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While the cash distributions to unitholders exceeded net income in the first nine months of 2008, Deepwell's distributions have generally not been based upon net income, as net income includes a number of non-cash items such as depreciation, amortization, accretion, and unit-based compensation that do not affect the Trust's ability to make distributions to unitholders. 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.

Investing activities

Cash used in investing activities during the quarter was $5,006,060 compared to $1,507,598 in the same quarter of 2007. The increase in cash used in investing in the current quarter reflects the purchase of Palko for $3,960,753 after post-closing adjustments, as well as the purchase by Deepwell of property, plant and equipment for $915,923.

Capital expenditures

The Trust's capital expenditures for purchase of property and equipment for the quarter were $915,923 compared to $2,846,290 in the third quarter of 2007. The investment in property and equipment included investment in tank and containment upgrades, safety equipment, future sites, computing equipment, and other oilfield service equipment. The larger amount in 2007 reflects the construction of the Claresholm plant.

Unitholders' equity

Trust unit option plan

As at September 30, 2008, a total of 487,971 options were issued and outstanding pursuant to the Trust's incentive unit option plan. The options carry a five-year term and, except for 73,800 options issued to executives during 2007 in lieu of a cash bonus for 2006 (vesting immediately), vest equally over a period of three years from the date of grant. The exercise price of each option is based upon the weighted average trading price for a period prior to the date of grant. The exercise price is adjusted downwards by 100 percent of the amount of distributions paid on outstanding Trust units. During the quarter, no options were granted.



Options outstanding as of Sept 30, 2008 Options exercisable as at
Sept 30, 2008
----------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Exercise Number of contractual exercise Number of exercise
price options life price options price
----------------------------------------------------------------------------
4.30 29,000 4.52 $4.30 - n/a
5.58 182,971 3.87 5.58 110,196 5.58
5.78 2,000 3.60 5.78 668 5.78
8.25 258,500 2.89 8.25 172,329 8.25
8.56 15,000 3.00 8.56 5,000 8.56
8.90 500 2.97 8.90 333 8.90
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487,971 3.36 $7.01 288,526 $7.23
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The Trust recorded unit-based compensation expense and contributed surplus of $ 94,226 during the quarter compared to $141,673 in the third quarter of 2007.

Liquidity

Cash provided by financing activities for the quarter was $4,953,468 compared to $852,835 for the same period in 2007. The Trust paid distributions to unitholders of $1,293,434 compared to $1,284,092 in the third quarter of 2007, of which $43,614 was realized in proceeds from its DRIP ($108,869 in the third quarter of 2007).

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:

Demand loan

Under the credit facilities, the Trust has a $2,000,000 demand revolving operating loan. During the quarter interest ranged from the lender's prime rate plus 0.125 percent to 1.625 percent and this rate is dependent on the funded debt to EBITDA ratio. As at September 30, 2008 the borrowing base for the demand loan was approximately $2,000,000. As at December 31, 2007 the borrowing base for the demand loan was $1,212,863 and the amount drawn was $550,000.

Long-term debt

Under the credit facilities, the Trust has a $25,000,000, 364-day extendible revolving term loan committed to May 29, 2009. No set principal repayment has been established and the Trust has the ability to repay, borrow and repay again until the 364-day term expires. The interest rate ranges from the lender's prime rate plus 0.125 percent to 1.625 percent per annum. Interest is calculated monthly and paid in arrears. As at September 30, 2008 an aggregate of $16,871,530 was outstanding of which $1,874,614 was current. The revolving period extends to May 29, 2009, at which time the credit facility is eligible for renewal. At September 30, 2008 the Trust's available capacity on its long-term credit facility was approximately $1,200,000. As at December 31, 2007, an aggregate of $4,800,000 was outstanding of which $933,333 was current.

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

Interest rate risk

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

Contractual obligations, commitments and contingencies

The following table shows future contractual obligations by period:



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Payments by
period Total 2008 2009-2010 2011-2012 Thereafter
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Long-term debt $ 16,871,530 $ - $ 11,247,687 $ 5,623,843 $ -
Commitments 436,553 41,863 163,024 139,962 91,704
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Total
contractual
obligations $ 17,308,083 $ 41,863 $ 11,410,711 $ 5,763,806 $ 91,704
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Financial instruments

All of the Trust's financial instruments as at September 30, 2008 relate to standard working capital and credit facility items. There are no significant differences between the carrying value of these financial instruments and their estimated fair values. There are no unusual off-balance-sheet arrangements and the Trust does not use any financial instruments such as derivatives. Of the Trust's financial instruments, only accounts receivable represent credit risk, and management views the credit risk related to accounts receivable as minimal. The operating loan and the extendible revolving long-term loan bear interest at a floating interest rate. Therefore, to the extent that the Trust borrows under these facilities, the Trust is at risk to rising interest rates.

Quarterly information

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 break-up or periods of rainfall. In the Grande Cache region restrictions also occur at certain times of the year in designated wildlife areas.



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Quarter Ended
September June March December
2008 2008 2007 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue 4,861,607 $ 4,738,690 $ 5,127,690 $ 3,650,736
Operating expenses 2,856,716 2,852,928 2,727,653 1,941,216
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Gross Margin 2,004,891 1,885,762 2,400,037 1,709,520
General and
administrative 746,382 597,415 477,714 842,448
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EBITDA 1,258,509 1,288,347 1,922,323 867,072

Internal
restructuring
charges 748,171 90,839 - -
Depreciation,
amortization
and accretion 979,964 1,213,804 1,011,626 838,528
Write-off of
goodwill 7,157,402 - - -
Financing fees - - - 114,043
Unit-based compensation 94,226 121,509 120,430 138,706
Interest 186,407 133,536 106,098 44,639
Loss (gain) on sale of
property and equipment 858 42 11,416 1,466
Loss on write-off of
property and equipment - - - -
Fire-related expenses - - - -
Income taxes payable 7,432 - - -
----------------------------------------------------------------------------
Net income (loss) $(7,915,951) $ (271,383) $ 672,753 $ (270,310)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net income (loss) per
Trust unit:
Basic ($1.10) ($0.04 ) $0.09 $(0.04)
Diluted ($1.10) ($0.04) $0.09 $(0.04)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Weighted average number
of Trust units
outstanding
Basic 7,188,578 7,180,086 7,173,770 7,154,344
Diluted 7,193,174 7,184,666 7,173,770 7,154,344
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

Quarter Ended
September June March December
2007 2007 2007 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(restated
(note 14)
Revenue $ 3,513,654 $ 2,532,151 $ 4,427,510 $ 4,059,296
Operating expenses 1,584,126 1,190,437 1,919,222 1,605,492
----------------------------------------------------------------------------
Gross Margin 1,929,528 1,341,714 2,508,288 2,453,804
General and
administrative 520,371 558,848 596,544 730,354
----------------------------------------------------------------------------

EBITDA 1,409,157 782,866 1,911,744 1,723,450

Internal
restructuring
charges - - - -
Depreciation,
amortization
and accretion 906,330 897,865 922,669 993,621
Write-off of
goodwill - - - -
Financing fees 35,000 - - -
Unit-based compensation 141,372 359,902 175,137 197,812
Interest 110,841 229,450 205,561 149,325
Loss (gain) on sale of
property and equipment - (17,500) 7,261 34,295
Loss on write-off of
property and equipment - - 367,702 -
Fire-related expenses - - 162,119 -
Income taxes payable - (62,651) (24,550) (47,799)
----------------------------------------------------------------------------
Net income (loss) $ 215,614 $ (624,200) $ 95,845 $ 396,196
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net income (loss) per
Trust unit:
Basic $0.04 $(0.14) $0.02 $0.05
Diluted $0.04 $(0.14) $0.02 $0.05
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Weighted average number
of Trust units
outstanding
Basic 6,324,139 4,357,724 4,356,000 4,356,000
Diluted 6,327,260 4,357,744 4,356,000 4,357,187
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Critical accounting estimates

Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods. The most significant estimates relate to depreciation, amortization, asset retirement obligations, accretion, income taxes, unit-based compensation and recoverability of goodwill and intangibles. Actual results could differ from such estimates. The consolidated financial statements have, in management's opinion, been properly prepared using careful judgment within 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. Management believes the critical accounting estimates are reasonable under the current circumstances except for the impairment of goodwill which was recorded this quarter.

Risks and uncertainties

Cyclicality of the oil and natural gas industry

The demand for oilfield services is largely dependent on the activity levels of oil and natural gas exploration and development companies. Industry conditions are influenced by numerous factors over which the Trust has no control, including: the level of oil and natural gas prices and production; expectations about future oil and natural gas prices; the cost of exploring for, producing and delivering oil and natural gas; the expected rates of declining production from maturing basins; the discovery of new oil and natural gas reserves; available pipeline and other oil and natural gas transportation capacity; weather conditions; global political stability, military actions, regulatory and economic conditions; the ability of oil and natural gas companies to raise capital; fuel conservation measures, alternative fuel requirements, and 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 uncertainity 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, which normally occurs during the second quarter of each year, leaves many secondary roads temporarily incapable of supporting the weight of heavy equipment, which results in severe restrictions on the provision of energy services. The timing and duration of spring break-up are dependent on weather patterns and the duration of this period will have an impact on the level of business of the Trust.

Dependence on key personnel

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

Competition for human resources

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

Reliance on major customers

It is estimated that the top 10 customers of Deepwell accounted for approximately 33 percent of revenue for the nine months ended September 30, 2008, with the largest customer accounting for 14 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 relationship with Deepwell.

Competition

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

Operating risks and insurance

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

Management will monitor the activities 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 reasonable 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 and fines. There can be no assurance that Deepwell will not be required, at some future date, to incur significant costs to comply with environmental laws, or that its operations, business, assets or cash flow will not be materially adversely affected by existing conditions or by the requirements or potential liability under current or future environmental laws.

Credit risk

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

Access to additional financing

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

Capital expenditures

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

Leverage and restrictive covenants

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

Uncertainty of cash distributions

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

Government regulations

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

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

Related-party transactions

During the current quarter, the Trust made payments in the amount of $65,680 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. There were no such transactions for the year ended December 31, 2007.

Internal controls

During the quarter, no changes were made that materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.

Outlook

Although Deepwell and the oil and natural gas industry continue to deal with the uncertainty in the business environment in the provinces of Alberta and Saskatchewan, the Trust has identified a number of growth opportunities, including its recent 50 percent acquisition of 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 bright future due to increased drilling activity, well licences and producing wells. The strong growth in land sales indicates that more drilling activity in the fourth quarter and through 2009 is likely in the Bakken play, which is expected to increase water production and other related water volumes for Palko to process. Accordingly, a key focus for Deepwell for the upcoming year will be to work with Palko to take advantage of the favourable investment climate in southeast Saskatchewan. Expansion of the existing facility and growth in the southeast Saskatchewan market area will be a key focus in the upcoming months and into 2009.

The Trust's outlook for the fourth quarter remains cautiously optimistic. The fourth quarter is historically one of the Trust's most active quarters. Although all of the Trust's facilities experienced increased activity through the second half of October 2008 and the Trust experienced a 38 percent year-over-year increase in third quarter revenue, there is a general climate of uncertainty. The Trust's client base of small, medium and large exploration and production companies have generally had encouraging third quarter results in 2008 and this provides some indication that activity is expected to continue in the fourth quarter, particularly if changes in oil and natural gas prices, equity markets and credit markets become less volatile.

In the fourth quarter, the Trust is planning to increase the injection capacity at its Grande Cache facility to satisfy increased demand for water and waste disposal in that market area. The Trust will also continue to dedicate some of its available capital to its existing facilities in Alberta by upgrading its current processes to provide higher through-put, new services or both to meet the increasing demand from its clients.

In spite of the recent challenges facing the oil and natural gas industry, the Trust remains focused on capitalizing on the increasing water production from existing oil and natural gas fields and increasing oilfield wastes associated with the increasing drilling and completions activities required to maintain oil and natural gas production in the Western Canada Sedimentary Basin (WCSB). Despite a soft short-term outlook, drilling and completions activities are expected to accelerate over the longer term because the rate of decline of oil and natural gas production in the WCSB has generally been increasing and the shift to non-conventional oil and natural gas resources generally requires more drilling and completions work to unlock the reserves. Accordingly, the Trust is basing its generally optimistic long-term outlook on water disposal and oilfield waste services business expanding as exploration and production companies attempt to maintain or enhance production of oil and natural gas from the WCSB.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF

DEEPWELL ENERGY SERVICES TRUST

AS AT AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 (unaudited)

The accompanying unaudited interim financial statements of the Trust as at and for the nine months ended September 30, 2008 have been internally prepared and are the responsibility of Deepwell's management.



DEEPWELL ENERGY SERVICES TRUST
CONSOLIDATED BALANCE SHEETS

September 30, 2008 December 31, 2007
(unaudited)
----------------------------------------------------------------------------
Assets
Current assets:
Cash $ 517,378 $ -
Accounts receivable 3,803,897 $ 2,746,918
Inventory (note 4) 566,120 219,991
Prepaid expenses and deposits 163,068 214,920
----------------------------------------------------------------------------
5,050,463 3,181,829

Property and equipment (note 5) 51,141,923 46,982,025
Intangible assets (note 6) 2,668,769 2,925,102
Goodwill (note 7) 2,105,914 7,157,402
----------------------------------------------------------------------------
$ 60,967,069 $ 60,246,358
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities
Current liabilities:
Bank indebtedness $ 134,409 $ 40,537
Demand loan - 550,000
Accounts payable and accrued
liabilities 2,547,344 3,631,316
Distributions payable 431,315 429,792
Current portion of long-term
debt (note 9) 1,874,614 933,333
Taxes payable 436,631 -
----------------------------------------------------------------------------
5,424,313 5,584,978

Long-term debt (note 9) 14,996,916 3,866,667
Future income taxes (note 3) 513,000 -
Asset retirement obligations 1,181,237 1,016,449
----------------------------------------------------------------------------
22,115,466 10,468,094
----------------------------------------------------------------------------

Unitholders' Equity
Trust units (note 8) 56,357,672 56,229,626
Contributed surplus (note 8) 1,402,714 1,066,549
Deficit (18,908,783) (7,517,911)
----------------------------------------------------------------------------
38,851,603 49,778,264
----------------------------------------------------------------------------

$ 60,967,069 $ 60,246,358
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.


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

(unaudited)

For the For the For the For the
three three nine nine
months months months months
ended ended ended ended
Sept 30, Sept 30, Sept 30, Sept 30,
2008 2007 2008 2007
(restated - (restated -
note 14) note 14)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Revenues $ 4,861,607 $ 3,513,654 $ 14,727,987 $ 10,473,315
----------------------------------------------------------------------------

Expenses
Operating 2,856,716 1,584,125 8,437,299 4,693,785
General and
administrative 746,382 520,071 1,821,511 1,675,765
Internal restructuring
charges (note 10) 748,171 - 839,010 -
Depreciation and
accretion 893,792 824,096 2,926,151 2,422,782
Amortization of
intangible assets 86,172 82,234 256,333 246,701
Unit-based compensation 94,226 141,673 336,165 676,111
Interest on short-term
debt 5,212 11,235 25,633 41,876
Interest on long-term
debt 181,195 99,606 400,408 503,976
Financing fees - 35,000 22,910 92,380
Loss (gain) on disposal
of property and
equipment 858 - 12,316 (10,239)
Impairment of goodwill
(note 7) 7,157,402 - 7,157,402 -
Loss on write-off of
property and equipment - -
(net of accrued
insurance proceeds) - - - 367,702
Fire-related expenses - - - 162,119
---------------------------------------------------------------------------
12,770,126 3,298,040 22,235,138 10,872,958

Income (loss) before
taxes (7,908,519) 215,614 (7,507,151) (399,643)
Future income tax
recovery - - - (87,201)
Current income tax 7,432 - 7,432 -
----------------------------------------------------------------------------
Net income(loss)
and comprehensive
income (loss) (7,915,951) 215,614 (7,514,583) (312,442)

Deficit, beginning of
period $ (9,699,398) $(4,915,935) $ (7,517,911) $(2,507,364)
Distributions to
unitholders (note 8) (1,293,434) (1,284,092) (3,876,289) (3,164,607)
----------------------------------------------------------------------------
Deficit, end of period $(18,908,783) $(5,984,413) $(18,908,783) $(5,984,413)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net income per trust
unit:
Basic and diluted $ (1.10) $ 0.03 $ (1.05) $ (0.06)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Weighted average number
of trust units
outstanding:
Basic 7,188,578 6,324,139 7,188,578 5,015,016
Diluted 7,193,174 6,327,260 7,192,047 5,015,143
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to interim consolidated financial statements.


INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the For the For the For the
three three nine nine
months months months months
ended ended ended ended
Sept 30, Sept 30, Sept 30, Sept 30,
2008 2007 2008 2007
(restated (restated
- note 14) - note 14)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating
activities
Net income
(loss) $ (7,915,951) $ 215,614 $ (7,514,583) $ (312,442)
Non-cash
items:
Depreciation
and
accretion 893,792 824,096 2,926,151 2,422,782
Financing
fees - - - 39,880
Amortization
of intangible
assets 86,172 82,234 256,333 246,701
Impairment
of goodwill 7,157,402 - 7,157,402 -
Future
income tax
recovery - - - (87,201)
Unit-based
compensation
(note 8) 94,226 141,673 336,165 676,111
Loss (gain)
on sale or
disposal of
property and
equipment 858 - 12,316 (10,239)
Loss on
write-off of
property and
equipment - - - 746,332
Change in
non-cash
working
capital 137,915 (606,991) (1,273,649) (728,092)
----------------------------------------------------------------------------
Cash flow
from operating
activities 454,414 656,626 1,900,135 2,993,832
----------------------------------------------------------------------------

Investing
activities
Financial
security
deposits - 1,468,473 - 1,433,474
Purchase of
property and
equipment (915,923) (2,846,290) (4,686,106) (5,298,219)
Acquisition
(note 3) (3,960,753) - (3,960,753) -
Proceeds on
sale of
property and
equipment - - 4,813 143,500
Change in
non-cash
investing
working
capital (13,828) (131,644) (609,393) (1,231,381)
----------------------------------------------------------------------------
Cash flow
used in
investing
activities (4,890,504) (1,509,461) (9,251,439) (4,952,626)
----------------------------------------------------------------------------

Financing
activities
Net proceeds
from
issuance of
units - 16,604,891 - 16,604,891
Increase
(decrease)
in bank
indebtedness $ 31,250 (262,005) 93,872 898,261
Net repayments
of long-term
debt (1,000,000) (13,500,000) (1,000,000) (13,500,000)
Advances from
long-term debt 7,871,530 - 13,071,530 2,000,000
Unit issuance
costs - (981,651) - (1,059,725)
Net repayments
on demand loan (700,000) - (550,000) -
Distributions
paid to
unitholders (1,249,312) (1,008,400) (3,746,720) (3,013,494)
----------------------------------------------------------------------------
Cash flow
from financing
activities 4,953,468 852,835 7,868,682 1,929,933
----------------------------------------------------------------------------

Increase
(decrease)
in cash 517,378 - 517,378 (28,861)

Cash,
beginning
of period - - - 28,861

----------------------------------------------------------------------------
Cash,
end of
period $ 517,378 $ - $ 517,378 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplementary
information
Cash
interest
paid $ 186,407 $ 110,841 $ 426,041 $ 545,852
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to interim consolidated financial statements.


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

AS AT AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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. The principal undertaking of the Trust is to engage in the oilfield waste management business indirectly through its wholly owned subsidiary, Deepwell Energy Services LP ("Deepwell LP") and its subsidiaries Deepwell Energy Services Commercial Trust and Deepwell Energy Services Ltd. and its joint interest investment in Palko Energy Ltd. ("Palko"). Deepwell provides oilfield waste management services, including treating, processing and disposing of oilfield wastes and custom treating of oil/water emulsions. 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. Use of the proportionate consolidation method is appropriate as Palko is jointly controlled by Deepwell through its 50% interest and other non-related parties which hold the remaining 50% interest.

The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles (GAAP) and are reported in Canadian dollars and are consistent with those set out in the audited consolidated financial statements as at December 31, 2007. Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. The most significant estimates relate to depreciation, amortization, asset retirement obligations, accretion, income taxes, unit-based compensation and recoverability of goodwill and intangibles. Actual results could differ from those estimates. The financial statements have, in management's opinion, been properly prepared using careful judgment with reasonable limits of materiality and within the framework of the Trust's accounting policies as summarized in the notes to the consolidated financial statements for the year ended December 31, 2007.

Certain information and disclosure normally required to be included in notes to annual consolidated financial statements have been condensed or omitted from these notes. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Trust's annual report for the year ended December 31, 2007. The consolidated interim financial statements have been prepared following the same accounting policies and methods of computation as the audited financial statements for the year ended December 31, 2007. Certain comparative amounts have been reclassified to conform to the current period's presentation.

2. Accounting policies

(a) Changes in accounting policies

In the first quarter of 2008, the Trust adopted three new Handbook sections issued by the Canadian Institute of Chartered Accountants (CICA):

Inventories

Effective January 1, 2008, the Trust adopted the CICA's new recommendation for inventory under Handbook Section 3031 "Inventories". The new section provides guidance on the measurement and disclosure of inventories. The new recommendation establishes that inventories should be measured at the lower of cost and net realizable value and provides guidance on the determination of cost. There was no material impact on the financial statements from the retrospective application of the new accounting recommendation. Disclosures relating to the new standard are presented in note 4.

Financial Instruments Disclosures and Presentation:

Section 3862 "Financial Instruments - Disclosures" describes the required disclosures related to the significance of financial instruments on an issuer's financial position and performance and the nature and extent of risks arising from financial instruments to which an issuer is exposed and how the issuer manages those risks.

Section 3863 "Financial Instruments - Presentation" describes the standards for presentation of financial instruments and non-financial derivatives and carries forward, unchanged, the presentation requirements of Section 3861 "Financial Instruments - Disclosure and Presentation" (notes 7 and 8). The Trust adopted each of these new sections effective January 1, 2008.

Capital Management

Section 1535 "Capital Disclosures" establishes standards for disclosing information about an entity's capital and how it is managed. These standards require an entity to disclose the following:

- Its objectives, policies and processes for managing capital;

- Summary quantitative data about what it manages as capital;

- Whether during the period it complied with any imposed capital requirements to which it is subject; and

- When the entity has not complied with such requirements, the consequences of such non-compliance.

The impact of the adoption of the new disclosures are presented in note 11.

(b) Recently issued

Goodwill and Intangible Assets

In February 2008, the CICA issued a new section, Section 3064 "Goodwill and Intangible Assets", replacing Section 3062 "Goodwill and Other Intangible Assets" as well as Section 3450 "Research and Development Costs". Section 3064 states that upon their initial identification, intangible assets are to be recognized as assets only if they meet the definition of an intangible asset and the recognition criteria. Section 3064 also provides further information on the recognition of internally generated intangible assets (including research and development costs). As for subsequent measurement of intangible assets, goodwill, and disclosure, Section 3064 carries forward the requirements of Section 3062. The new section applies to annual and interim financial statements relating to fiscal years beginning on or after October 1, 2008. The Trust is currently evaluating the effect of these new standards on its results, financial position and cash flows.

International Financial Reporting Standards

On February 13, 2008, the Accounting Standards Board confirmed the date of changeover from GAAP to International Financial Reporting Standards (IFRS). Canadian publicly accountable enterprises must adopt IFRS for their interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The Trust is currently developing its IFRS conversion plan and evaluating the effect of the new standards on its consolidated financial statements.

3. Acquisition

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 $3,960,753. Palko currently operates one facility which provides treatment, processing and disposing 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 184,533
---------------------------------------------------------------------------
Total consideration 5,456,063
Cash acquired (1,495,310)
---------------------------------------------------------------------------
Net cash consideration $ 3,960,753
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Allocation of purchase price
---------------------------------------------------------------------------
Net working capital $ 115,555
Capital assets
- Disposal Well 1,900,000
- Oilfield service equipment 459,532
Goodwill 2,105,914
Asset retirement obligation (107,248)
Future income tax liability (513,000)
---------------------------------------------------------------------------
$ 3,960,753
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Finalizing of the estimated fair value of the Palko acquisition is still in
progress and therefore, the allocation of the purchase price to the assets
acquired and liabilities assumed is subject to adjustment.
---------------------------------------------------------------------------
---------------------------------------------------------------------------


4. Inventories

Oil inventory consists of custom treating and waste oil retained in storage tanks at certain facilities. The inventory is valued at net realizable value and the offsetting credit is recorded as unearned revenue. As at September 30, 2008, oil inventory was valued at $566,120 (December 31, 2007 - $219,991).



5. Property, plant and equipment

---------------------------------------------------------------------------
Accumulated
September 30, 2008 Cost depreciation Net book value
---------------------------------------------------------------------------
Disposal wells $ 31,796,890 $ 4,754,971 $ 27,041,919
Pipelines 3,523,204 358,820 3,164,384
Tanks 4,179,451 278,511 3,900,940
Oilfield service equipment 4,962,440 1,219,600 3,742,840
Site improvements 8,253,596 644,462 7,609,134
Future sites 2,103,106 - 2,103,106
Buildings 2,867,606 144,382 2,723,224
Computer equipment 690,731 234,253 456,478
Vehicles 416,379 112,821 303,558
Furniture and fixtures 129,375 41,112 88,263
Leasehold improvements 12,784 4,707 8,077
---------------------------------------------------------------------------
$ 58,935,562 $ 7,793,639 $ 51,141,923
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


6. Intangible assets



---------------------------------------------------------------------------
Accumulated Net
September 30, 2008 Cost amortization book value
---------------------------------------------------------------------------
Completions and contracts $ 2,115,000 $ 227,434 $ 1,887,566
Customer relationships 1,310,000 538,130 771,870
Non-competition agreements 48,000 38,667 9,333
---------------------------------------------------------------------------
$ 3,473,000 $ 804,231 $ 2,668,769
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


7. Goodwill impairment

During the period, 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 in the amount of $7,157,407 was impaired.



----------------------------------------------------------------------------
Opening balance, January 1, 2008 $ 7,157,402
Acquisition (Note 3) 2,505,914
Impairment of goodwill (7,157,402)
-----------------
Ending balance, September 30, 2008 2,505,914
----------------------------------------------------------------------------


8. Unitholders' equity

(a) Regular Trust units

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

Trust units are redeemable at any time at the option of the unitholder. The redemption price is equal to the lesser of 90 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.



----------------------------------------------------------------------------
For the nine months ended For the year ended
September 30, 2008 December 31, 2007
Number Amount Number Amount
----------------------------------------------------------------------------
Balance, beginning
of period 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 25,383 128,046 44,323 264,184
Trust unit issue costs - - - (1,129,826)
----------------------------------------------------------------------------
Balance, end of period 7,188,583 $ 56,357,672 7,163,200 $ 56,229,626
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(b) Trust unit options

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

The fair value of options issued have been estimated using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 4.21 percent, volatility of 48 percent. 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.



----------------------------------------------------------------------------
Options outstanding as of Sept 30, 2008 Options exercisable as at
Sept 30, 2008
----------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Exercise Number of contractual exercise Number of exercise
price options life price options price
----------------------------------------------------------------------------
4.30 29,000 4.52 4.30 - n/a
5.58 182,971 3.87 5.58 110,196 5.58
5.78 2,000 3.60 5.78 668 5.78
8.25 258,500 2.89 8.25 172,329 8.25
8.56 15,000 3.00 8.56 5,000 8.56
8.90 500 2.97 8.90 333 8.90
----------------------------------------------------------------------------
487,971 3.36 7.14 288,526 7.35
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(c) Contributed surplus

----------------------------------------------------------------------------
For the nine months ended For the year ended
September 30, 2008 December 31, 2007
----------------------------------------------------------------------------
Balance, beginning of period $ 1,066,549 $ 251,432
Unit-based compensation expense 336,165 815,117
----------------------------------------------------------------------------
Balance, end of period $ 1,402,714 $ 1,066,549
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(d) Distributions to unitholders

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



----------------------------------------------------------------------------
Distri-
bution Distri-
Record Payment per Trust bution
Period date date unit amount
----------------------------------------------------------------------------
January 2008 January 31, 2008 February 15, 2008 $ 0.06 $ 430,112
February 2008 February 29, 2008 March 14, 2008 0.06 430,268
March 2008 March 31, 2008 April 15, 2008 0.06 430,426
April 2008 April 30, 2008 May 15, 2008 0.06 430,564
May 2008 May 31, 2008 June 15, 2008 0.06 430,682
June 2008 June 30, 2008 July 15, 2008 0.06 430,805
July 2008 July 31, 2008 August 15, 2008 0.06 430,974
August 2008 August 31, 2008 September 15, 2008 0.06 431,144
September 2008 September 30, 2008 October 15, 2008 $ 0.060 431,315
----------------------------------------------------------------------------
Distributions declared to unitholders during the period $ 3,876,290
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(e) Dividend re-investment plan

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

9. 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:

(a) Demand loan

Under the credit facilities, the Trust has a $2,000,000 demand revolving operating loan. During the period, interest ranged from the lender's prime rate plus 0.125 percent to 1.625 percent, according to the funded debt to EBITDA ratio. As of September 30, 2008 the borrowing base for the demand loan was at $2,000,000. As at September 30, 2008, there were no amounts drawn on this facility (December 31, 2007 - $550,000).

(b) Long-term debt

Under the credit facilities, the Trust has a $25,000,000, 364-day extendible revolving term loan committed to May 29, 2009. No set principal repayment has been established and the Trust has the ability to draw down and repay advances on this facility until the expiry of the credit agreement. Interest on the facility ranges from the lender's prime rate plus 0.125 percent to 1.625 percent per annum and is calculated monthly and paid in arrears. As at September 30, 2008 an aggregate of $16,871,530 was outstanding on this facility of which $1,874,614 is the current portion due within one year. This credit facility has $1,200,000 remaining that can be drawn based on the current borrowing base (December 31, 2007 $4,800,000).

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

10. Internal restructuring charges

Internal restructuring charges consist of certain employee recruitment, other employee, legal and professional costs incurred in 2008. For the three and nine months ended September 30, 2008 these amounted to $748,171 and $839,010 respectively (September 30, 2007 - nil).

11. Capital disclosures

A key objective of the Trust is effective management of its capital to allow it to maintain investor, creditor and market confidence and to sustain future development of the business. 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 has externally imposed capital requirements as governed through the credit facilities through the maintenance of certain bank covenants, in particular. the funded debt to EBITDA 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 and EBITDA (which is a Non-GAAP measure), is calculated as trailing twelve months earnings before interest, income taxes, depreciation and amortization and one-time allowance 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 3.00:1. At September 30, 2008 the funded debt to EBITDA ratio was 2.80:1 and at December 31, 2007 the ratio was 1.42:1.

12. Financial risk management and financial instruments

The Trust's risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Trust's financial performance. The Trust manages its risks and risk exposures through a combination of financial instruments, insurance, a system of internal and disclosure controls and sound business practices. The Trust does not purchase any derivative financial instruments for speculative purposes. Risk management is primarily the responsibility of the Trust's corporate finance function. Significant risks are regularly monitored and actions are taken, when appropriate, according to the Trust's approved policies, established for that purpose.

The following summarizes the methods and assumptions used in estimating the fair value of the Trust's financial instruments:

i) Short-term financial instruments approximate their carrying amount due to the relatively short period to maturity. These include cash, accounts receivable, bank indebtedness, accounts payable and accrued liabilities and distributions payable.

ii) Long-term debt with a variable interest rate is carried at cost, which reflects fair value as the interest rate is the current market rate available to the Trust.

Pursuant to CICA Handbook Section 3855 the Trust has classified and measures its financial instruments as follows:

Loans and receivables - initially measured at fair value, subsequently measured at amortized cost using the effective interest method. Included in this category is accounts receivable.

Other financial liabilities - initially measured at fair value, subsequently measured at amortized cost using the effective interest method. Included in this category are accounts payable and accrued liabilities, bank indebtedness, long-term debt and distributions payable.

Held-for-trading - measured at fair value with realized and unrealized gains and losses include in net income in the period incurred. Included in this category is cash.

Interest rate risk

The Trust's short and long term borrowings are subject to floating interest rates. Based on outstanding bank loans and indebtedness as at September 30, 2008, a 1% increase or decrease in interest rates would increase or decrease interest expense by approximately $126,000 over a nine-month period. Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in the interest rates. Changes in market interest rates may have an effect on the cash flows associated with some financial assets and liabilities, known as cash flow risk, and on the fair value of other financial assets or liabilities, known as price risk. The Trust is exposed to interest rate risk with respect to the utilization of floating rate credit facilities to finance operations and expansion which are subject to floating interest rates ranging from prime rate plus 0.125 to 1.625 percent with the actual rate dependent upon the Trust's ratio of funded debt to EBITDA. The Trust has the option to renew these loans annually.

Credit concentration

The carrying value of accounts receivable is net of an allowance for doubtful accounts which reflects management's current assessment of its credit risk. The allowance for doubtful accounts at September 30, 2008 is $35,200 (2007 - $35,200) and has not changed since December 31, 2007. The Trust has a concentration of credit risk because substantially all oil revenues are accumulated by a single purchaser and paid in full the month following receipt. The allowance for doubtful accounts is less than 1% of accounts receivable and relates to revenues earned in the normal course of operations. The Trust manages this risk by entering into sales contracts with credit-worthy counterparties, reviewing its exposure to individual entities on a regular basis, and delaying repayment of oil credits beyond the settlement date.

Liquidity risk

Investments to drive growth can require significant financial resources. A range of funding alternatives is available to the Trust including cash flow provided by operations, additional debt, the issuance of equity or a combination thereof. Under the terms of the Trust's bank credit facilities currently in place, $16,871,530 of long-term debt outstanding is revolving, although the Trust retains the right to repay, without penalty, amounts as deemed appropriate. At September 30, 2008, the Trust has remained within all prescribed bank debt covenants.

Below is a summary of the financial performance under selected bank covenants:



----------------------------------------------------------------------------
Sept. 30, Dec. 31,
Prescribed Target 2008 2007
Covenant Covenant (actual) (actual)
----------------------------------------------------------------------------
Working capital ratio(1) Min 1.25 Min 1.50 1.29 1.25
----------------------------------------------------------------------------
Funded debt/EBITDA(2) Max 3.0/2.75 2.5 2.8 1.42
----------------------------------------------------------------------------
Trailing 4 quarter
distributable cash Excess
exceeds cash distributable $ 500,000
distributions(3) cash excess $604,042 $204,067
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Working capital ratio is defined as the ratio of current assets to
current liabilities (excluding assets and liabilities of Palko).
(2) Funded debt consists of the current and long-term portions of bank debt,
operating loan advances and commitments at the balance sheet date.
EBITDA (which is a Non-GAAP measure), is calculated as trailing twelve
months earnings before interest, income taxes, depreciation and
amortization and one-time allowance for certain items incurred in the
third quarter of 2008 of $1,550,000, but excludes EBITDA from Palko.
(3) Distributable cash is defined as EBITDA less interest expense and cash
taxes. Cash distributions are total distributions less reinvested
distributions.


Commodity price risk

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 and the Trust is impacted based on the activity levels in the industry. 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.

Seasonality

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.

13. Related party transactions

During the current quarter, the Trust made payments in the amount of $65,680 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. There were no such transactions for the year ended December 31, 2007.

14. Correction of an error

The comparative statements of income (loss), other comprehensive income (loss), and statements of cash flows have been restated for financing fees that were recorded as deferred financing fees at September 30, 2007 in error. The following summarizes the effect of the adjustment as at and for the three and nine month periods ended September 30, 2007:



----------------------------------------------------------------------------
As at September 30, 2007 Previously Increase (decrease) Restated recorded
--------------------------------------------------
Deferred financing fees $ 25,455 $ (25,455) $ -
Deficit 5,958,958 25,455 5,984,413
Three months ended
September 30, 2007
Financing fees expense $ 9,545 $ 25,455 $ 35,000
Net income (loss)
and comrehensive
income 241,069 (25,455) 215,614
Nine months ended
September 30, 2007
Financing fees
expense $ 66,925 $ 25,455 $ 92,380
Net income (loss)
and comrehensive
income (286,987) (25,455) (312,442)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


15. Subsequent events

The Trust declared a cash distribution for the period October 1, 2008 to October 31, 2008 at $0.06 per unit to be paid on November 14, 2008.

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

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

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