Deepwell Energy Services Trust
TSX : DWL.UN

Deepwell Energy Services Trust

August 14, 2008 18:45 ET

Deepwell Announces Second Quarter and First-Half 2008 Results

CALGARY, ALBERTA--(Marketwire - Aug. 14, 2008) - Deepwell Energy Services Trust (TSX:DWL.UN) ("Deepwell" or the "Trust") is pleased to release its financial and operating results for the three-month and six-month periods ended June 30, 2008. Deepwell achieved significant improvements in performance over the second quarter of 2007.

Highlights of the second quarter:

- Quarterly revenue of $4.7 million, an increase of 87 percent over the second quarter of 2007;

- Quarterly earnings before interest, taxes, depreciation and amortization (EBITDA) of $1.9 million ($0.17 per unit), an increase of 53 percent over the second quarter of 2007;

- Funds from operations of $1.0 million ($0.13 per unit), an increase of 89 percent over the second quarter of 2007; and

- Maintained monthly distributions at $0.06 per unit ($1.3 million or $0.18 per unit for the quarter).

The second quarter results demonstrate the continuing performance of Deepwell's original three oil field waste management facilities and a modest contribution from the Claresholm oilfield waste management facility, which opened in the first quarter of 2008. Although the second quarter is traditionally the most challenging of the year due to seasonal factors, Deepwell posted reasonably strong results that were a significant improvement over the second quarter of 2007. The strengthened results were primarily a result of operational improvements and capacity additions at Deepwell's facilities, higher commodity prices and a modest increase in oilfield activity in general over the prior year's quarter.

Industry forecasts for oilfield activity are somewhat stronger than originally forecast for 2008. Due to this anticipated recovery, to the 2008 addition of Deepwell's Claresholm facility and to service and capacity improvements at Deepwell's original three facilities, Deepwell is optimistic about the potential for stronger year-over-year performance in the second half of 2008.

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

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following Management's Discussion and Analysis (MD&A) of Deepwell Energy Services Trust (the "Trust") has been prepared taking into consideration information available to August 13, 2008 and should be read in conjunction with the Trust's unaudited interim consolidated financial statements as at and for the three and six months ended June 30, 2008. This MD&A discusses operations and events for the three and six months ended June 30, 2008. Unless otherwise noted, references to the "quarter" or "Q2-08" refer to the three months ended June 30, 2008. References to "2008" or the "year" or "year-to-date" refer to the six months ended June 30, 2008. References to "Q2-07" refer to the three months ended June 30, 2007. References to "2007" or the "prior year" refer to the six months ended June 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"). The Trust and its subsidiaries (collectively "Deepwell") are based in Calgary, Alberta and were established to acquire and operate businesses that engage in oilfield waste management services. The principal undertaking of Deepwell is to provide a variety of services to oil and natural gas exploration and production companies in western Canada.

Forward-looking statements

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

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

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

Non-GAAP measures

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

- Earnings before interest, taxes, depreciation and amortization (EBITDA); and

- Funds from operations, which refers to cash flow from operating activities before changes in non-cash working capital.

These measures are identified and presented, where appropriate, together with reconciliations to the equivalent GAAP measure. 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 oilfield waste management business, and intends to continue that focus. The oilfield waste management business in Alberta has significant barriers to entry, which support the long-term cash flow of current and future facilities.

- Growth: Deepwell is primarily focused on organic growth through adding new facilities and increasing capacity and services provided at existing facilities.

- 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 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.



----------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue $4,738,690 $2,532,151 $9,866,380 $6,959,661
Operating expenses 2,852,928 1,190,739 5,580,583 3,109,961
----------------------------------------------------------------------------
Gross Margin 1,885,762 1,341,412 4,285,797 3,849,700
General and
administrative expenses 688,254 558,849 1,165,968 1,155,393
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EBITDA 1,197,508 782,563 3,119,829 2,694,307
Depreciation, accretion
and amortization 1,194,711 864,413 2,202,520 1,763,154
Financing fees 19,093 33,452 22,910 57,380
Unit-based compensation 121,509 359,600 241,939 534,737
Interest 133,536 229,450 239,634 435,011
Loss on sale or disposal
of property and
equipment 42 (17,500) 11,458 (10,239)
Loss on write-off of
property and equipment - - - 367,702
Fire-related expenses - - - 162,119
Future income tax
recovery - (62,651) - (87,201)
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Net income (loss) (271,383) (624,201) 401,368 (528,356)

Non-cash items:
Depreciation,
amortization and
accretion 1,194,711 864,413 2,202,520 1,763,154
Financing fees 33,452 - 57,380
Unit-based compensation 121,509 359,600 241,939 534,737
Loss on sale or disposal
of property and
equipment 42 (17,500) 11,458 (10,239)
Loss on write-off of
property and equipment - - - 746,332
Future income tax
recovery - (62,651) - (87,201)
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Funds from operations $1,044,879 $553,113 $2,857,285 $2,475,807

Changes in non-cash
working capital 351,968 1,404,547 (762,028) (76,367)
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Cash flow from operating
activities $1,396,847 $1,957,660 $2,095,257 $2,399,440
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----------------------------------------------------------------------------

----------------------------------------------------------------------------
Net income $ (271,383) $ (624,201) $ 401,368 $ (528,356)
Per unit, basic and
diluted (0.04) (0.14) 0.06 (0.12)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
EBITDA $1,197,508 $782,563 $3,119,829 $2,694,307
Per unit, basic and
diluted 0.17 0.18 0.43 0.62
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----------------------------------------------------------------------------
Funds from operations $1,044,879 $553,113 $2,857,285 $2,475,807
Per unit, basic and
diluted 0.15 0.13 0.40 0.57
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----------------------------------------------------------------------------
Distributions to
Unitholders $1,292,051 $753,183 $2,582,855 $1,849,153
Per unit, basic and
diluted 0.18 0.17 0.36 0.42
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Gross margin as a
percentage of revenue 40% 53% 43% 55%
General and
administrative expenses
as a percentage of
revenue 15% 22% 12% 17%
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Capital expenditures $ 858,390 $ 1,613,245 $ 3,770,183 $ 2,451,930
Total assets, end of
period $62,825,170 $53,839,846 $62,825,170 $53,839,846
Long-term debt, end of
period $10,000,000 $13,500,000 $10,000,000 $13,500,000
Total long-term
liabilities, end of
period $10,776,341 $13,869,652 $10,776,341 $13,869,652
Trust unit equity, end
of period $56,314,060 $40,443,363 $56,314,060 $40,443,363
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Weighted average Trust
units, basic 7,180,086 4,357,724 7,180,086 4,356,867
Weighted average Trust
units, diluted 7,184,666 4,357,744 7,184,021 4,356,867
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Second quarter 2008 overview

Deepwell achieved significantly improved year-over-year results in what is traditionally the weakest quarter of the year for the industry. Deepwell generated revenue of $4,738,690 for the second quarter of 2008, an increase of 87 percent from the same period in 2007. Second quarter EBITDA was $1,197,508, an increase of 53 percent from the same period in 2007 and funds from operations for the quarter were 89 percent higher than Q2-07. Capacity growth, service additions and stronger commodity prices led to the improved results.

The net loss for the quarter was $0.04 per unit basic and diluted (Q2-07 - net loss of $0.14 per unit basic and diluted) and funds from operations for the quarter were $0.15 per unit basic and diluted (Q2-07 - $0.13 basic per unit and diluted).

The Trust's balance sheet remains strong with long term debt of $10,000,000 and a funded debt to twelve month EBITDA of 1.99:1. At June 30, 2008 the Trust's available capacity on its credit facilities was approximately $4,100,000. Distributions were maintained at 6 cents per unit. Total distributions paid to unitholders for the quarter, including distributions to participants under the Trust's Distribution Reinvestment Plan (DRIP), were $1,292,051 or $0.18 per unit (Q2-07 - $0.18 per unit).

Results of operations

Revenue

Revenues for the quarter were $4,738,690 (year-to-date - $9,866,380; prior year - $6,959,661) an increase of 87 percent from the second quarter of 2007. In the quarter 60 percent of revenues were from processing and disposal fees and 40 percent were from the sale of recovered oil, compared to 66 percent and 34 percent, respectively, for the same period in 2007. Processing revenues of $2,853,063 increased significantly (71 percent) from 2007 processing revenues of $1,672,814. The addition of the Claresholm facility in 2008 contributed to the increased revenues, although revenue growth at the facility has been hampered by the timing of its start-up near the beginning of spring break-up. While the second quarter of 2008 included a longer than normal break-up, it was a slight improvement over the conditions in the second quarter of 2007. In addition to the revenue impact of the Claresholm facility and the reduced severity of spring break-up, overall industry conditions were improved over the second quarter of 2007.

Increased oil volumes received in the quarter were a result of the higher activity levels and due to product received from well fracturing and production oil classified as waste, which did not meet pipeline specification (off-spec production fluids). The increase in oil revenues was partially offset by additional oil repayments reflected directly in operating costs.

Expenses

Operating expenses

Operating expenses were $2,852,928 for the quarter (Q2-07 - $1,190,436), yielding a gross margin of 40 percent for the quarter (Q2-07 - 53 percent). The decrease in operating margin is largely due to the start-up of the Claresholm facility. The facility began the quarter slowly and produced losses in the first two months of the quarter. The three original facilities produced a combined gross margin of 52 percent for the quarter, one percent lower than in Q2-07. Operating expenses include $525,722 in oil credits repaid to customers compared to $27,168 in Q2-07. The increase in oil credits is due largely to increased activity, and secondarily to an increased proportion of revenues coming from waste versus produced water for the quarter as well as to credits paid on off-spec production fluids in Q2-08. 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 the higher oil and solid waste volumes.

General and administrative

General and administrative expenses, which represent costs associated with the Trust's head office, senior management and public entity costs, were $688,254 or 15 percent of revenue for the quarter and $1,165,968 or 12 percent of revenue year-to-date (Q2-07 - $558,849 or 22 percent of revenue; prior year - $1,155,393 or 17 percent of revenue).

Depreciation, amortization and accretion

Depreciation, amortization and accretion expense was $1,194,711 for the quarter (Q2-07 - $897,865) and consisted of depreciation of fixed assets of $1,088,713 (Q2-07 - $766,726), accretion of $19,869 (Q2-07 - $15,453). Amortization of intangible assets totalled $86,129 (Q2-07 - $82,234), and consisted of the amortization of completions and contracts, customer relationships, and non-competition agreements. The increase in depreciation expense is a result of the completion of the Claresholm facility in the first quarter of 2008.

Interest

Total cash interest expense for the quarter was $133,536 (Q2-07 - $229,450), comprised of interest on long-term debt of $123,303 (Q2-07 - $216,309) and interest on the Trust's operating loan of $10,233 (Q2-07 - $13,141). Interest expense decreased from the second quarter of 2007 due to lower debt levels. Interest rates are floating, with a range from 0.125 percent to 1.400 percent over the lender's prime rate, depending on the Trust's ratio of consolidated funded debt to earnings before interest, taxes, depreciation, amortization, accretion, and unit-based compensation. Actual interest rates during the quarter ranged from 0.125 percent to 1.4 percent over the lender's prime rate.

Distributions to unitholders

Distributions declared to unitholders for the quarter, including distributions to participants under the DRIP, were $1,292,051 (Q2-07 - $784,544). Actual cash distributions paid were $1,259,739 (Q2-07 - $753,183) 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, which was a result of Deepwell raising equity in support of its growth initiatives. The distribution rate per unit remained unchanged at $0.06 per month in the second quarter, reflecting Deepwell's ongoing ability to generate cash from operating activities.



Three months ended Six months ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Cash flows from
operating activities $ 1,396,847 $ 1,957,660 $ 2,095,257 $ 2,399,441
Net income (loss) (271,383) (624,201) 401,368 (528,356)
Actual cash
distributions paid
during the period 1,259,739 753,183 2,498,423 1,849,153
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----------------------------------------------------------------------------
Excess (shortfall) of cash
flows from operating
activities over cash
distributions paid 137,108 1,204,477 (403,166) 550,288
Shortfall of net income
(loss) over cash
distributions paid $(1,531,122) $(1,377,384) $(2,097,055) $(2,377,509)
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While the cash distributions to unitholders exceeded net income in the first six 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. While the Trust believes that the current operating assets have the ability to support the current level of 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.

Investing activities

Net cash used in investing activities during the quarter was $1,528,871 (Q2-07 - $1,277,961).

Capital expenditures

The Trust's capital expenditures for purchase of property and equipment for the quarter were $858,390 (Q2-07 - $1,613,245). During the period Deepwell invested $410,808 in completing construction of the Claresholm facility. The remaining investment in property and equipment included investment in tank and containment upgrades, safety equipment, future sites, computing equipment, and other oilfield service equipment.

Unitholders' equity

Trust unit option plan

As at June 30, 2008, a total of 511,971 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, 29,000 options were granted at an exercise price of $4.58.



Options outstanding as at June Options exercisable as
30, 2008 at June 30, 2008
----------------------------------------------------------------------------
Weighted Weighted Number of Weighted
Number average average average
Exercise of contractual exercise options exercise
price options life price price
--------- ---------- ------------ ---------- ------------ ----------

$4.46 29,000 4.77 $4.46 - n/a

5.76 188,971 4.13 5.76 73,800 5.76

5.96 2,000 3.85 5.96 668 5.96

8.43 276,500 3.14 8.43 92,171 8.43

8.92 15,000 3.26 8.92 5,000 8.92

$9.30 500 3.22 9.30 167 9.30
----------------------------------------------------------------
511,971 3.61 $7.22 171,806 $7.29
----------------------------------------------------------------
----------------------------------------------------------------


The Trust recorded unit-based compensation expense and contributed surplus of $121,509 during the period (Q2-07 - $241,939).

Liquidity

Net cash provided by financing activities for the quarter was $440,261 (Q2-07 - $590,739). The Trust paid distributions to unitholders of $1,292,051 (Q2-07 - $753,183) during the quarter, of which $32,312 was realized in proceeds from its distribution reinvestment plan (Q2-07 - $31,060).

Credit facilities

The Trust renewed its existing credit facilities on June 30, 2008 with a Canadian chartered bank (the "credit facilities"), which 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 1.4 percent and this rate is dependent on the funded debt to EBITDA ratio. As at June 30, 2008 the borrowing base for the demand loan was $1,300,000 and the amount drawn was $700,000.

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. Interest ranges from the lender's prime rate plus 0.125 percent to 1.4 percent per annum. Interest is calculated monthly and paid in arrears. As at June 30, 2008 an aggregate of $10,000,000 is outstanding of which $277,778 is current. The revolving period extends to May 29, 2009, at which time the credit facility is eligible for renewal.

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

Interest rate risk

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

Contractual obligations, commitments and contingencies



The following table shows future contractual obligations by period:

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Payments by
period Total 2008 2009-2010 2011-2012 Thereafter
----------------------------------------------------------------------------
Long-term
debt $10,000,000 $ - $ 6,666,667 $ 3,333,333 $ -
Commitments 477,387 82,697 163,024 139,962 91,704
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Total
contractual
obligations $10,477,387 $ 82,697 $ 6,829,691 $ 3,473,296 $ 91,704
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Financial instruments

All of the Trust's financial instruments as at June 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 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
----------------------------------------------------------------------------

Quarter Ended
June March December September
2008 2008 2007 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue $ 4,738,690 $ 5,127,690 $ 3,650,736 $ 3,513,654
Operating expenses 2,852,928 2,727,653 1,941,216 1,584,126
----------------------------------------------------------------------------
Gross Margin 1,885,762 2,400,037 1,709,520 1,929,528
General and
administrative 688,254 477,714 842,448 520,373
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EBITDA 1,197,508 1,922,323 867,072 1,409,155

Depreciation,
amortization
and accretion 1,213,804 1,011,626 838,528 915,875
Financing fees - - 114,043 -
Unit-based compensation 121,509 120,430 138,706 141,372
Interest 133,536 106,098 44,639 110,841
Loss (gain) on sale of
property and equipment 42 11,416 1,466 -
Loss on write-off of
property and equipment - - - -
Fire-related expenses - - - -
Future income tax
recovery - - - -
----------------------------------------------------------------------------
Net income (loss) $ (271,383) $ 672,753 $ (270,310) $ 241,067
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Net income (loss) per
Trust unit:
Basic $ (0.04) $ 0.09 $ (0.04) $ 0.04
Diluted $ (0.04) $ 0.09 $ (0.04) $ 0.04
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Weighted average number
of Trust units
outstanding
Basic 7,180,086 7,173,770 7,154,344 6,324,139
Diluted 7,184,666 7,173,770 7,154,344 6,327,260
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Quarter Ended
June March December September
2007 2007 2006 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue $ 2,532,151 $ 4,427,510 $ 4,059,296 $ 3,808,795
Operating expenses 1,190,437 1,919,222 1,605,492 2,040,285
----------------------------------------------------------------------------
Gross Margin 1,341,714 2,508,288 2,453,804 1,768,510
General and
administrative 558,848 596,544 730,354 448,788
----------------------------------------------------------------------------

EBITDA 782,866 1,911,744 1,723,450 1,319,722

Depreciation,
amortization
and accretion 897,865 922,669 993,621 697,052
Financing fees - - - 15,588
Unit-based compensation 359,902 175,137 197,812 53,620
Interest 229,450 205,561 149,325 102,469
Loss (gain) on sale of
property and equipment (17,500) 7,261 34,295 -
Loss on write-off of
property and equipment - 367,702 162,119 -
Fire-related expenses - 162,119 - -
Future income tax
recovery (62,651) (24,550) (47,799) -
----------------------------------------------------------------------------
Net income (loss) $ (624,200) $ 95,845 $ 234,077 $ 450,993
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Net income (loss) per
Trust Unit:
Basic $ (0.14) $ 0.02 $ 0.05 $ 0.10
Diluted $ (0.14) $ 0.02 $ 0.05 $ 0.10
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Weighted average number
of Trust units
outstanding
Basic 4,357,724 4,356,000 4,356,000 4,356,000
Diluted 4,357,744 4,356,000 4,357,187 4,477,793
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The Trust's business is seasonal with the first and fourth quarters traditionally being the two strongest quarters for the industry and the second quarter being the weakest. The underlying causes of the seasonality are variations in prevailing weather conditions, which in turn have effects on the ability to carry out field operations. While Deepwell's facilities remain open and accessible throughout the year, its customers are, at times, restricted from moving waste due to spring break-up or periods of rainfall. In the Grande Cache region restrictions also occur at certain times of the year in designated wildlife areas.

Outlook

Deepwell anticipates that, based upon current industry activity levels, its quarterly performance during the remainder of 2008 will continue to surpass levels in comparable quarters of previous years. Stronger year-over-year industry activity, coupled with the addition of the Claresholm facility, should be the primary contributors to anticipated growth. Commodity prices remain at levels higher than in previous years, although they have softened recently. Expectations are that commodity prices will remain higher than 2007 levels, leading to year-over-year increases in industry activity and oil revenue.

The Petroleum Services Association of Canada recently reiterated an earlier forecast for drilling activity to be somewhat stronger than initially forecast for 2008, while the Canadian Association of Oilwell Drilling Contractors recently increased its drilling forecast for 2008. These forecast levels remain considerably lower than the record activity levels experienced in 2005 and 2006, but are stronger than initial forecasts of a serious downturn for 2008. Activity levels at oilfield waste processing facilities are driven by a combination of new well tie-ins and existing production within their service areas. With the total number of producing wellbores in Alberta continuing to increase (even if at somewhat lower annual rates), demand for third-party waste management services is also expected to grow. The medium to longer-term effects on industry activity levels of Alberta's new royalty regime, with higher royalty rates commencing in January 2009, remain uncertain.

Deepwell continues to pursue opportunities for increasing services and capacity at existing facilities and anticipates the construction of a facility in a new market territory in 2009.

Critical accounting estimates

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

Risks and uncertainties

Cyclicality of the oil and natural gas industry

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

Oil and natural gas prices

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

Seasonal weather

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

Dependence on key personnel

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

Competition for human resources

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

Reliance on major customers

It is estimated that the top 10 customers of Deepwell accounted for approximately 50 percent of revenue for the six months ended June 30, 2008, the largest customer accounting for 22 percent. Deepwell does not generally enter into long-term contracts with its customers and there can be no assurance that the current customers will continue their relationships with Deepwell.

Competition

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

Operating risks and insurance

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

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

Environmental risks

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

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

Credit risk

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

Access to additional financing

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

Capital expenditures

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

Leverage and restrictive covenants

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

Uncertainty of cash distributions

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

Government regulations

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

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

Related-party transactions

There were no related-party transactions in the three months ended June 30, 2008.

Internal controls

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



INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF


DEEPWELL ENERGY SERVICES TRUST

AS AT AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008
(unaudited)


As per the disclosure requirements of National Instrument 51-102, Part 4, subsection 4.3(3)(a), this note is to inform readers that Deepwell has elected not to review these financial statements and notes with its auditors.

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



DEEPWELL ENERGY SERVICES TRUST
CONSOLIDATED BALANCE SHEETS

June 30, December 31,
2008 2007
As at (unaudited) (audited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Assets
Current assets:
Accounts receivable $ 3,264,145 $ 2,746,918
Inventory 699,169 219,991
Prepaid expenses and deposits 208,265 214,920
----------------------------------------------------------------------------
4,171,579 3,181,829

Property and equipment (note 3) 48,741,248 46,982,025
Intangible assets (Note 4) 2,754,941 2,925,102
Goodwill 7,157,402 7,157,402
----------------------------------------------------------------------------
$62,825,170 $60,246,358
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities
Current liabilities:
Bank indebtedness $ 103,159 $ 40,537
Demand loan 700,000 550,000
Accounts payable and accrued liabilities 2,613,937 3,631,316
Distributions payable 430,805 429,792
Current portion of long-term debt 277,778 933,333
----------------------------------------------------------------------------
4,125,679 5,584,978

Long-term debt (note 6) 9,722,222 3,866,667
Asset retirement obligations 1,054,119 1,016,449
----------------------------------------------------------------------------
14,902,020 10,468,094
----------------------------------------------------------------------------

Unitholders' Equity
Trust units (note 5) 56,314,060 56,229,626
Contributed surplus (note 5) 1,308,488 1,066,549
Deficit (9,699,398) (7,517,911)
----------------------------------------------------------------------------
47,923,150 49,778,264

----------------------------------------------------------------------------
$62,825,170 $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 RETAINED EARNINGS (DEFICIT)
(unaudited)

For the For the For the For the
three three six six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Revenues $ 4,738,690 $ 2,532,151 $ 9,866,380 $ 6,959,661
----------------------------------------------------------------------------

Expenses
Operating 2,852,928 1,190,739 5,580,583 3,109,961
General and
administrative 688,254 558,849 1,165,968 1,155,393
Depreciation and
accretion 1,108,582 782,179 2,032,359 1,598,686
Amortization of
intangible assets 86,129 82,234 170,161 164,468
Unit-based compensation 121,509 359,600 241,939 534,737
Interest on short-term debt 10,233 13,141 20,421 30,641
Interest on long-term debt 123,303 216,309 219,213 404,370
Financing fees 19,093 33,452 22,910 57,380
Loss (gain) on disposal of
property and equipment 42 (17,500) 11,458 (10,239)
Loss on write-off of
property and equipment
(net of accrued
insurance proceeds) - - - 367,702
Fire-related expenses - - - 162,119
----------------------------------------------------------------------------
5,010,073 3,219,003 9,465,012 7,575,218

Income (loss) before
taxes (271,383) (686,852) 401,368 (615,557)
Future income tax
recovery - (62,651) - (87,201)
----------------------------------------------------------------------------
Net income (loss) and
comprehensive income
(loss) (271,383) (624,201) 401,368 (528,356)

Retained earnings
(deficit), beginning
of period $(8,135,964) $(3,507,491) $(7,517,911) $ 859,027
Distributions to
unitholders (1,292,051) (784,243) (2,582,855) (5,246,606)
----------------------------------------------------------------------------
Deficit, end of period $(9,699,398) $(4,915,935) $(9,699,398) $(4,915,935)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net income per trust unit:
Basic and diluted $ (0.04) $ (0.14) $ 0.06 $ (0.12)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Weighted average number
of trust units
outstanding:
Basic 7,180,086 4,357,724 7,180,086 4,356,867
Diluted 7,184,666 4,357,744 7,184,021 4,356,867
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to interim consolidated financial statements.


DEEPWELL ENERGY SERVICES TRUST
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)


For the For the For the For the
three three six six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating activities
Net income (loss) $ (271,383) $ (624,201) $ 401,368 $ (528,356)

Non-cash items:
Depreciation and
accretion 1,108,582 782,179 2,032,359 1,598,686
Financing fees - 33,452 - 57,380
Amortization of
intangible assets 86,129 82,234 170,161 164,468
Future income tax
recovery - (62,651) - (87,201)
Unit-based
compensation
(Note 5) 121,509 359,600 241,939 534,738
Loss (gain) on sale
or disposal of
property and
equipment 42 (17,500) 11,458 (10,239)
Loss on write-off of
property and
equipment - - - 746,332
Change in non-cash
working capital 351,968 1,404,547 (762,028) (76,367)
----------------------------------------------------------------------------
Cash flow from
operating activities 1,396,847 1,957,660 2,095,257 2,399,441
----------------------------------------------------------------------------

Investing activities
Financial security
deposits - 70,404 - 55,826
Purchase of property
and equipment (858,390) (1,613,245) (3,770,183) (2,451,930)
Proceeds on sale of
property and
equipment 1,313 80,000 4,813 143,500
Change in non-cash
investing working
capital (671,795) 184,880 (1,244,086) (1,099,737)
----------------------------------------------------------------------------
Cash flow from
investing activities (1,528,871) (1,277,961) (5,009,456) (3,352,341)
----------------------------------------------------------------------------

Financing activities
Share issuance costs - (337,556) - (387,074)
Proceeds from
long-term debt 1,000,000 500,000 5,200,000 2,000,000
Repayments on demand
loan 700,000 - 150,000 -
Distributions paid
to unitholders (1,259,739) (753,183) (2,498,423) (1,849,153)
----------------------------------------------------------------------------
Cash flow from
financing activities 440,261 (590,739) 2,851,577 (236,227)
----------------------------------------------------------------------------

Decrease in cash 308,236 88,960 (62,622) (1,189,127)

(Bank indebtedness)
cash, beginning of
period (411,395) (1,249,226) (40,537) 28,861

----------------------------------------------------------------------------
Bank indebtedness,
end of period $ (103,159) $(1,160,266) $ (103,159) $(1,160,266)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplementary
information
Cash interest paid $ 133,536 $ 229,450 $ 239,634 $ 435,011
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to interim consolidated financial statements.


DEEPWELL ENERGY SERVICES TRUST
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
AS AT AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008


1. Nature of the Organization

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. Deepwell LP provides oilfield waste management services, including treating, processing and disposing of oilfield wastes and custom treating of oil/water emulsions.

2. Significant Accounting Policies

(a) Basis of presentation

The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles (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.

(b) Changes in accounting policies

(i) Adopted in 2008

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.

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.

(ii) Adopted in 2007

Comprehensive Income, Financial Instruments and Hedges

In the first quarter of 2007, the Trust adopted the following new Handbook sections issued by the CICA:

Section 1530 "Comprehensive Income" introduced a new financial statement which shows the change in equity of an enterprise from transactions and other events and circumstances from non-owner sources.

Section 3855 "Financial Instruments - Recognition and Measurement" established standards for recognizing and measuring financial instruments, namely financial assets, financial liabilities and derivatives.

Section 3861 "Financial Instruments - Disclosure and Presentation" required entities to provide disclosures in their financial statements that enable users to evaluate the significance of financial instruments on the entity's financial position, performance and cash flows. Also this section enabled users through disclosure to evaluate the nature and extent of an entity's use of financial instruments, the business purposes they serve and the risks associated with the instruments and management policies for mitigating and manages those risks. As noted above, Section 3861 has been superseded by the recently enacted Section 3862 and Section 3863.

Section 3865 "Hedges", the application of which is optional, established how hedge accounting may be applied. The Trust, in accordance with its risk management strategy, decided to apply hedge accounting to interest rate swaps and treat them as cash flow hedges. These derivatives are marked-to-market at each period-end and resulting gains/losses are recognized in comprehensive income to the extent the hedging relationship is effective. The Trust has not entered into any interest rate swaps.

Please refer to the audited consolidated financial statements for the year ended December 31, 2007 for more detailed information.

(iii) 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. Property and equipment

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

As at
December
As at June 30, 2008 31, 2007
Accumulated Net book Net book
Asset class Cost depreciation value value
----------------------------------------------------------------------------
Disposal w ells $ 29,784,820 $ 4,428,924 $ 25,355,897 $ 25,364,798
Pipelines 3,523,204 315,231 3,207,973 3,227,259
Tanks 4,157,805 239,726 3,918,079 2,697,002
Oilfield service
equipment 5,167,039 1,008,530 4,158,509 2,400,773
Site improvements 8,235,710 484,098 7,751,612 2,362,439
Future sites 690,827 - 690,827 8,258,067
Buildings 2,866,558 116,407 2,750,151 1,858,293
Computer equipment 681,421 191,452 489,968 483,950
Vehicles 416,379 95,197 321,182 229,170
Furniture and
fixtures 124,680 36,183 88,498 90,772
Leasehold
improvements 12,784 4,232 8,552 9,502
----------------------------------------------------------------------------
$ 55,661,228 $ 6,919,980 $ 48,741,248 $ 46,982,025
----------------------------------------------------------------------------
----------------------------------------------------------------------------

4. Intangible assets

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

As at
December
As at June 30, 2008 31, 2007
Accumulated Net book Net book
Cost amortization value value
----------------------------------------------------------------------------
Completions and
contracts $ 2,115,000 $ 200,964 $ 1,914,036 $ 1,964,792
Customer
relationships 1,310,000 482,428 827,572 938,977
Non-competition
agreements 48,000 34,667 13,333 21,333
----------------------------------------------------------------------------
$ 3,473,000 $ 718,059 $ 2,754,941 $ 2,925,102
----------------------------------------------------------------------------
----------------------------------------------------------------------------


5. 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 quarter ended For the year ended
June 30, 2008 December 31, 2007
Number Amount Number Amount
----------------------------------------------------------------------------
Balance, beginning of period 7,173,770 $ 56,281,748 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 6,316 32,312 44,323 264,184
Trust unit issue costs - - - (1,129,826)
----------------------------------------------------------------------------
Balance, end of period 7,180,086 $ 56,314,060 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.

Options have been estimated using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 4.25 percent, volatility of 45 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 Options exercisable
as at June 30, 2008 as at June 30, 2008
----------------------------------------------------------------------------
Weighted Weighted Weighted
Number average average Number average
Exercise of contractual exercise of exercise
price options life price options price
--------- --------- ------------- ---------- --------- ----------
$ 4.46 29,000 4.77 $ 4.46 - n/a
5.76 188,971 4.13 5.76 73,800 5.76
5.96 2,000 3.85 5.96 668 5.96
8.43 276,500 3.14 8.43 92,171 8.43
8.92 15,000 3.26 8.92 5,000 8.92
$ 9.30 500 3.22 9.30 167 9.30
--------------------------------------------------------------------
511,971 3.61 $ 7.22 171,806 $ 7.29
--------------------------------------------------------------------
--------------------------------------------------------------------

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options outstanding Options exercisable
as at December 31, 2007 as at December 31, 2008
----------------------------------------------------------------------------
Weighted Weighted Weighted
Number average average Number average
Exercise of contractual exercise of exercise
price options life price options price
--------- --------- ------------- ---------- --------- ----------
$ 6.12 206,971 4.64 $ 6.12 73,800 $ 6.12
6.32 2,000 4.36 6.32 - -
8.79 282,500 3.64 8.79 94,167 8.79
9.10 14,500 3.76 9.10 4,833 9.10
$ 9.44 1,000 3.73 9.44 333 9.44
--------------------------------------------------------------------
506,971 4.04 $ 7.70 173,133 $ 7.66
--------------------------------------------------------------------
--------------------------------------------------------------------

(c) Contributed surplus

----------------------------------------------------------------------------
For the quarter ended For the year ended
June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
Balance, beginning of period $ 1,186,979 $ 251,432
Unit-based compensation expense 121,509 815,117
----------------------------------------------------------------------------
Balance, end of period $ 1,308,488 $ 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:



----------------------------------------------------------------------------
Distribution
Record Payment per Distribution
Period date date Trust 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
----------------------------------------------------------------------------
Distributions declared to unitholders during the period 2,582,857
Balance, beginning of period 7,819,342
----------------------------------------------------------------------------
Balance, end of period $10,402,199
----------------------------------------------------------------------------
----------------------------------------------------------------------------


6. Credit facilities

The Trust renewed its existing credit facilities on June 30, 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 1.400 percent, according to the funded debt to EBITDA ratio. As of June 30, 2008 the borrowing base for the demand loan was at $1,300,000 and the amount drawn was $700,000.

(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 repay, borrow and repay again until the 364-day term expires. Interest ranges from the lender's prime rate plus 0.125 percent to 1.400 percent per annum. Interest is calculated monthly and paid in arrears. As at June 30, 2008 an aggregate of $10,000,000 was outstanding of which $277,778 is current. The revolving period extends to May 29, 2009, at which time the credit facility is eligible for renewal.

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.



7. Financial instruments

The following table presents the carrying value and fair value of financial
instruments as at June 30, 2008:

----------------------------------------------------------------------------
Assets(liabilities) (carried at
cost/amortized cost) Carrying value Fair value
----------------------------------------------------------------------------
Accounts receivable $ 3,264,145 $ 3,264,145
Bank indebtedness (103,159) (103,159)
Accounts payable and accrued liabilities (2,613,937) (2,613,937)
Distributions payable (430,805) (430,805)
Long-term debt (10,000,000) (10,000,000)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Fair value is based on quoted market prices when available. However, when financial instruments lack an available trading market, fair value is determined using management's estimates and is calculated using market factors with similar characteristics and risk profiles. These amounts represent point-in-time estimates and may not reflect fair value in the future. These calculations are subjective in nature, involve uncertainties and are a matter of judgment.

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.

8. Capital disclosures

The Trust's objective with the management of its capital is 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. The Trust monitors capital on the basis of funded debt to EBITDA (earnings before interest, income taxes, depreciation and amortization). The ratio of funded debt to EBITDA is to be maintained under 2.75:1. As at June 30, 2008 the ratio was 1.99:1.

9. Financial risk management

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.

Interest rate risk

Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in the interest rates. Changes in market interest rates may have an effect on the cash flows associated with some financial assets and liabilities, known as cash flow risk, and on the fair value of other financial assets or liabilities, known as price risk. The Trust is exposed to interest rate risk with respect to the utilization of floating rate credit facilities to finance operations which are subject to floating interest rates ranging from 0.125 percent to 1.400 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 Trust has a concentration of credit risk because substantially all oil revenues are accumulated by a marketer, and paid in full the month following receipt. The Trust manages this risk by entering into sales contracts with credit-worthy counterparties, reviewing its exposure to individual entities on a regular basis, and delaying repayment of oil credits beyond the settlement date. The carrying amount of accounts receivable is reduced through the use of an allowance account and the amount of the loss is recognized in the earnings statement within selling, general, and administrative expenses. When a receivable balance is considered uncollectible, it is written off against the allowance for accounts receivable. Subsequent recoveries of amounts previously written off are credited against selling, general, and administrative expenses in the statements of other comprehensive income and deficit.

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, the $10,000,000 of long-term debt outstanding is revolving, although the Trust retains the right to repay, without penalty, amounts as deemed appropriate. The Trust has remained within all bank debt covenants and foresees no change in its ability to meet these covenants in 2008.

Commodity price risk

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.

10. 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.

11. Subsequent events

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

12. Comparative figures

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

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

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

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