Deepwell Energy Services Trust
TSX : DWL.UN

Deepwell Energy Services Trust

May 15, 2007 23:59 ET

Deepwell Energy Services Trust reports first quarter results

CALGARY--(Marketwire - May 15) -

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

Deepwell Energy Services Trust ("Deepwell" or the "Trust") today announced its financial results for the three month period ended, March 31 2007. For the three months ended March 31, 2007 Deepwell recorded revenue of $4,427,510, funds from operations(1) of $1,922,695 and EBITDA(1) of $1,911,744. Deepwell recorded net income for the period of $95,846 due; after adjusting for the impact of losses and expenses relating to the 2006 fire at Grande Cache, normalized net income(1) for the period was $625,666. During the period, Deepwell paid cash distributions to unitholders of $1,251,915.

1. EBITDA, funds from operations, and normalized net income are Non-GAAP measures and are defined in the attached Management's Discussion &

Analysis

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 May 15, 2007 and should be read in conjunction with the Trust's unaudited interim consolidated financial statements as at and for the three months ended March 31, 2007 and in conjunction with the Trust's MD&A and audited consolidated financial statements for the period from April 27, 2006 to December 31, 2006. This MD&A discusses operations and events for the three-month period ended March 31, 2007. Unless otherwise noted, references to the "period" or "quarter" in this MD&A refer to the three-month period ended March 31, 2007. Because the Trust commenced operations on April 27, 2006, no comparative financial figures or discussion can be provided for the previous year's comparable quarter.

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);
- Funds from operations, which refers to cash flow from operating
activities before changes in non-cash working capital; and
- Normalized net income, which refers to net income excluding expenses
and losses relating to the December 7, 2006 fire at Grande Cache.


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

Deepwell overview

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.

Strategy

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


- Focus on oilfield waste management: Deepwell currently operates
exclusively in the oilfield waste management business, and intends
to continue that focus;
- Growth: Deepwell is primarily focused on organic growth through
adding new facilities and through increasing capacity and services
provided at existing facilities;
- Operational efficiency: Attain and maintain efficient operations and
a high standard of customer service within a safe working
environment; and
- Environmental stewardship: Meet or exceed regulatory requirements
and industry standards.


Selected financial information

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


-------------------------------------------------------------------------
Financial Highlights For the three months
ended March 31, 2007
-------------------------------------------------------------------------
Revenue $ 4,427,510
Operating costs 1,919,221
-------------------------------------------------------------------------
Gross Margin 2,508,289
Selling and administrative 596,545
-------------------------------------------------------------------------

Earnings before interest, taxes, depreciation
& amortization (EBITDA) 1,911,744
Depreciation, accretion and amortization 922,669
Unit-based compensation 175,137
Interest 205,561
Loss on sale of property and equipment 7,261
Loss on write-off of property and equipment
(net of accrued insurance proceeds) 367,701
Fire related expenses 162,119
Future income taxes (24,550)
-------------------------------------------------------------------------

Net income 95,846

Add:
Depreciation, accretion and amortization 922,669
Unit-based compensation expense 175,137
Loss on sale of property and equipment 7,261
Loss on write-off of property and equipment 746,332
Future income taxes (24,550)
-------------------------------------------------------------------------

Funds from operations $ 1,922,695
-------------------------------------------------------------------------

Net income $ 95,846
add back:
Loss on write-off of property and equipment
(net of accrued proceeds) 367,701
Fire related expenses 162,119
-------------------------------------------------------------------------
Normalized net income $ 625,666
Per unit, basic 0.14
Per unit, diluted 0.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income $ 95,846
Per unit, basic 0.02
Per unit, diluted 0.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA $ 1,911,744
Per unit, basic 0.44
Per unit, diluted 0.44
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Funds from operations $ 1,922,695
Per unit, basic 0.44
Per unit, diluted 0.44
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash distributions paid to Unitholders $ 1,251,915
Per unit, basic 0.29
Per unit, diluted 0.29
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash distributions declared to Unitholders $ 1,095,970
Per unit, basic 0.25
Per unit, diluted 0.25
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin as a percentage of revenue 57%
Selling and administrative as a percentage of revenue 13%
EBITDA as a percentage of revenue 43%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 776,186
Total assets, end of period $54,110,875
Long-term debt, end of period (includes current portion) $12,966,548
Trust units, end of period $40,440,860
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average Trust units, basic 4,356,000
Weighted average Trust units, diluted 4,356,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Revenue for the period was $4,427,510, with a gross margin of $2,508,289 (57 percent of revenue), EBITDA of $1,911,744 (43 percent of revenue) and net income of 95,846. After adjusting for the impact of losses and expenses relating to the fire at Grande Cache the fire, normalized net income for the period was $625,666.

On a basic and diluted per unit basis, net income for the period was $0.02 per unit and funds from operations were $0.44 per unit. Basic and diluted distributions declared to unitholders in the quarter were $1,095,970 or $0.25 per unit. Distributions paid during the quarter were $1,251,915 or $0.29 per unit, basic and diluted.

Results of operations

Revenue

All facilities experienced strong demand for services during the period. Revenues for the quarter were $4,427,510, generated approximately 64 percent from processing and disposal fees and 36 percent from the sale of recovered oil. Revenues exceeded management's expectations primarily due to gains at Deepwell's Rycroft facility. The Grande Cache facility performed reasonably well considering the operational limitations in January due to the December fire (discussed in the Trust's 2006 annual report). The Mayerthorpe facility continued to meet management's expectations.

Expenses

Operating expenses

Operating expenses were $1,919,221 for the quarter and the relationship to revenues remained consistent with management's expectations. Operating expenses include $656,820 in oil credits repaid to customers, which mitigates the impact of changes to oil prices on Deepwell's revenues. Certain expenses, such as oil credits, trucking, and landfill expenses, are activity-driven; however, a significant portion of expenses can be considered fixed.

Selling and administrative expenses

Selling and administrative expenses for the quarter were $596,545 or 13 percent of revenue and were consistent with management's expectations.

Depreciation, amortization and accretion

Depreciation, amortization and accretion expense was $922,669 for the period and consisted of depreciation of fixed assets of $801,053, accretion of $15,454, amortization of intangible assets of $82,234, and amortization of deferred financing charges of $23,928. Intangible assets consist of regulatory approvals, customer relationships and non-competition agreements.

Interest

Total cash interest expense for the quarter was $205,561, comprised of interest on long-term debt of $188,061 and interest on the Trust's operating loan of $17,500. Interest rates are floating, with a range from 0.125 percent to 1.4 percent over the lender's prime rate, depending on the Trust's ratio of consolidated funded debt to earnings before interest, taxes, depreciation, amortization, accretion, and unit-based compensation. Actual interest rates during the quarter ranged from 0.125 percent to 0.625 percent over the lender's prime rates.

Loss on sale of assets

During the first quarter, a plant vehicle was sold for total proceeds of $1,000 and a recognized loss on disposal of $7,261.

Grande Cache Fire

On December 7, 2006, a fire at the Grande Cache facility damaged the waste receiving area. The facility was shut down for one week, until regulatory approval to reopen was received, and operations were limited until February 1, 2007 when a temporary waste receiving system was implemented; since that time the facility has operated using the temporary system while a new permanent receiving system is being installed. The damaged equipment has been dismantled and removed and reconstruction is near completion. Assets damaged in the incident include the waste receiving pit, solids treatment pad, a conveyor system used for waste separation, and miscellaneous piping and electrical components. During the continuing process of restoring the facility to its full operating condition and subsequent to the release of the December 31, 2006 financial statements it was determined that efforts to restore the damaged assets were more extensive than anticipated and had taken on the nature of a replacement rather than a repair. As a result of the change in the nature of the restoration, the net book value of assets valued at $746,333 was written off, net of an accrued provision for insurance proceeds of $378,631. Deepwell submitted a claim for the property loss however no proceeds have been received and it is anticipated that actual proceeds will be no lower than the accrued amount. The change in the nature of the restoration and the change in estimated insurance proceeds have been reflected as changes in estimates in the current interim period.

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

Income taxes

The trust recognized a future income tax recovery of $24,550 for the quarter.

Distributions to Unitholders

During the quarter, distributions declared to unitholders were $1,095,970, and distributions paid were $1,251,915. On March 19, 2007 the Trust announced a change in the monthly distribution rate and that the cash distribution for the period of March 1 to March 31, 2007 had been set at $0.06 per Trust unit. This cash distribution was paid on April 13, 2007 to unitholders of record on March 30, 2007.

Upon review of Deepwell's opportunities for growth, the Trustees concluded that retention of more cash to provide capital for growth would be most appropriate. In further efforts to retain more cash for growth, and to provide an opportunity for investors to reinvest in the Trust, Deepwell has adopted a Distribution Reinvestment Plan.

Investing activities

Net cash used in investing activities during the quarter was $2,069,122, consisting of capital expenditures of $770,917, a change in non-cash investing working capital of $1,284,617, security deposit interest, and proceeds from the sale of a plant truck.

Capital expenditures

In the first quarter of 2007 the Trust invested in property and equipment valued at $770,917. During the period, $557,190 was invested in the reconstruction of property and equipment damaged during the December 7, 2006 fire at Grande Cache. Other investments were primarily to improve wellhead pressure and complete a boiler installation at Grande Cache, and for various engineering and future site costs.

Unitholders' equity

Trust unit option plan

As at March 31, 2007 a total of 301,000 options issued pursuant to the Trust incentive stock option plan ("Option Plan") were outstanding. No options are exercisable at March 31, 2007, and the weighted average contractual life remaining is 4.4 years. The total number of outstanding options shall not exceed 10 percent of the outstanding Trust Units. 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. As at March 31, 2007, the exercise prices of outstanding options ranged from $9.33 to $9.98 per unit and the weighted average exercise price of granted options was $9.34 per unit. The Trust recorded unit option compensation expense and contributed surplus of $175,136 during the period.

Related party transactions

During the period the Trust made payments in the amount of $6,176 to a partnership of which one of the partners is a Director of Deepwell Energy Services Ltd. and a Trustee of Deepwell Energy Services Commercial Trust. The payments were made for settlement of legal expenses outstanding in accounts payable and accrued liabilities at December 31, 2006. The amount currently outstanding is nil.

Liquidity

As at March 31, 2007, the Trust had issued cheques in excess of bank balance of $1,249,226. The Trust also has credit facilities in place in the aggregate of $17,500,000.

Net cash provided by financing activities for the quarter was $198,568. As at March 31, 2007, the Trust had drawn $13,000,000 on its long-term credit facility, an increase of $1,500,000 from December 31, 2006. Deferred financing costs of $17,500 were paid relating to an amendment of the Trust's credit facilities. A total of $23,928 of deferred financing costs was amortized during the period. Other financing activities include the payment of $1,251,915 in distributions to Unitholders related to the periods from December 1, 2006 to February 28, 2007.

Credit facilities

As at March 31, 2007, the borrowing base for the demand revolving loan was $1,719,079 and the amount drawn was $472,500. As at March 31, 2007 an aggregate of $13,000,000 was drawn on the revolving term loan.

Summary of Quarterly Results

The following table shows selected financial information for the past three quarters plus the partial quarter representing the Trust's initial operating period. The information has been obtained from quarterly financial statements, which have been prepared in accordance with Canadian GAAP and, in the opinion of management, have been prepared using accounting policies consistent with the audited financial statements and include all adjustments necessary for the fair presentation of the results of the interim periods. The Trust expects its operating results to vary significantly from quarter to quarter and they should not be relied upon to predict future information.



-------------------------------------------------------------------------
Summary of Three months Three months Three months 64 days
Quarterly ended ended ended ended
information Mar 31, 2007 Dec 31, 2006 Sep 30, 2006 Jun 30, 2006
-------------------------------------------------------------------------

Revenue $ 4,427,510 $ 4,059,296 $ 3,808,795 $ 1,778,929
Operating costs 1,919,221 1,605,492 2,040,285 948,937
-------------------------------------------------------------------------
Gross Margin 2,508,289 2,453,804 1,768,510 829,992
Selling and
administrative 596,545 730,354 448,788 229,889
-------------------------------------------------------------------------

Earnings before
interest, taxes,
depreciation
& amortization
(EBITDA) 1,911,744 1,723,450 1,319,722 600,103
Depreciation,
amortization
and accretion 922,669 993,621 712,640 480,317
Unit-based
compensation 175,137 197,812 53,620 -
Interest 205,561 149,325 102,469 107,946
Loss on sale of
property and
equipment 7,261 34,295 - -
Net loss on
write-down of
property and
equipment
destroyed in fire 367,701 - - -
Fire related
expenses 162,119 - - -
Future income taxes (24,550) (47,799) - -
-------------------------------------------------------------------------

Net income (loss) 95,846 396,196 450,993 11,840

Add:
Depreciation,
amortization
and accretion 922,669 993,621 712,640 480,317
Unit-based
compensation 175,137 197,812 53,620 -
Loss on sale of
property and
equipment 7,261 34,295 - -
Loss on write-off
of property and
equipment 746,332 - - -
Future income taxes (24,550) (47,799) - -
-------------------------------------------------------------------------

Funds from
operations $ 1,922,695 $ 1,574,125 $ 1,217,253 $ 492,157
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net income (loss)
per trust unit:
Basic $ 0.02 $ 0.09 $ 0.10 $ 0.00
Diluted $ 0.02 $ 0.09 $ 0.10 $ 0.00
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Weighted average
number of Trust
Units outstanding
Basic 4,356,000 4,356,000 4,356,000 4,356,000
Diluted 4,356,000 4,356,000 4,477,793 4,356,000
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-------------------------------------------------------------------------


Outlook

The Trust has grown EBITDA each quarter since inception and the outlook is positive. Demand for services has remained strong to date in 2007, although an early spring break-up softened results in March and April. The Trust's management expects that facilities will operate at or near capacity after spring break-up.

The addition of the second Class 1b disposal well at the Rycroft facility is expected to be complete in the second quarter, and indications are that demand will be strong enough to support the additional capacity.

Deepwell is also in the final stages of the approval process with the Alberta Energy and Utilities Board (EUB) for its fourth facility, near Claresholm, Alberta. Deepwell believes that it is nearing approval of the facility, although no date for approval has been provided by the EUB. Construction commencement cannot be confirmed at this time, but Deepwell remains optimistic that construction of the facility will be completed during 2007.

Accounting policies

The unaudited 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, 2006 except for the adoption of the following new accounting standards, which were effective for the Trust as of January 1, 2007:


- As of January 1, 2007 the Trust adopted Handbook Section 1530
"Comprehensive Income" for the reporting and disclosure of
comprehensive income. Unrealized gains and losses on financial assets
that will be held as available for sale, unrealized foreign currency
translation amounts arising from self-sustained foreign operations,
and changes in the fair value of cash flow hedging instruments will
be in a Consolidated Statement of Other Comprehensive Income until
recognized in the consolidation statements of earnings. The Trust has
determined that it had no comprehensive income nor accumulated other
comprehensive income for the period.

- As of January 1, 2007 the Trust adopted Handbook Section 3855
"Financial Instruments - Recognition and Measurement" and Handbook
section 3861 "Financial Instruments - Disclosure and Presentation".
Under the new standards, all financial instruments will be classified
as one of the following: held-to-maturity, loans and receivables,
held-for-trading and available for sale. Financial assets and
liabilities held for trading will be measured at fair value with
gains and losses recognized in net income. Financial assets held-to-
maturity, loans and receivables and financial liabilities other than
those held-for-trading will be measured at amortized cost. Available
for sale instruments will be measured at fair value with gains and
losses recognized in other comprehensive income. As a result of these
standards, the balance of deferred financing charges, previously
included in prepaids and deposits, is netted against the
corresponding balances in the respective credit facility.

- As of January 1, 2007 the Trust adopted Handbook Section 1506
"Accounting changes" ("CICA 1506"). CICA 1506 requires that voluntary
changes in accounting policy are only made if they result in the
financial statements providing reliable and more relevant
information; changes in accounting policy are applied retrospectively
unless doing so is impracticable or the change in accounting policy
is made on initial application of a primary source of GAAP; a change
in accounting estimate is generally recognized prospectively;
material prior period errors are corrected retrospectively; new
disclosures required in respect of changes in accounting policies,
changes in accounting estimates, and correction of errors. The
adoption of CICA 1506 has had no impact on the interim consolidated
financial statements.


Internal controls

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

Seasonality and weather

In Canada, the level of activity in the oil and 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 in the level of energy services. The timing and duration of spring break-up is dependent on weather patterns and the duration of this period will have a direct impact on the level of business of Deepwell. Additionally, if an unseasonably warm winter prevents sufficient freezing, well sites may be rendered inaccessible, shortening the drilling season and reducing demand for oilfield waste management services. Additionally, a warm winter can reduce demand for oil and natural gas for heating purposes, which may reduce activity for oil and natural gas exploration and development and demand for the oilfield services offered by Deepwell.

The volatility in the weather and temperature can therefore create unpredictability in activity, demand for oilfield services and equipment utilization rates, which could have a material adverse effect on the financial results, cash flows, and the overall financial condition of the Trust and its subsidiaries.

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.



INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF

DEEPWELL ENERGY SERVICES TRUST

FOR THE THREE MONTHS ENDED MARCH 31, 2007





Under National Instrument 51-102, Part 4, subsections 4.3(3)(a), an

auditor has not performed a review of the interim financial statements as

at and for the three months ended March 31, 2007.

The accompanying unaudited interim financial statements of the Trust at

March 31, 2007 have been prepared and are the responsibility of the

Trust's management.




DEEPWELL ENERGY SERVICES TRUST
INTERIM CONSOLIDATED BALANCE SHEET


March 31, December 31,
2007 2006
As at (Unaudited) (Audited)
-------------------------------------------------------------------------
Assets
Current assets:
Cash $ - $ 28,861
Accounts receivable 3,329,353 2,729,106
Inventory 68,132 80,205
Prepaid expenses and deposits 149,988 242,990
-------------------------------------------------------------------------
3,547,473 3,081,162

Property and equipment 38,786,145 39,565,606
Intangible assets 3,171,803 3,254,037
Goodwill 7,157,402 7,157,402
Financial security deposits 1,448,052 1,433,474
-------------------------------------------------------------------------
$ 54,110,875 $ 54,491,681
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities
Current liabilities:
Bank indebtedness $ 1,249,226 $ -
Accounts payable and accrued liabilities 1,481,952 3,538,986
Distributions payable 261,360 417,305
Current portion of long-term debt 1,772,104 -
-------------------------------------------------------------------------
4,764,642 3,956,291

Long-term debt 11,194,444 11,500,000
Future income taxes 62,651 87,201
Asset retirement obligations 729,198 713,744
-------------------------------------------------------------------------
16,750,935 16,257,236
-------------------------------------------------------------------------

Unitholders' Equity
Trust units (Note 3) 40,440,860 40,490,377
Contributed surplus 426,569 251,432
Deficit (3,507,489) (2,507,364)
-------------------------------------------------------------------------
37,359,940 38,234,445
-------------------------------------------------------------------------

$ 54,110,875 $ 54,491,681
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.



DEEPWELL ENERGY SERVICES TRUST
INTERIM CONSOLIDATED STATEMENT OF INCOME
AND ACCUMULATED DEFICIT
(unaudited)

For the three months ended March 31 2007
-------------------------------------------------------------------------

Revenues $ 4,427,510
-------------------------------------------------------------------------

Expenses
Operating 1,919,221
Selling and administrative 596,545
Depreciation and accretion 816,507
Amortization of intangible assets 82,234
Unit-based compensation 175,137
Interest on short-term debt 17,500
Interest on long-term debt 188,061
Amortization of deferred financing costs 23,928
Loss on sale of property and equipment (Note 5) 7,261
Loss on write-off of property and equipment (net of
accrued insurance proceeds) (Note 6) 367,701
Fire related expenses (Note 6) 162,119
-------------------------------------------------------------------------
4,356,214

Income before taxes 71,296

Future income tax recovery (24,550)
-------------------------------------------------------------------------
Net income 95,846

Accumulated deficit, beginning of period (2,507,365)
Distributions to unitholders (1,095,970)
-------------------------------------------------------------------------
Accumulated deficit, end of period $ (3,507,489)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net income per trust unit:
Basic $ 0.02
Diluted $ 0.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Weighted average number of trust units outstanding:
Basic 4,356,000
Diluted 4,356,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.



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


For the three months ended March 31 2007
-------------------------------------------------------------------------

Operating activities
Net income $ 95,846

Non-cash items:
Depreciation and accretion 816,507
Amortization of deferred financing costs 23,928
Amortization of intangibles 82,234
Future income tax recovery (24,550)
Unit-based compensation 175,137
Loss on write-off of property and equipment (Note 6) 746,332
Loss on sale of property and equipment (Note 5) 7,261

Change in non-cash working capital (1,324,969)
-------------------------------------------------------------------------
Cash flow from operating activities 597,726
-------------------------------------------------------------------------

Investing activities
Financial security deposits (14,578)
Purchase of property and equipment (776,186)
Proceeds on sale of property and equipment 1,000

Change in non-cash investing working capital (1,284,617)
-------------------------------------------------------------------------
Cash flow from investing activities (2,074,381)
-------------------------------------------------------------------------

Financing activities
Net proceeds from long-term debt 1,500,000
Unit issuance costs (49,517)
Distributions to unitholders (1,251,915)
-------------------------------------------------------------------------
Cash flow from financing activities 198,568
-------------------------------------------------------------------------

Change in cash (1,278,087)

Cash (bank indebtedness), beginning of period 28,861
-------------------------------------------------------------------------
Cash (bank indebtedness), end of period $ (1,249,226)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplementary Information
Cash interest paid $ 205,561
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.



DEEPWELL ENERGY SERVICES TRUST
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)

1. Nature of the Organization

Deepwell Energy Services Trust (the "Trust" or "Deepwell") (is an open
ended un-incorporated investment trust governed by the laws of the
Province of Alberta and created pursuant to a Declaration of Trust dated
April 21, 2006. Therefore, no comparative numbers are presented within
the interim consolidated financial statements. 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

Basis of presentation

The interim consolidated financial statements have been prepared by
management in accordance with Canadian generally accepted accounting
principles and are reported in Canadian dollars. Management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the period. The most significant
estimates relate to depreciation, amortization, asset retirement
obligations, accretion, unit-based compensation, 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
summarized below.

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, 2006. 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, 2006 except for the adoption of the following new
accounting standards, which were effective for the Trust as of January 1,
2007:

- As of January 1, 2007 the Trust adopted Handbook Section 1530
"Comprehensive Income" for the reporting and disclosure of
comprehensive income. Unrealized gains and losses on financial assets
that will be held as available for sale, unrealized foreign currency
translation amounts arising from self-sustained foreign operations,
and changes in the fair value of cash flow hedging instruments will
be in a Consolidated Statement of Other Comprehensive Income until
recognized in the consolidation statements of earnings. The Trust
has determined that it had no comprehensive income nor accumulated
other comprehensive income for the period.

- As of January 1, 2007 the Trust adopted Handbook Section 3855
"Financial Instruments - Recognition and Measurement" and Handbook
section 3861 "Financial Instruments - Disclosure and Presentation".
Under the new standards, all financial instruments will be classified
as one of the following: held-to-maturity, loans and receivables,
held-for-trading and available for sale. Financial assets and
liabilities held for trading will be measured at fair value with
gains and losses recognized in net income. Financial assets held-to-
maturity, loans and receivables and financial liabilities other than
those held-for-trading will be measured at amortized cost. Available
for sale instruments will be measured at fair value with gains and
losses recognized in other comprehensive income. As a result of these
standards, the balance of deferred financing charges, previously
included in prepaids and deposits, is netted against the
corresponding balances in the respective credit facility.

- As of January 1, 2007 the Trust adopted Handbook Section 1506
"Accounting changes" ("CICA 1506"). CICA 1506 requires that voluntary
changes in accounting policy are only made if they result in the
financial statements providing reliable and more relevant
information; changes in accounting policy are applied retrospectively
unless doing so is impracticable or the change in accounting policy
is made on initial application of a primary source of GAAP; a change
in accounting estimate is generally recognized prospectively;
material prior period errors are corrected retrospectively; new
disclosures required in respect of changes in accounting policies,
changes in accounting estimates, and correction of errors. The
adoption of CICA 1506 has had no impact on the interim consolidated
financial statements.

3. Unitholders' equity

(a) Trust Unit Options and unit-based compensation

As at March 31, 2007 a total of 301,000 options issued pursuant to the
Trust incentive unit option plan ("Option Plan") were outstanding at an
average exercise price of $9.34. No options are exercisable at March 31,
2007, and the weighted average contractual life remaining is 4.4 years.
The total number of outstanding options shall not exceed 10 percent of
the outstanding Trust Units. 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. As at March 31, 2007, the exercise prices of
outstanding options range from $9.33 to $9.98 per unit and the weighted
average exercise price of granted options is $9.34 per unit.

The Trust recorded unit option compensation expense and contributed
surplus of $175,137 during the period. No unit options were granted
during the period.

(b) Cash distributions

During the period, the Trust declared and paid distributions to the
Unitholders in accordance with the following schedule:

-------------------------------------------------------------------------
Record Payment Cash per
Period date date Trust unit Amount
-------------------------------------------------------------------------
January 2007 January 31, 2007 February 15, 2007 $0.0958 417,305
February 2007 February 28, 2007 March 15, 2007 0.0958 417,305
March 2007 March 31, 2007 April 13, 2007 0.0600 261,360
-------------------------------------------------------------------------
Distributions declared to unitholders during the period $1,095,970
-------------------------------------------------------------------------

(c) Per Trust unit information

Weighted average basic and diluted Trust units outstanding for the period
were 4,356,000.

4. Related party transactions

During the period the Trust made payments in the amount of $6,176 to a
partnership of which one of the Trustees is a partner. The payments were
made for settlement of legal expenses outstanding in accounts payable and
accrued liabilities at December 31, 2006. The amount outstanding at
March 31, 2007 was nil.

5. Loss on sale of assets

During the first quarter, a plant vehicle was sold for total proceeds of
$1,000 and a recognized loss on disposal of $7,261.

6. Fire-related expenses and losses

On December 7, 2006, a fire at the Grande Cache facility damaged the
waste receiving area. The facility was shut down for one week, until
regulatory approval to reopen was received, and operations were limited
until February 1, 2007 when a temporary waste receiving system was
implemented; since that time the facility has operated using the
temporary system while a new permanent receiving system is being
installed. The damaged equipment has been dismantled and removed and
reconstruction is near completion. Assets damaged in the incident include
the waste receiving pit, solids treatment pad, a conveyor system used for
waste separation, and miscellaneous piping and electrical components.
During the continuing process of restoring the facility to its full
operating condition and subsequent to the release of the December 31,
2006 financial statements it was determined that efforts to restore the
damaged assets were more extensive than anticipated and had taken on the
nature of a replacement rather than a repair. As a result of the change
in the nature of the restoration, the net book value of assets valued at
$746,333 was written off, net of an accrued provision for insurance
proceeds of $378,631. Deepwell submitted a claim for the property loss
however no proceeds have been received and it is anticipated that actual
proceeds will be no lower than the accrued amount. The change in the
nature of the restoration and the change in estimated insurance proceeds
have been reflected as changes in estimates in the current interim
period.

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

7. Subsequent events

On April 17, 2007 the Trust declared a cash distribution for the period
April 1, 2007 to April 30, 2007 at $0.06 per unit, to be paid on May 15,
2007 to Unitholders of record on April 30, 2007.

On April 17, 2007 the Trust adopted a Distribution Reinvestment Plan (the
"Plan"). Eligible unitholders may elect to participate in the Plan
commencing with the monthly cash distribution payable on May 15, 2007.
The Plan allows eligible unitholders of the Trust to direct that their
cash distributions be reinvested in additional Trust units. The cash
distributions will be reinvested at the discretion of Deepwell Energy
Services Ltd. either by acquiring Trust units issued from treasury at 95
percent of the average market price (as defined in the Plan) or by
acquiring Trust units at prevailing market rates.

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