Deepwell Energy Services Trust
TSX : DWL.UN

Deepwell Energy Services Trust

November 08, 2007 23:59 ET

Deepwell Energy Services Trust reports third quarter results

CALGARY--(Marketwire - Nov. 8) -

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

Deepwell Energy Services Trust ("Deepwell" or the "Trust") is pleased to announce results from the third quarter of 2007. In the third quarter, Deepwell achieved a seven percent increase in EBITDA(1) and funds from operations(1) over the same period in 2006. Deepwell recorded revenue of $3,513,654, net income of $241,069, funds from operations of $1,298,617, EBITDA of $1,409,458 and paid cash distributions to unitholders of $1,284,092. The Trust's margins increased significantly, with EBITDA as a percentage of revenue improving from 35 percent in the third quarter of 2006 to 40 percent in the third quarter of 2007 and gross margin as a percentage of revenue for the third quarter improving from 46 percent in 2006 to 55 percent in 2007. Also significant is the Trust's clean balance sheet as a result of the issuance of Trust units through a private placement and rights offering during the quarter.


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Financial Review(1)
-------------------------------------------------------------------------
Nine months
Three months ended ended 154 days
Sept 30, Sept 30, Sept 30, Sept 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue $3,513,654 $3,808,795 $10,473,315 $5,587,724
Net income (loss) 241,069 450,993 (286,987) 473,455
Net income (loss)
per unit
Basic 0.04 0.10 (0.06) 0.11
Diluted 0.04 0.10 (0.06) 0.11

EBITDA 1,409,458 1,319,723 4,103,765 1,930,437
Basic 0.22 0.30 0.82 0.44
Diluted 0.22 0.29 0.82 0.44

Funds from operations 1,298,617 1,217,254 3,774,424 1,746,232
Basic 0.21 0.28 0.75 0.40
Diluted 0.21 0.27 0.75 0.39


The third quarter results are very positive, when viewed in the light of the challenging industry environment. During the third quarter, the oilfield services sector experienced impacts of commodity price instability, weather factors, and uncertainty surrounding the Alberta royalty review. The strong results in a challenging environment, coupled with the Trust's clean balance sheet and the growth potential offered by the upcoming completion of the Trust's fourth facility demonstrate the underlying strength of the Trust's business.

The Trust completed a rights offering and private placement during the quarter, with total gross proceeds of $16,604,891, positioning the Trust with minimal debt levels and a strong capital base to support future growth. The financings were completed in July and proceeds were initially used to repay outstanding debt, which can be redrawn as required - at September 30, 2007 the Trust had drawn $898,261 on its credit facilities which carry limits in the aggregate of $17,500,000.

Progress continues on construction of Deepwell's fourth facility, near Claresholm, Alberta and the facility is anticipated to be operational in the first quarter of 2008 with construction costs near the previous estimate of $9,000,000. Deepwell is optimistic about the market for services at the Claresholm facility, due to its location in an active region of oil and natural gas production and exploration which is not currently served by any third party oilfield waste management facility in the local area.

(1) EBITDA and Funds from operations, 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 November 6, 2007 and should be read in conjunction with the Trust's unaudited interim consolidated financial statements as at and for the three months ended September 30, 2007 and in conjunction with the Trust's audited consolidated financial statements as at December 31, 2006. This MD&A discusses operations and events for the three-month period ended September 30, "2007" and unless otherwise noted, references to the "period" or "quarter" in this MD&A refer to the three-month period ended September 30, 2007. References to "2006" refer to the three months ended September 30, 2006. References to "2007" refer to the nine months ended September 30, 2007. Due to the difficulty in comparing periods of different lengths, Deepwell has not analyzed the 154 day period ending September 30, 2006.

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 of the Trust believes they assist the reader in understanding the Trust's results. These measures include:


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


These measures are identified and presented, where appropriate, together with reconciliations to the equivalent GAAP measure. However, they should not be used as an alternative to GAAP, because they may not be consistent with 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 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 consolidated financial statements of the Trust.


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Financial Highlights
For the For the For the
three months three months nine months 154 days
ended ended ended ended
Sept 30, Sept 30, Sept 30, Sept 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue $3,513,654 $3,808,795 $10,473,315 $5,587,724
Operating costs 1,584,125 2,040,285 4,693,785 2,989,222
-------------------------------------------------------------------------
Gross Margin 1,929,529 1,768,510 5,779,530 2,598,502
Selling and
administrative 520,071 448,787 1,675,765 668,065
-------------------------------------------------------------------------

EBITDA 1,409,458 1,319,723 4,103,765 1,930,437
Depreciation,
accretion and
amortization 915,875 712,640 2,736,408 1,219,156
Unit-based
compensation 141,673 53,621 676,111 53,621
Interest 110,841 102,469 545,852 194,826
Gain on sale of
property and
equipment - - (10,239) -
Loss on write-off of
property and equipment - - 367,702 -
Fire-related expenses - - 162,119 -
Future income taxes - - (87,201) -
-------------------------------------------------------------------------

Net income (loss) 241,069 450,993 (286,987) 462,834

Add:
Depreciation,
amortization and
accretion 915,875 712,640 2,736,408 1,219,156
Unit-based compensation
expense 141,673 53,621 676,111 53,621
Loss on sale of
property and equipment - - (10,239) -
Loss on write-off
of property and
equipment - - 746,332 -
Future income taxes - - (87,201) -
-------------------------------------------------------------------------

Funds from operations $1,298,617 $1,217,254 $3,774,424 $1,735,611
Changes in non-cash
working capital (442,031) 2,729,106 (716,908) 3,430,511
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Cash flow from
operating activities $856,586 $3,946,360 $3,057,516 $5,166,122
-------------------------------------------------------------------------
-------------------------------------------------------------------------

-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income (loss) $241,069 $450,993 $(286,987) $462,834
Per unit, basic 0.04 0.10 (0.06) 0.11
Per unit, diluted 0.04 0.10 (0.06) 0.10
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA $1,409,458 $1,319,723 $4,103,765 $1,930,437
Per unit, basic 0.22 0.30 0.82 0.44
Per unit, diluted 0.22 0.29 0.82 0.44
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Funds from operations $1,298,617 $1,217,254 $3,774,424 $1,735,611
Per unit, basic 0.21 0.28 0.75 0.40
Per unit, diluted 0.21 0.27 0.75 0.39
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions paid to
Unitholders $1,284,092 $1,669,220 $3,164,607 $2,114,478
Per unit, basic 0.20 0.38 0.63 0.49
Per unit, diluted 0.20 0.37 0.63 0.48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin as a
percentage of revenue 55% 46% 55% 47%
Selling and
administrative as
a percentage of
revenue 15% 12% 16% 12%
EBITDA as a
percentage of revenue 40% 35% 39% 35%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $2,846,290 $3,313,792 $5,298,219 $3,507,560
Total assets, end
of period $55,349,356 $51,554,944 $55,349,356 $51,554,944
Long-term debt, end
of period (includes
current portion) $0 $7,000,000 $0 $7,000,000
Trust units, end
of period $56,175,472 $40,509,489 $56,175,472 $40,509,489
-------------------------------------------------------------------------
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Weighted average
Trust units, basic 6,324,139 4,356,000 5,015,016 4,356,000
Weighted average
Trust units, diluted 6,327,260 4,477,793 5,015,143 4,427,827
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Revenue for the quarter was $3,513,654 ($3,808,795 - 2006), with a gross margin of $1,929,529 or 55 percent of revenue ($1,768,510 or 46 percent of revenue - 2006), EBITDA of $1,409,458 or 40 percent of revenue, ($1,319,723 or 37 percent of revenue - 2006) and net income of $241,069 ($450,993 - 2006).

On a basic and diluted per unit basis, net income for the period was $0.04 per unit, ($0.10 - 2006) and funds from operations were $0.21 per unit ($0.28 per unit basic and $0.27 per unit diluted - 2006). Basic and diluted distributions declared to Unitholders in the quarter were $1,284,092 or $0.20 per unit, ($1,669,220 or $0.38 per unit basic and $0.27 per unit diluted - 2006).

Results of operations

Revenue

Revenues for the quarter were $3,513,654 ($3,808,795 - 2006) generating 67 percent (65 percent - 2006) from processing and disposal fees and 33 percent (37 percent - 2006) from the sale of recovered oil. Deepwell experienced a reduction of $295,141 (8 percent) in overall revenue from the third quarter of 2006. Unusually inclement weather conditions led to more road bans than are generally seen in the third quarter - limiting customers' ability to move equipment and transport waste to Deepwell's facilities. Gross oil revenues decreased by 49 percent, or $760,000, primarily due to a reduction of waste and frac oil volumes during the quarter. Water revenues increased by 18 percent or $310,000 due primarily to increased capacity at the Trust's Rycroft facility. Waste revenues increased from the prior year's quarter by 27 percent or $194,000 due to the receipt of more dry solids. Flushes and trucking revenues decreased slightly from the third quarter of 2006.

Operating expenses

Operating expenses were $1,584,125 for the third quarter of 2007 ($2,040,285 - 2006) and the relationship to revenues remained consistent with management's expectations. The decrease is primarily due to lower oil credits repaid to customers on recovered oil. Operating expenses for the quarter include $134,757 ($574,121 - 2006) in oil credits repaid to customers. Certain expenses, such as oil credits, trucking and landfill expenses, are activity-driven; however, a significant portion of expenses can be considered fixed.

Selling and administrative

Selling and administrative costs for the period were $520,071 or 15 percent of revenue ($448,787 or 12 percent of revenue - 2006) exceeding management's expectations primarily due to public issuer-associated costs and computing costs.

Depreciation, accretion and amortization

Depreciation, accretion and amortization expenses totalled $915,875 for the third quarter ($712,640 - 2006) and were in line with management's expectations. During the third quarter of 2007, the Trust recorded depreciation on fixed assets of $808,642, ($546,006 - 2006), accretion of $15,454 ($14,243 - 2006), amortization of intangible assets of $82,234, ($136,803 - 2006), and amortization of deferred financing charges of $9,545 ($15,588 - 2006). Intangible assets consist of regulatory approvals, customer relationships, and non-competition agreements. Accretion represents the recognition of future closure costs for facilities.

Interest

Total cash interest expense for the period was $110,841 ($102,469 - 2006), comprised of interest on long-term debt of $99,606 ($97,868 - 2006) and interest on short-term debt of $11,235 ($4,601 - 2006). 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.

Investing activities

Net cash used in investing activities during the period was $1,507,598 ($3,556,231 - 2006).

Capital expenditures

In the third quarter of 2007, the Trust invested in property and equipment at a cost of $2,846,290 ($3,331,792 - 2006). A significant portion of the capital expenditures were for the Trust's first expansion facility near Claresholm, Alberta. Construction of the Claresholm Facility is continuing and proceeding well and expectations are that the facility will be operational in the first quarter of 2008, with construction costs in line with the previous estimates of $9,000,000. Other capital investments during the third quarter include site improvements, oilfield service equipment, buildings, pipelines, computing equipment and in the development of a production accounting and billing system.

Unitholders' equity

Trust unit option plan

As at September 30, 2007, a total of 506,971 options issued pursuant to the Trust incentive unit option plan ("Option Plan") were outstanding (nil - September 2006). On September 17, 2007, 130,171 Trust Unit options were granted at an exercise price of $6.30. At September 30, 2007, 170,133 options were exercisable and the weighted average contractual life remaining was 4.29 years. The total number of outstanding options shall not exceed 10 percent of the outstanding trust units. The options (except the 73,800 issued in the second quarter) 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 September 30, 2007, the exercise prices of outstanding options ranged from $6.30 to $9.62 per unit and the weighted average exercise price of granted options was $7.93 per unit. The Trust recorded unit option compensation expense and contributed surplus of $141,673 during the period.

Private Placement and rights offering

On July 9th, 2007, Deepwell closed a private placement of 582,362 units for gross proceeds of $3,499,996. On July 31, 2007, the Trust completed its rights offering and issued 2,180,515 units for gross proceeds of $13,104,895. Combined gross proceeds of the offerings were $16,604,891 with expenses of $1,059,725 for total net proceeds of $15,545,166. Proceeds were initially used to repay outstanding debt, which can be redrawn. The purposes of the offerings were to fund the estimated $9,000,000 construction cost of an oilfield waste management facility near Claresholm, Alberta, to fund improvements and expansions at existing facilities, to fund preliminary costs of future facilities and for general corporate purposes.

Distributions to Unitholders

During the quarter, distributions declared to Unitholders were $1,284,092 ($1,669,220 - 2006).

Distribution re-investment plan

During the quarter 17,508 units were issued under the Trust's distribution re-investment plan at an average price of $6.22 per unit.

Liquidity

As at September 30, 2007, the Trust had issued cheques in excess of bank balance of $898,261. On the date of this MD&A the Trust has credit facilities in place of $17,500,000.

Net cash received from financing activities for the quarter was $913,017 (net cash used by financing activities of $1,768,279 - 2006). As at September 30, 2007, the Trust had $15,500,000 available on its long-term credit facility. A total of $9,545 of deferred financing costs was amortized during the quarter. Other financing activities for the quarter include the payment of $1,284,092 in distributions to Unitholders.

Credit facilities

As at September 30, 2007, the borrowing base for the demand revolving loan was $1,877,268 and the amount drawn was $850,000.

Summary of Quarterly Results

The following table shows selected financial information for the past five 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.


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Summary of Quarterly information

Three months Three months Three months
ended ended ended
Sep 30, Jun 30, Mar 31,
2007 2007 2007
-------------------------------------------------------------------------
Revenue $3,513,654 $2,532,151 $4,427,510
Operating costs 1,584,125 1,190,739 1,919,221
-------------------------------------------------------------------------
Gross Margin 1,929,529 1,341,412 2,508,289
Selling and administrative 520,071 558,849 596,545
-------------------------------------------------------------------------

EBITDA 1,409,458 782,563 1,911,744

Depreciation, amortization
and accretion 915,875 897,865 922,669
Unit-based compensation 141,673 359,600 175,137
Interest 110,841 229,450 205,561
Loss on sale of property
and equipment - (17,500) 7,261
Net loss on write-down of
property and equipment
destroyed in fire - - 367,701
Fire-related expenses - - 162,119
Future income taxes - (62,651) (24,550)
-------------------------------------------------------------------------
Net income (loss) 241,069 (624,201) 95,845

Add:
Depreciation, amortization
and accretion 915,875 897,865 922,669
Unit-based compensation 141,673 359,600 175,137
Loss on sale of property
and equipment - (17,500) 7,261
Loss on write-off of
property and
equipment - - 746,332
Future income taxes - (62,651) (24,550)
-------------------------------------------------------------------------
Funds from operations 1,298,617 553,113 1,922,694
Changes in non-cash working
capital (442,031) 1,404,547 (1,324,968)
-------------------------------------------------------------------------
Cash flow from operating
activities $856,586 $1,957,660 $597,726
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

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



-------------------------------------------------------------------------
Summary of Quarterly information

Three months Three months 64 days
ended ended ended
Dec 31, Sep 30, Jun 30,
2006 2006 2006
-------------------------------------------------------------------------
Revenue $4,059,296 $3,808,795 $1,778,929
Operating costs 1,605,492 2,040,285 948,937
-------------------------------------------------------------------------
Gross Margin 2,453,804 1,768,510 829,992
Selling and administrative 730,354 448,787 229,889
-------------------------------------------------------------------------

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

Depreciation, amortization
and accretion 993,621 712,640 480,317
Unit-based compensation 197,812 53,621 -
Interest 149,325 102,469 107,946
Loss on sale of property
and equipment 34,295 - -
Net loss on write-down of
property and equipment
destroyed in fire - - -
Fire-related expenses - - -
Future income taxes (47,799) - -
-------------------------------------------------------------------------
Net income (loss) 396,196 450,993 11,840

Add:
Depreciation, amortization
and accretion 993,621 712,640 480,317
Unit-based compensation 197,812 53,621 -
Loss on sale of property
and equipment 34,295 - -
Loss on write-off of
property and
equipment - - -
Future income taxes (47,799) - -
-------------------------------------------------------------------------
Funds from operations 1,574,125 1,217,254 492,157
Changes in non-cash working
capital (373,713) 2,729,106 1,219,763
-------------------------------------------------------------------------
Cash flow from operating
activities $1,200,412 $3,946,360 $1,711,920
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

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


Outlook

Deepwell continues its commitment to improving results at the three existing facilities. The main tools for improving results are the targeting of higher-yield waste streams and increasing capacities by adding well capacity through the addition of new disposal wells, or stimulation to improve performance of existing wells. In addition, Deepwell believes that approval by Alberta Energy and Utilities Board (EUB) of the Rycroft Facility as an Oilfield Waste Management Facility is forthcoming. Currently, Rycroft is classified as an Injection Facility and upgrading the approval to an Oilfield Waste Management Facility will permit Rycroft to receive additional waste streams, at higher prices and permit the facility to offer custom treating.

Consistent with Deepwell's focus from inception are the efforts to grow through addition of greenfield facilities. Construction of the Claresholm facility is anticipated to be complete in January 2007 with final costs of construction near $9 million as previously estimated. Claresholm is located in an active region of oil and natural gas production and exploration which is not currently served by any third-party oilfield waste management facility in the local area. The facility will include equipment and processes which are anticipated to provide improved operating efficiencies and environmental advantages over Deepwell's existing facilities. Deepwell has also initiated the approval process for its fifth facility and is prospecting for suitable sites for construction beyond 2008.

On October 25, 2007 the Premier of Alberta delivered a proposal for a new royalty framework. The proposals include increases to royalties levied on natural gas, conventional oil and oil sands produced in Alberta with most changes proposed to take effect in January 2009. Deepwell's revenues are not directly impacted by royalties or the proposed changes to royalties. However, these recommendations, if enacted as proposed, may have a negative impact on Deepwell's customers and may impact oil and natural gas activity in Alberta. Because Deepwell's cash flow is more dependent on activity in the production of oil and natural gas than on exploration, management believes that impacts may be less pronounced than in other oilfield service sectors.

Traditionally the strongest demand for Deepwell's services is in the fourth and first quarters of the year, and Deepwell anticipates that trend to continue for the fourth quarter of 2007 and the first quarter of 2008. Deepwell is exposed to the price of oil due to sales of recovered oil and anticipates that prices will continue to be volatile but strong through the end of 2007. Deepwell anticipates that the cash flow of the Trust will be sufficient to continue distributions at the current level through the end of 2007.

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 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 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

AS AT AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007

(unaudited)

As per the disclosure requirements of the National Instrument 51-102, Part 4, subsections 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 nine months ended September 30, 2007 have been internally prepared and are the responsibility of Deepwell's management.


DEEPWELL ENERGY SERVICES TRUST
INTERIM CONSOLIDATED BALANCE SHEETS

September December
30, 2007 31, 2006
As at (unaudited) (audited)
-------------------------------------------------------------------------
Assets
Current assets:
Cash - $28,861
Accounts receivable $ 2,966,485 2,729,106
Inventory (Note 5) 187,234 80,205
Deferred financing costs 25,454 39,880
Prepaid expenses and deposits 397,634 203,110
-------------------------------------------------------------------------
3,576,807 3,081,162

Property and equipment 41,607,811 39,565,606
Intangible assets 3,007,336 3,254,037
Goodwill 7,157,402 7,157,402
Financial security deposits - 1,433,474

-------------------------------------------------------------------------
$55,349,356 $54,491,681
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities
Current liabilities:
Bank indebtedness $ 898,261 -
Accounts payable and accrued liabilities 2,118,449 $ 3,538,986
Distributions payable 428,485 417,305
-------------------------------------------------------------------------
3,445,195 3,956,291

Long-term debt - 11,500,000
Future income taxes (Note 4) - 87,201
Asset retirement obligations 760,106 713,744
-------------------------------------------------------------------------
4,205,301 16,257,236
-------------------------------------------------------------------------

Unitholders' Equity
Trust units (Note 3) 56,175,472 40,490,377
Contributed surplus 927,541 251,432
Deficit (5,958,958) (2,507,364)
-------------------------------------------------------------------------
51,144,055 38,234,445

-------------------------------------------------------------------------
$55,349,356 $54,491,681
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to interim consolidated financial statements.



DEEPWELL ENERGY SERVICES TRUST
INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND ACCUMULATED DEFICIT
(unaudited)
Three months Three months Nine months 154 days
ended ended ended ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
-------------------------------------------------------------------------
Revenues $ 3,513,654 $ 3,808,795 $10,473,315 $ 5,587,724
-------------------------------------------------------------------------

Expenses
Operating 1,584,125 2,040,285 4,693,785 2,989,222
Selling and
administrative 520,071 448,787 1,675,765 668,055
Depreciation and
accretion 824,096 560,249 2,422,782 1,045,541
Amortization of
intangible assets 82,234 136,803 246,701 136,803
Unit-based
compensation 141,673 53,621 676,111 53,621
Interest on
short-term debt 11,235 4,601 41,876 15,046
Interest on
long-term debt 99,606 97,868 503,976 179,781
Amortization of
deferred financing
costs 9,545 15,588 66,925 36,821
Gain on sale of
property and equipment - - (10,239) -
Loss on write-off of
property and equipment
(net of accrued
insurance proceeds) - - 367,702 -
Fire-related expenses - - 162,119 -
-------------------------------------------------------------------------
3,272,585 3,357,802 10,847,503 5,124,890

Income (loss) before
taxes 241,069 450,993 (374,188) 462,834

Future income tax
recovery (Note 4) - - 87,201 -

-------------------------------------------------------------------------
Net income (loss) 241,069 450,993 (286,987) 462,834

Accumulated deficit,
beginning of period (4,915,935) (433,417) (2,507,364) $ 0
Distributions to
unitholders (1,284,092) (1,669,220) (3,164,607) (2,114,478)
-------------------------------------------------------------------------
Accumulated deficit,
end of period $(5,958,958) $(1,651,644) $(5,958,958) $(1,651,644)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net income (loss)
per trust unit:
Basic $ 0.04 $ 0.10 $ (0.06) $ 0.11
Diluted $ 0.04 $ 0.10 $ (0.06) $ 0.10
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Weighted average
trust units
outstanding:
Basic 6,324,139 4,356,000 5,015,016 4,356,000
Diluted 6,327,260 4,477,793 5,015,143 4,427,827
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to interim consolidated financial statements.



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

Three months Three months Nine months 154 days
ended ended ended ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
-------------------------------------------------------------------------
Operating activities
Net income (loss) $ 241,069 $ 450,993 $ (286,987) $ 462,834

Non-cash items:
Depreciation and
accretion 824,096 560,249 2,422,782 1,182,335
Amortization of
intangible assets 82,234 136,803 246,701 -
Unit-based
compensation 141,673 53,621 676,111 53,621
Amortization of
deferred financing
costs 9,545 15,588 66,925 36,821
Gain on sale of
property and equipment - - (10,239) -
Loss on write-off of
property and equipment - - 746,332 -
Future income tax
recovery (Note 4) - - (87,201) -
Change in non-cash
working capital (442,031) 2,729,106 (716,908) 3,430,511
-------------------------------------------------------------------------
Cash flow from
operating activities 856,586 3,946,360 3,057,516 5,166,122
-------------------------------------------------------------------------

Investing activities
Financial security
deposits 1,470,336 (194,552) 1,433,474 (1,414,200)
Business acquisitions
(net of cash
of $259,925) - (47,887) - (42,881,776)
Purchase of property
and equipment (2,846,290) (3,313,792) (5,298,219) (3,507,560)
Proceeds on sale of
property and equipment - - 143,500 -
Change in non-cash
investing working
capital (131,644) - (1,231,381) -
-------------------------------------------------------------------------
Cash flow from
investing activities (1,507,598) (3,556,231) (4,952,626) (47,803,536)
-------------------------------------------------------------------------

Financing activities
Proceeds from
issuance of units 16,604,891 - 16,604,891 36,925,374
Units issued from
distribution
re-investment plan 108,869 - 139,929 -
Deferred financing
costs (35,000) - (52,500) -
Net proceeds from
(repayments to)
long-term debt (13,500,000) (15,711) (11,500,000) 6,904,289
Unit issuance costs (981,651) (83,348) (1,059,725) -
Distributions to
unitholders (1,284,092) (1,669,220) (3,164,607) (2,114,478)
-------------------------------------------------------------------------
Cash flow from
financing activities 913,017 (1,768,279) 967,988 41,715,185
-------------------------------------------------------------------------

Change in cash 262,005 (1,378,150) (927,122) (922,229)

Cash (bank
indebtedness),
beginning of period (1,160,266) 455,921 28,861 -

-------------------------------------------------------------------------
Cash (bank
indebtedness),
end of period $ (898,261) $ (922,229) $ (898,261) $ (922,229)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplementary
information
Cash interest paid $ 110,841 $ 102,469 $ 545,852 $ 194,827
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to interim consolidated financial statements.



DEEPWELL ENERGY SERVICES TRUST
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
As at and for the periods ended September 30, 2007 and 2006
(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. 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, are reported in Canadian dollars, and are consistent with
those set out in the audited consolidated financial statements for the
247 day period ended December 31, 2006. 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 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 247 day period ended
December 31, 2006.

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
247 day period 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 new
accounting standards presented in the notes to the interim consolidated
financial statements for the period ending March 31, 2007.

Certain comparative amounts have been reclassified to conform to the
current period's presentation and no nine-month comparative numbers have
been presented because Deepwell and its subsidiaries commenced operations
on April 28th, 2006.

3. Unitholders' equity

(a) Trust unit options and unit-based compensation

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. The following table summarizes the Trust unit
options:

-------------------------------------------------------------------------
September December
30, 2007 31, 2006
-------------------------------------------------------------------------
Trust unit options outstanding 506,971 314,500
Trust unit options exercisable 170,133 -
Range of exercise prices (per unit) 6.30 to $9.62 to
$9.62 $10.26
Weighted average remaining contractual
life (years) 4.29 4.65
Weighted average exercise price (per unit) $ 7.93 $ 9.63
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The Trust recorded unit based compensation expense in respect of Trust
unit options of $141,673 during the three months ended September, 2007,
and $676,111 for the nine months September 30, 2007 with an offsetting
increase to contributed surplus. The fair value of options issued was
estimated using the Black-Scholes pricing model with the following
assumptions: risk free interest rate of 4.25 percent, volatility rate of
45 percent; life of 5 years; the impact of monthly distributions and
corresponding changes in exercise price. During the period 130,171 Trust
unit options were granted.

-------------------------------------------------------------------------
Unitholders' Equity Number Amount
-------------------------------------------------------------------------
Issued on redemption of Class B units 4,356,000 $43,560,000
Units issued - rights offering 2,180,515 13,104,895
Units issued - private placement 582,362 3,499,996
Distibution re-investment plan 22,539 139,929
Trust Unit issue costs - (4,129,348)
-------------------------------------------------------------------------
September 30, 2007 7,141,416 $56,175,472
-------------------------------------------------------------------------
-------------------------------------------------------------------------

(b) Distributions to Unitholders

The Trust has declared distributions to Unitholders in accordance with
the following schedule:

-------------------------------------------------------------------------
Record Payment Cash per
2007 date date Trust unit Amount
-------------------------------------------------------------------------
January January 31 February 15 $0.0958 $417,305
February February 28 March 15 0.0958 417,305
March March 31 April 13 0.06 261,360
April April 30 May 15 0.06 261,360
May May 31 June 15 0.06 261,523
June June 30 July 14 0.06 261,662
July July 31 August 15 0.06 427,655
August August 31 September 14 0.06 427,952
September September 30 October 15 0.06 428,485
-------------------------------------------------------------------------
Distributions declared to unitholders $3,164,607
-------------------------------------------------------------------------
-------------------------------------------------------------------------

(c) Weighted average units outstanding

-------------------------------------------------------------------------
Three months Three months Nine months 154 days
ended ended ended ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
-------------------------------------------------------------------------

Basic 6,324,139 4,356,000 5,015,016 4,356,000
Diluted 6,327,260 4,477,793 5,015,143 4,356,000
-------------------------------------------------------------------------

(d) Dividend re-investment plan

During the third quarter of 2007, a total of $108,869 was reinvested by
unitholders under the Trust's distribution reinvestment plan, resulting
in the issuance of 17,508 Trust units.

(e) Private placement and rights offering

On July 9th, 2007, Deepwell closed a private placement of 582,362 units
for gross proceeds of $3,499,996. On July 31, 2007, Deepwell's closed a
rights offering, which was fully subscribed for 2,180,515 units and gross
proceeds of $13,104,895.

4. Income taxes

On June 22, 2007, Bill C-52, an Act to implement certain provisions of
the March 19, 2007 federal budget, received royal assent. Bill C-52
includes legislative provisions, the SIFT Trust Legislation, to implement
proposals originally announced on October 31, 2006, which are now in
force, relating to the taxation of certain publicly-traded trusts and
their unitholders under the Tax Act. The SIFT Trust Legislation generally
will apply to trusts that are resident in Canada for purposes of the Tax
Act, that hold one or more "non-portfolio properties", and the units of
which are listed on a stock exchange or other public market (a "specified
investment flow-through trust" or "SIFT trust"). A SIFT trust effectively
is subject to tax on its income from non-portfolio properties and taxable
capital gains from dispositions of non-portfolio properties paid, or made
payable, to unitholders at a rate comparable to the combined federal and
provincial corporate income tax rate. Distributions of such income to
unitholders should be treated as eligible dividends paid by a taxable
Canadian corporation.

GAAP requires Deepwell to recognize future income tax assets and
liabilities based on estimated temporary differences expected as at
January 1, 2011 and on the basis of its structure at the balance sheet
date. The Trust has completed preliminary consolidated analysis and has
estimated a future income tax asset. A valuation allowance has been
applied against this amount and therefore the potential impact is not
reflected in the interim consolidated financial statements as at and for
the nine months ended September 30, 2007.

5. Inventories

As of January 1, 2008, Deepwell is required to replace the existing
inventory accounting policy. The new policy requires inventory to be
valued on a first-in, first-out or weighted average basis. The
application of this standard is not expected to have a material impact on
the interim consolidated financial statements.

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

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 its subsidiaries, or industry results, to be materially
different from any future results, performance or achievements expressed
or implied by such forward looking statements. Without limiting the
foregoing, such forward-looking statements include statements made in
this press release regarding the anticipated timing for commencing
construction of the oilfield waste management facility and the
anticipated completion date of the facility. There is no assurance that
the expected timeframes will be met as all are subject to risks which
include, without limitation, the possibility for equipment failures,
labour disputes, work stoppages, equipment delivery delays, and the
potential for delays arising from injuries and safety concerns at the
worksite. 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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