Enerflex Systems Income Fund
TSX : EFX.UN

Enerflex Systems Income Fund

August 03, 2005 23:59 ET

Enerflex Announces 58% Increase in Earnings

CALGARY--(CCNMatthews - Aug. 3) - Enerflex Systems Ltd. (EFX:TSX), a leading Canadian supplier of products and services to the global oil and gas production industry, today announced its financial and operating results for the three and six months ended June 30, 2005.


For the three months ended June 30
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$ millions, except per
share amounts (unaudited) 2005 2004 % change
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Revenue $ 157.1 $ 119.8 31%
Gross margin $ 34.8 $ 27.7 25%
Net income $ 9.2 $ 5.8 58%
Earnings per share (Basic) $ 0.41 $ 0.26 58%
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For the six months ended June 30
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$ millions, except
per share amounts (unaudited) 2005 ` 2004 % change
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Revenue $ 304.8 $ 248.1 23%
Gross margin $ 66.3 $ 57.2 16%
Net income $ 16.5 $ 12.9 28%
Earnings per share (Basic) $ 0.74 $ 0.58 28%
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Mr. P. John Aldred, Chairman and Chief Executive Officer, is pleased to report that "Enerflex delivered strong results in the second quarter of 2005, reporting earnings per share of $0.41, a 58% increase over the second quarter of 2004."

"We indicated in our last quarterly report that longer lead times for major components and repair parts had an impact on our first quarter results; however, we did expect a full recovery in the second quarter. Results for the second quarter confirm that our forecast was correct. Revenue and earnings for the first six months have grown by 23% and 28% respectively over the same period in 2004, putting us firmly on track for a strong year."

J. Blair Goertzen, President and Chief Operating Officer added, "while all three of our business segments have shown solid gains, we are particularly pleased with the performance of our Fabrication segment in the second quarter. Fabrication revenues have increased by 49%, while earnings before interest and taxes grew by 149% over the prior year period."

Quarterly Overview:

- A strong quarter for all three of our segments resulted in earnings per share of $0.41, an increase of 58% over the second quarter of 2004, on revenue growth of 31%.

- Operating margin increased to 9.5% of revenue during the second quarter of 2005 compared to 7.7% in the same quarter of 2004.

- Late in the quarter, Enerflex announced plans to acquire 100% of HPS Group Limited in Perth, Australia. The acquisition closed on July 6, 2005.

- Service revenue increased by 19% during the quarter led by a 26% increase in domestic Mechanical Service revenue. The service segment's earnings before interest and income taxes increased by 58% during the three months ended June 30, 2005 as compared to the same period in 2004.

- International revenue from the Mechanical Service division increased by 20% in the second quarter of 2005, when compared to the same period of 2004. The increase reflects new maintenance contracts in Australia, and increased service revenue and engine sales in Europe.

- Activity remained high throughout the six months ended June 30, 2005, marked by an increase in our Fabrication bookings of 32% when compared to the same period of 2004, and an increase of 28% in our backlog over December 31, 2004.

- Maintained diligent cost controls, reducing second quarter selling, general and administrative expenses to 12.7% of revenue.

- Enerflex has embarked on a strategic initiative for the Canadian market called 'Variable Cost Compression'. This product offering will involve Enerflex owning, operating and maintaining existing compression equipment for a variable fee, based on throughput and uptime. This initiative is expected to strengthen all of our Canadian operations.

- Early in July, Enerflex, through Presson and Presson-Descon International (Private) Limited, was awarded a contract in Egypt for the supply of a natural gas processing facility. The total amount of the contract is expected to be $40 million, while Enerflex's combined share will result in revenue of approximately $32 million.

- Presson has initiated a 9,000 square foot expansion at its shop in Nisku, Alberta to allow for heavy vessel fabrication.

Three months ended June 30, 2005

During the three months ended June 30, 2005, Enerflex generated net income of $9.2 million ($0.41 per common share) from revenue of $157.1 million. This represents an increase in net income of $3.4 million or 58%, resulting from a revenue increase of $37.3 million or 31%, all as compared to the three month period ended June 30, 2004. Increased revenue and the leveraging of existing fixed costs, offset by a reduction in the average gross margin, contributed to the earnings improvement. During the second quarter of 2005, revenue increased in each division with Compression, Mechanical Service and Production and Processing experiencing the greatest levels of improvement driven by high domestic demand. Compression and Mechanical Service revenue were positively impacted during the second quarter of 2005 as the previously disclosed delay in deliveries of major components and spare parts was rectified and shipments were completed.

Gross margin for the three months ended June 30, 2005 was $34.8 million or 22.1% of revenue as compared to $27.7 million or 23.2% of revenue for the three months ended June 30, 2004, an increase of $7.0 million or 25%. The reduction in the gross margin as a percentage of revenue is attributed to a change in the mix of revenue from higher margin Service and Leasing activity towards lower margin Fabrication activity and higher labour, input and shipping costs.

Selling, general and administrative ("SG&A") expenses were $20.0 million or 12.7% of revenue during the three months ended June 30, 2005, compared with $18.7 million or 15.6% of revenue in the same period of 2004. Included in SG&A for the second quarter of 2005 is $0.4 million of stock-based compensation expense and $0.5 million associated with the ongoing program for adopting compliance measures for Multilateral Instrument 52-109.

Operating margin(1) assists the reader in understanding the margin contributions made from the Company's core businesses after considering all SG&A expenses and the impact of the Company's foreign exchange hedging strategy. For the three months ended June 30, 2005, Enerflex produced an operating margin(1) of $14.9 million, or 9.5% of revenue, as compared to an operating margin(1) of $9.2 million, or 7.7% of revenue, for the same three month period in 2004. The increase in operating margin(1) of $5.6 million or 61% is primarily attributed to the leveraging of existing fixed costs offset by changes in the Company's revenue mix as referred to above.

Income before interest and income taxes totalled $15.7 million for the second quarter of 2005, as compared to $9.7 million for the same period in 2004, an increase of $5.9 million or 61%. Interest expense during the quarter was virtually unchanged from the second quarter of 2004 and income taxes totalled $5.6 million, an increase of $2.5 million. The effective income tax rate increased to 38%, as compared to 35% in 2004, as a consequence of an unfavorable income tax assessment from prior years and a reduction in the recognition of future income tax benefits arising from foreign jurisdictions. Management expects the effective tax rate to revert back toward normal rates in the future.

Segmented results for the three months ended June 30, 2005

Service

The Service business segment provides a complete line of mechanical, and electrical, instrumentation and controls ("EI&C") services to the oil and gas industry through an extensive branch network in Canada, as well as operations in the United States, Germany, the Netherlands, Australia and Indonesia. Service employs 47% of staff, holds 35% of the total assets, and generated 45% of the Company's revenue in the second quarter of 2005. Key performance metrics include labour utilization, revenue, gross margin percent and income before interest and income taxes.



-------------------------------------------------------------------------
Three months ended June 30
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(unaudited) (thousands) 2005 2004
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Segment revenue $ 74,661 $ 63,505
Intersegment revenue (3,657) (3,832)
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Revenue 71,004 59,673
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Gross margin 19,455 15,602
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EBITDA(2) 7,511 4,996
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Income before interest and income taxes $ 6,617 $ 4,171
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Service revenue was $71.0 million in the three months ended June 30, 2005 and comprised 45% of consolidated revenue. This compares to $59.7 million and 50% of consolidated revenue in the same period of 2004. In the second quarter of 2005, Mechanical Service generated 61% of the segment's revenue as compared to 59% in 2004. EI&C contributed 39% of the segment's revenue in the three months ended June 30, 2005 and 41% in the same period of 2004. The increase in the segment's revenue of 19%, or $11.3 million, was due to increased demand for products and services in Mechanical Service, resulting in an increase of $8.3 million, and an increase in revenue contributed by EI&C of $3.0 million. Gross margin for the segment totalled $19.5 million, or 27.4% of revenue, as compared to $15.6 million, or 26.1% of revenue, in the second quarter of 2004. The increase in gross margin percentage reflects efficiency gains from the Mechanical Service Central Services facility established in 2004 and increased utilization rates by field service operations. Margins in the EI&C division were essentially unchanged between the periods. Income before interest and income taxes for the three months ended June 30, 2005 totalled $6.6 million, an increase of $2.4 million from the $4.2 million generated in the second quarter of 2004. This increase in income before interest and income taxes was a result of the gross margin improvements referred to above.

Fabrication

The Fabrication business segment engineers, fabricates and assembles standard and custom-design compression packages, production and processing equipment and facilities, and power generation systems. The key performance metrics for this business segment are plant utilization and gross margin as a percentage of revenue. It employs 50% of staff, holds 39% of the total assets, and generated 50% of the Company's revenue in the second quarter of 2005.



-------------------------------------------------------------------------
Three months ended June 30
-------------------------------------------------------------------------
(unaudited) (thousands) 2005 2004
-------------------------------------------------------------------------
Segment revenue $ 85,004 $ 62,308
Intersegment revenue (6,851) (9,731)
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Revenue 78,153 52,577
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Gross margin 10,028 7,624
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EBITDA(2) 4,784 2,672
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Income before interest and income taxes $ 3,735 $ 1,499
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Fabrication revenue totalled $78.2 million for the three months ended June 30, 2005 and comprised 50% of consolidated revenue. This compares to $52.6 million and 44% of consolidated revenue for the same period in 2004. Compression generated 72% of the segment's revenue in the second quarter of 2005 and 73% during the comparable period in 2004. Production and Processing contributed 26% of the segment's revenue in the three months ended June 30, 2005 and 26% during the same period of 2004. Power contributed 2% of the segment's revenue in the second quarter of 2005 and 1% in 2004.

The increase in the segment's revenue of $25.6 million, or 49%, for the second quarter of 2005 over the second quarter of 2004, was a result of domestic growth in the Production and Processing division and increased demand for the Company's compression products. A portion of this growth in revenue occurred as a result of the Compression division receiving many key components for compression packages of which delivery was delayed in the first quarter of 2005. At present, most major suppliers of key components continue to require significant order lead times and as such the Company has significantly increased its order quantities and inventory levels for such items. Gross margin for the segment was 12.8%, or $10.0 million, for the period as compared to 14.5% in the second quarter of 2004. The reduction in gross margin percentage was principally a result of the timing of certain Production and Processing projects and completion costs incurred on international projects. To a lesser extent, gross margin was also affected by discounts on multiple unit orders, higher input costs and the incurrence of additional costs to limit the impact of delays in the delivery of major components. Income before interest and income taxes for the three months ended June 30, 2005 increased by $2.2 million, or 149%, to $3.7 million.

Enerflex owns approximately 370,000 square feet of compression shop floor space in North America and during the three months ended June 30, 2005 management estimates that the average utilization rate, based on the theoretical plant capacity in labour hours, was 63% as compared to 49% during the same period in 2004.

Enerflex owns approximately 100,000 square feet of Production and Processing shop floor space in Alberta, and during the second quarter of 2005 management estimates that the average utilization rate, based on labour hours, was 92% as compared to 89% during the same period in 2004. Enerflex will expand its production and processing fabrication facility in Nisku, Alberta with the construction of a 9,000 square foot large vessel fabrication facility and it will pursue additional international contracts in order to support its domestic operations in this division.

Leasing

The Leasing business segment provides a variety of rental and leasing alternatives for natural gas compression, power generation and processing equipment. As of June 30, 2005, the Enerflex lease fleet was comprised of approximately 360 compression units and 97,000 horsepower, as compared with 320 units and 88,000 horsepower as at June 30, 2004. This resulted in an average fleet of 357 units and 97,000 horsepower for the three months ended June 30, 2005. The key performance metrics in this business are fleet size and utilization rates. The Leasing segment employs 1% of staff, holds 19% of the total assets and generated 5% of the Company's revenue in the second quarter.



-------------------------------------------------------------------------
Three months ended June 30
-------------------------------------------------------------------------
(unaudited) (thousands) 2005 2004
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Segment revenue $ 7,963 $ 7,615
Intersegment revenue (32) (32)
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Revenue 7,931 7,583
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Gross margin 5,267 4,518
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EBITDA(2) 6,982 5,867
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Income before interest and income taxes 5,328 4,061
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Capital expenditures, net of proceeds
on disposal $ 1,082 $ 5,182
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Revenue during the three months ended June 30, 2005 of $7.9 million increased by $0.3 million or 5% from revenue of $7.6 million in the second quarter of 2004. Although the segment owns and rents compression, power and processing equipment, the main driver for its revenue growth is compression equipment. The increase in revenue during the period was a result of a larger average fleet offset by slightly lower fleet utilization rates. Rental rates have not increased significantly during the period. For the three months ended June 30, 2005, the segment's revenue was generated 92% by compression and 8% by power and production process equipment. Overall, the segment experienced compression rental utilization rates, based on capital deployed, of 82% compared to 84% for the second quarter of 2004. The decline in utilization rates is attributable to the timing of disposals of leased units.

During the second quarter of 2005, Leasing sold a number of compression, power and process equipment units from its fleet, for gross proceeds of $3.5 million and a gain on sale of $0.8 million. The sale of units generally occurs when customers exercise their contractual option to purchase equipment. This compares to gross proceeds of $3.5 million and a gain on sale of $0.5 million in the same period of 2004.

Six Months Ended June 30, 2005

During the six months ended June 30, 2005, Enerflex generated net income of $16.5 million ($0.74 per common share) from revenue of $304.8 million. This represents an increase in net income of $3.6 million or 28%, resulting from a revenue increase of $56.7 million or 23%, all as compared to the six month period ended June 30, 2004. Increased revenue and the leveraging of existing fixed costs contributed to the earnings improvement, offset by a small reduction in the average gross margin. During the first six months of 2005, revenue increased in each division with significant increases occurring in three divisions. Compression and Mechanical Service's increased domestic demand contributed to revenue growth, while international project revenue was the primary reason for growth in Production and Processing.

Gross margin for the six months ended June 30, 2005 was $66.3 million or 21.7% of revenue as compared to $57.2 million or 23.0% of revenue for the six months ended June 30, 2004, an increase of $9.1 million or 16%. The reduction in the gross margin as a percentage of revenue is attributed to a change in the mix of revenue from higher margin Service and Leasing activity towards lower margin Fabrication activity and higher labour, input and shipping costs.

Selling, general and administrative expenses were $39.7 million or 13.0% of revenue during the six months ended June 30, 2005, compared with $36.4 million or 14.7% of revenue in the same period of 2004. Included in SG&A for the first six months of 2005 is $0.7 million of stock-based compensation expense and $1.3 million associated with the Company's ongoing program for adopting compliance measures for Multilateral Instrument 52-109. Information technology expenditures and employee related costs account for the remainder of the increase.

Operating margin(1) assists the reader in understanding the margin contributions made from the Company's core businesses after considering all SG&A expenses and the impact of the Company's foreign exchange hedging strategy. For the six months ended June 30, 2005, Enerflex produced an operating margin(1) of $26.6 million, or 8.7% of revenue, as compared to an operating margin(1) of $20.4 million, or 8.2% of revenue, for the same six month period in 2004. The increase in operating margin(1) of $6.1 million or 30% is primarily attributed to the leveraging of existing fixed costs, offset by changes in the Company's revenue mix as referred to above.

Income before interest and income taxes totalled $28.1 million for the six months ended June 30, 2005, as compared to $21.7 million for the same period in 2004, an increase of $6.4 million or 29%. During the period, interest expense was virtually unchanged from the prior year and income taxes totalled $9.6 million, an increase of $2.7 million. The effective income tax rate increased to 37% from 35% as a consequence of an unfavorable income tax assessment from prior years and a reduction in the recognition of future income tax benefits arising from foreign jurisdictions. Management expects the effective tax rate to revert back toward normal rates in the future.



Segmented results for the six months ended June 30, 2005

Service
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Six months ended June 30
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(unaudited) (thousands) 2005 2004
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Segment revenue $ 138,359 $ 126,420
Intersegment revenue (7,174) (7,990)
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Revenue 131,185 118,430
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Gross margin 35,013 31,971
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EBITDA(2) 11,341 10,319
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Income before interest and income taxes $ 9,566 $ 8,706
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Service revenue was $131.2 million in the six months ended June 30, 2005 and comprised 43% of consolidated revenue. This compares to $118.4 million and 48% of consolidated revenue in the same period of 2004. In the first six months of 2005, Mechanical Service generated 60% of the segment's revenue as compared to 56% in 2004. EI&C contributed 40% of the segment's revenue in the six months ended June 30, 2005 and 44% in the same period of 2004. The revenue increase of 11%, or $12.8 million, was due to increased demand for products and services in Mechanical Service, resulting in an increase of $11.6 million, and an increase in revenue contributed by EI&C of $1.2 million. Gross margin for the segment totalled $35.0 million, or 26.7%, as compared to $32.0 million or 27.0% in the same period of 2004. The small decrease in gross margin percent was caused by slightly lower margins in the competitive EI&C division with consistent margins in Mechanical Service despite the incurrence of increased costs associated with the transportation of parts to overcome supplier delivery obstacles. Income before interest and income taxes for the six months ended June 30, 2005 totalled $9.6 million, an increase of $0.9 million from the $8.7 million generated in the second quarter of 2004.



Fabrication
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Six months ended June 30
-------------------------------------------------------------------------
(unaudited) (thousands) 2005 2004
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Segment revenue $ 169,363 $ 132,718
Intersegment revenue (11,709) (17,457)
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Revenue 157,654 115,261
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Gross margin 20,849 16,476
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EBITDA(2) 10,277 7,161
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Income before interest and income taxes $ 8,154 $ 4,787
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Fabrication revenue totalled $157.7 million for the six months ended June 30, 2005 and comprised 52% of consolidated revenue. This compares to $115.3 million and 47% of consolidated revenue for the same period in 2004. Compression generated 70% of the segment's revenue in the first six months and 73% during the comparable period in 2004. Production and Processing contributed 28% of the segment's revenue in the six months ended June 30, 2005 and 26% during the same period of 2004. Power contributed 2% of the segment's revenue in the first six months of 2005 and 1% in 2004.

The increase of $42.4 million, or 37%, in the segment's revenue for the first six months of 2005 over the same period in 2004, was a result of international and domestic growth in the Production and Processing division and increased domestic demand for the Company's compression products. Gross margin for the segment was 13.2%, or $20.8 million, for the period as compared to 14.3% in the first six months of 2004. The reduction in gross margin percent was a result of completion costs on international projects, discounts on multiple unit orders, higher input costs and the incurrence of additional costs to limit the impact of delays in the delivery of major components. Income before interest and income taxes for the six months ended June 30, 2005 increased by $3.4 million, or 70%, to $8.2 million.

Fabrication Segment Bookings

During the first six months of 2005, Enerflex increased its order bookings in the Fabrication segment by approximately 32% versus bookings recorded in the same period of 2004. The Fabrication segment's order backlog at June 30, 2005 was approximately 28% above the segment's order backlog at December 31, 2004, and essentially unchanged from the segment's order backlog at June 30, 2004.

The Fabrication segment's order backlog continued to grow in July 2005 as exemplified by the awarding of a significant international contract. On July 13, 2005, the Company announced the awarding of an additional contract with respect to production and processing equipment to be supplied to Egypt totaling $40.0 million, of which approximately $32.0 million will be reflected in the Company's future revenues in 2005 and the first quarter of 2006.

Leasing

During the first six months of 2005, Leasing had an average fleet of 360 units and 97,000 horsepower for the six months ended June 30, 2005.



-------------------------------------------------------------------------
Six months ended June 30
-------------------------------------------------------------------------
(unaudited) (thousands) 2005 2004
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Segment revenue $ 16,002 $ 14,471
Intersegment revenue (64) (55)
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Revenue 15,938 14,416
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Gross margin 10,416 8,762
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EBITDA(2) 13,894 11,721
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Income before interest and income taxes 10,337 8,211
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Capital expenditures, net of proceeds
on disposal $ (290) $ 9,948
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Revenue during the six months ended June 30, 2005 was $15.9 million, an increase of 11% over the $14.4 million in 2004. The increase in revenue during the period was a result of a larger average fleet, offset by slightly lower fleet utilization rates. Rental rates have not increased significantly during the period. For the six months ended June 30, 2005, the segment's revenue was generated 92% by compression and 8% by power and production process equipment. Overall, the segment experienced compression rental utilization rates, based on capital deployed, of 83% compared to 86% for the first half of 2004. The decline in utilization rates was attributed to the timing of disposals of leased units. It is currently management's belief that the increase in 2005 drilling activity and subsequent production requirements for new wells in the segment's core market of Canada, the increase in the number of coal bed methane ("CBM") wells, and a desire by natural gas producers to maintain production during periods when their equipment requires maintenance will ultimately drive increased demand for rental units.

During 2005, Leasing sold 25 compression units and 33 power and process equipment units from its fleet, for gross proceeds of $9.9 million and a gain on sale of $1.5 million. This compares to 21 compression units and 47 power and process equipment units, for gross proceeds of $8.1 million and a gain on sale of $1.2 million in the same period of 2004. The sale of units generally occurs when customers exercise their contractual option to purchase equipment. To satisfy demand for leased compression, Enerflex added 20 compression units and 16 power and processing units to its fleet during the six months ended June 30, 2005, for an investment of $9.6 million. This turnover of assets renews the fleet, resulting in an average fleet age of less than five years.

Financial Condition and Liquidity

During the first six months of 2005, Enerflex reduced its cash balances by $4.9 million. This reduction in cash balances occurred as the Company incurred net capital additions of $3.7 million, repaid operating loans and debt of $6.8 million, paid dividends of $4.5 million and increased its working capital by $11.4 million. These activities were offset by funds generated from operations before changes in non-cash working capital of $19.3 million and the receipt of proceeds on the exercise of stock options of $2.2 million.

On August 2, 2005, the Company had 22,593,255 common shares outstanding. Enerflex has a dividend policy, which is reviewed on an annual basis. On August 3, 2005, the Company declared a quarterly dividend equal to $0.10 per common share, payable on October 7, 2005 to shareholders of record September 26, 2005.

Subsequent Event

On July 6, 2005 the Company acquired 100% of the outstanding shares of HPS Group Limited ("HPS Group") of Perth, Australia. HPS Group is a specialized engineering, contracting and project management organization, servicing a wide range of energy and other industrial customers. The total purchase consideration, including transaction costs of approximately $0.7 million, was $25.1 million. Approximately $2.8 million was paid through the issuance of 122,176 common shares of Enerflex and the remaining $22.3 million was paid in cash and financed through additional drawings on the Company's existing credit facilities. Subject to the achievement of certain performance measures and future earnings targets in the HPS Group covering the twelve months following the acquisition, a maximum contingent consideration of $5.0 million Australian could be paid in July 2006.

Enerflex is presently completing its assessment of the valuation of specific assets acquired and currently estimates the acquired assets to be: intangible assets of $15.2 million, cash and cash equivalents of $6.0 million, capital assets of $2.5 million and working capital of $1.5 million.

INDUSTRY OUTLOOK

While Enerflex continues to build its international presence, the Company's fortunes are largely tied to natural gas capital and operating expenditures in western Canada. In 2005, industry analysts forecast that capital expenditures on plant and equipment will remain strong and will be at least comparable to 2004. Many forecasters expect that, in the absence of significant discoveries, North American conventional natural gas production will decrease. Sustaining or increasing production volumes is progressively more dependent upon development of tight gas and CBM, both of which require more compression than traditional reservoirs, and expansion in frontier regions such as the Northwest Territories. The continuation of higher natural gas prices similar to, or above, those experienced in recent years will be required to support gas development in these areas.

Internationally, Enerflex will continue to incrementally grow its existing international operations, seek new opportunities to expand its market presence and will pursue additional international contracts in order to support its domestic operations. The awarding of such contracts is difficult to predict and often requires substantial sales effort and lead time prior to the commencement of such contracts. As such, future revenues are difficult to predict and are subject to significant levels of volatility.

A continuing challenge to achieving improved profitability in 2005 will be the timely availability of certain Original Equipment Manufacturer components, which will be in steady demand as activity levels and demand for natural gas in North America remain high.

In order to continue to grow both the international and domestic markets for Enerflex's products and services, it is important to maintain the ability of Enerflex to attract and retain skilled employees. In periods of high economic activity in the oil and natural gas industry such employees are in high demand. Although the Company has been successful at acquiring, developing and retaining such employees in the past, current and future economic conditions will continue to challenge the resources of the organization.

Advisory

This document contains forward-looking information, which is subject to certain risks, uncertainties and assumptions. Should one or more of these risk factors materialize, or should assumptions prove incorrect, actual results may vary significantly from those expected.

The unaudited Consolidated Balance Sheets as at June 30, 2005 and December 31, 2004, and Consolidated Statements of Income, Retained Earnings and Cash Flows for the three and six months ended June 30, 2005 and 2004 are attached. The financial statements and above analysis should be read in conjunction with the Company's Annual Report for the year ended December 31, 2004 and the Interim Report for the period ended March 31, 2005.

Enerflex Systems Ltd. is a leading supplier of products and services to the global oil and gas production industry. Our core expertise lies between the wellhead and the pipeline. Enerflex provides natural gas compression, power generation and process equipment for sale or lease, hydrocarbon production and processing facilities, electrical, instrumentation and controls services and a comprehensive package of field maintenance and contracting capabilities. Through our ability to provide these products and services in an integrated manner, or as stand-alone offerings, Enerflex offers its customers a unique value proposition.

Headquartered in Calgary, Canada, the Company has approximately 2,400 employees and operations in Canada, Australia, the Netherlands, Pakistan, the United States, Indonesia and Germany. The Company's shares trade on the Toronto Stock Exchange under the symbol EFX.

Conference Call and Webcast Notice

Enerflex will host a conference call at 9:00 a.m. MDT (11:00 a.m. EDT) on Thursday, August 4, 2005 to discuss the Company's 2005 second quarter financial and operating results. To participate, call 1.800.814.4859 or 1.416.640.4127, ten minutes prior to the start. A replay of this call will be available until Thursday, August 11, 2004 by dialing 1.877.289.8525 or 1.416.640.1917 (passcode: 21131157 followed by the number sign).

A live audio webcast of the conference call will be available on our internet site (www.enerflex.com) in the Investor Relations section under Webcasts & Presentations on Thursday, August 4, at 9:00 a.m. MDT (11:00 a.m. EDT). A recording of the event will be available on our internet site approximately one hour following the call.



CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
(Thousands) 2005 2004
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Assets
Current assets
Cash $ 7,892 $ 12,840
Accounts receivable 154,314 132,562
Inventory 70,010 63,176
Income taxes receivable 341 412
Future income taxes 3,659 3,402
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Total current assets 236,216 212,392

Rental equipment 86,553 88,772
Property, plant and equipment 64,455 65,814
Assets under construction 1,347 -
Future income taxes 4,361 4,425
Intangible assets 2,921 3,210
Goodwill 111,965 112,252
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$ 507,818 $ 486,865
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LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Operating bank loans $ 23,457 $ 28,853
Accounts payable and accrued liabilities 91,514 72,699
Dividends payable 2,247 2,234
Income taxes payable 5,363 6,729
Current portion of long-term debt - 16,009
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Total current liabilities 122,581 126,524

Long-term debt 62,835 48,027
Future income taxes 11,048 14,445
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196,464 188,996
Shareholders' equity
Share capital 180,969 178,540
Cumulative translation adjustment (1,512) (414)
Contributed surplus 1,305 1,203
Retained earnings 130,592 118,540
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311,354 297,869
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$ 507,818 $ 486,865
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See accompanying note to the Consolidated Financial Statements



CONSOLIDATED STATEMENTS OF INCOME

Three months ended Six months ended
June 30 June 30
------------------------ -------------------------
(Unaudited) (Thousands,
except share amounts) 2005 2004 2005 2004
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Revenue $ 157,088 $ 119,833 $ 304,777 $ 248,107
Cost of goods sold 122,338 92,089 238,499 190,898
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Gross margin 34,750 27,744 66,278 57,209
Selling, general and
administrative expenses 19,987 18,662 39,713 36,435
Foreign currency
(gains) and losses (97) (133) - 334
Gain on sale of assets (820) (516) (1,492) (1,264)
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Income before interest
and income taxes 15,680 9,731 28,057 21,704
Interest 908 880 1,870 1,876
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Income before
income taxes 14,772 8,851 26,187 19,828
Income taxes 5,608 3,067 9,641 6,901
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Net income $ 9,164 $ 5,784 $ 16,546 $ 12,927
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Net income per
common share
- basic $ 0.41 $ 0.26 $ 0.74 $ 0.58
- diluted $ 0.41 $ 0.26 $ 0.73 $ 0.58
Weighted average
number of
common shares 22,470,828 22,314,892 22,439,503 22,282,783
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

Three months ended Six months ended
June 30 June 30
------------------------ -------------------------
(Unaudited) (Thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Retained earnings,
beginning of period $ 123,675 $ 100,321 $ 118,540 $ 95,409
Net income 9,164 5,784 16,546 12,927
Dividends (2,247) (2,232) (4,494) (4,463)
-------------------------------------------------------------------------
Retained earnings,
end of period $ 130,592 $ 103,873 $ 130,592 $ 103,873
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying note to the Consolidated Financial Statements



CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended Six months ended
June 30 June 30
------------------------ -------------------------
(Unaudited) (Thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating Activities
Net income $ 9,164 $ 5,784 $ 16,546 $ 12,927
Depreciation and
amortization 3,597 3,804 7,455 7,497
Future income taxes (279) (65) (3,547) 898
Gain on sale of assets (820) (516) (1,492) (1,264)
Stock option expense 232 161 367 379
-------------------------------------------------------------------------
11,894 9,168 19,329 20,437
Changes in non-cash
working capital (2,734) 1,334 (11,678) (239)
-------------------------------------------------------------------------
9,160 10,502 7,651 20,198
-------------------------------------------------------------------------

Investing Activities
Purchase of:
Rental equipment (4,552) (8,648) (9,648) (18,051)
Property, plant
and equipment (1,450) (2,999) (2,772) (4,174)
Assets under
construction (768) - (1,347) -
Proceeds on
disposal of:
Rental equipment 3,470 3,463 9,923 8,103
Property, plant
and equipment 87 384 153 425
-------------------------------------------------------------------------
(3,213) (7,800) (3,691) (13,697)
Changes in non-cash
working capital 469 (481) 85 (783)
-------------------------------------------------------------------------
(2,744) (8,281) (3,606) (14,480)
-------------------------------------------------------------------------

Financing Activities
(Decrease) increase
in operating
bank loans (4,039) 471 (5,396) (1,848)
Repayment of
long-term debt (1,421) (2,630) (1,421) (2,630)
Stock options
exercised 4 107 2,164 1,148
Dividends (2,247) (2,232) (4,481) (4,463)
-------------------------------------------------------------------------
(7,703) (4,284) (9,134) (7,793)
Changes in non-cash
working capital 65 376 141 648
-------------------------------------------------------------------------
(7,638) (3,908) (8,993) (7,145)
-------------------------------------------------------------------------
Decrease in cash (1,222) (1,687) (4,948) (1,427)
Cash, beginning
of period 9,114 7,001 12,840 6,741
-------------------------------------------------------------------------
Cash, end of period $ 7,892 $ 5,314 $ 7,892 $ 5,314
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying note to the Consolidated Financial Statements



Note 1. Segmented Information

The Company has three reportable segments: Service, Fabrication and
Leasing. The Service reportable segment is the aggregation of the
Mechanical Service and Electrical, Instrumentation and Controls
divisions. The Fabrication reportable segment is the aggregation of the
Production and Processing, Compression and Power divisions.

(Unaudited) (Thousands) Service Fabrication
---------------------------------------------------
Three months ended
June 30 2005 2004 2005 2004
-------------------------------------------------------------------------
Segment revenue $ 74,661 $ 63,505 $ 85,004 $ 62,308
Intersegment revenue (3,657) (3,832) (6,851) (9,731)
-------------------------------------------------------------------------
Revenue 71,004 59,673 78,153 52,577
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 19,455 15,602 10,028 7,624
-------------------------------------------------------------------------
Depreciation and
amortization 894 825 1,049 1,173
-------------------------------------------------------------------------
Income before interest
and income taxes 6,617 4,171 3,735 1,499
-------------------------------------------------------------------------
Capital expenditures 573 974 942 1,465
Corporate
-------------------------------------------------------------------------

-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proceeds on disposal $ 25 $ 341 $ 62 $ 43
Corporate
-------------------------------------------------------------------------

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


(Unaudited) (Thousands) Leasing Consolidated
---------------------------------------------------
Three months ended
June 30 2005 2004 2005 2004
-------------------------------------------------------------------------
Segment revenue $ 7,963 $ 7,615 $ 167,628 $ 133,428
Intersegment revenue (32) (32) (10,540) (13,595)
-------------------------------------------------------------------------
Revenue 7,931 7,583 157,088 119,833
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 5,267 4,518 34,750 27,744
-------------------------------------------------------------------------
Depreciation and
amortization 1,654 1,806 3,597 3,804
-------------------------------------------------------------------------
Income before interest
and income taxes 5,328 4,061 15,680 9,731
-------------------------------------------------------------------------
Capital expenditures 4,552 8,645 6,067 11,084
Corporate 703 563
-------------------------------------------------------------------------
6,770 11,647
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proceeds on disposal $ 3,470 $ 3,463 $ 3,557 $ 3,847
Corporate $ - $ -
-------------------------------------------------------------------------
$ 3,557 $ 3,847
-------------------------------------------------------------------------
-------------------------------------------------------------------------



(Unaudited) (Thousands) Service Fabrication
---------------------------------------------------
Six months ended
June 30 2005 2004 2005 2004
-------------------------------------------------------------------------
Segment revenue $ 138,359 $ 126,420 $ 169,363 $ 132,718
Intersegment revenue (7,174) (7,990) (11,709) (17,457)
-------------------------------------------------------------------------
Revenue 131,185 118,430 157,654 115,261
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 35,013 31,971 20,849 16,476
-------------------------------------------------------------------------
Depreciation and
amortization 1,775 1,613 2,123 2,374
-------------------------------------------------------------------------
Income before interest
and income taxes 9,566 8,706 8,154 4,787
-------------------------------------------------------------------------
Segment assets 123,537 112,991 146,813 127,850
Corporate
Goodwill 52,516 53,326 52,093 52,149
-------------------------------------------------------------------------
Total segment assets 176,053 166,317 198,906 179,999
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures 1,342 1,381 1,733 2,117
Corporate
-------------------------------------------------------------------------

-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proceeds on disposal $ 70 $ 369 $ 83 $ 56
Corporate
-------------------------------------------------------------------------

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


(Unaudited) (Thousands) Leasing Consolidated
---------------------------------------------------
Six months ended
June 30 2005 2004 2005 2004
-------------------------------------------------------------------------
Segment revenue $ 16,002 $ 14,471 $ 323,724 $ 273,609
Intersegment revenue (64) (55) (18,947) (25,502)
-------------------------------------------------------------------------
Revenue 15,938 14,416 304,777 248,107
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 10,416 8,762 66,278 57,209
-------------------------------------------------------------------------
Depreciation and
amortization 3,557 3,510 7,455 7,497
-------------------------------------------------------------------------
Income before interest
and income taxes 10,337 8,211 28,057 21,704
-------------------------------------------------------------------------
Segment assets 90,222 83,696 360,572 324,537
Corporate 35,281 8,614
Goodwill 7,356 7,356 111,965 112,831
-------------------------------------------------------------------------
Total segment assets 97,578 91,052 507,818 445,982
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures 9,633 18,051 12,708 21,549
Corporate 1,059 676
-------------------------------------------------------------------------
13,767 22,225
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proceeds on disposal $ 9,923 $ 8,103 $ 10,076 $ 8,528
Corporate $ - $ -
-------------------------------------------------------------------------
$ 10,076 $ 8,528
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Revenue from foreign countries was:

Three months ended Six months ended
June 30 June 30
------------------------ -------------------------
(Unaudited) (Thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Australia $ 6,734 $ 4,821 $ 18,552 $ 13,790
Indonesia 2,473 628 3,004 1,077
Netherlands 5,236 3,825 10,583 9,473
Pakistan 3,560 4,858 9,456 6,822
United States 7,788 6,018 10,768 13,189
Other 10,837 7,238 21,188 12,220
-------------------------------------------------------------------------
$ 36,628 $ 27,388 $ 73,551 $ 56,571
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Included in these
amounts are gross
exports from domestic
operations of:
$ 17,129 $ 11,843 $ 39,791 $ 24,694
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Revenue is attributed to countries by the destination of the sale.


------------------------------
(1) Operating margin and operating margin percent are non-GAAP
(Generally Accepted Accounting Principles) earnings measures that do
not have a standardized meaning prescribed by GAAP and therefore are
unlikely to be comparable to similar measures presented by other
issuers.
(2) Earnings before interest, taxes, depreciation and amortization
("EBITDA") is a non-GAAP earnings measure that does not have a
standardized meaning prescribed by GAAP and therefore is unlikely to
be comparable to similar measures presented by other issuers.

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