Enerflex Systems Income Fund
TSX : EFX.UN

Enerflex Systems Income Fund

May 04, 2006 23:59 ET

Enerflex Announces an Outstanding Quarter

CALGARY--(CCNMatthews - May 4) - 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 months ended March 31, 2006.


Three Months Ended March 31
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$ millions, except per share amounts
(unaudited) 2006 2005 % increase
-------------------------------------------------------------------------
Revenues $ 206.8 $ 147.7 40 %
Gross margin $ 46.6 $ 31.5 48 %
Gross margin percent 22.5 21.3 6 %
Operating margin $ 21.6 $ 11.7 84 %
Operating margin percent 10.4 7.9 32 %
Net income $ 12.9 $ 7.4 75 %
Earnings per share (Basic) $ 0.57 $ 0.33 73 %
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"The first quarter of 2006 marks the eleventh straight quarter that Enerflex has delivered earnings per share that exceed prior year comparatives. The Company also achieved strong gains in other key performance measures," said Mr. P. John Aldred, Chairman and Chief Executive Officer. "We view this latest period as decisive in terms of the increase in momentum and the traction we have achieved in our markets. This achievement results from the extraordinary commitment throughout the Company over the past three years to improve operating performance and position Enerflex to further capitalize on growth opportunities."

Mr. J. Blair Goertzen, President and Chief Operating Officer, added "Each of our segments posted gains during the quarter. Our Service segment significantly improved its profitability due to a combination of process improvements and strong market conditions. Engineered Systems delivered significantly improved margins and gained market acceptance of a number of its new products. Profitability, order bookings and backlog strengthened dramatically in this segment. Our Production Services segment continues to be a dominant player in the rental of compression, production and process equipment."

"We are making good progress with two strategic priorities for 2006." Mr. Goertzen continued. "In domestic markets, we have increased customer interest in our Variable Cost Compression (VCC) initiative which addresses customers' increased focus on cash flow and their drive to optimize legacy gas production assets. In April 2006, we received a letter of intent for our first VCC contract in western Canada. In international markets, we further developed Enerflex Global as a single point of contact for turnkey projects and completed the integration of existing operations in the AustralAsia region with HPS, establishing a strong regional business unit there."

Quarterly Overview:

- Net income for the first three months of 2006 increased by 75% to

$12.9 million or $0.57 per common share compared with a year ago.

- Revenue generated in the first quarter increased by $59.1 million or

40% to $206.8 million, compared with the three months ended March 31,

2005.

- Consolidated gross margin increased by $15 million or 48% to

$46.6 million as compared to $31.5 million the prior year period.

- Operating margin jumped by 84% to $21.6 million or 10.4% of revenues

compared to $11.7 million or 7.9% of revenues in the first quarter of

2005.

- Engineered Systems segment increased its revenue by 56% in the first

quarter to $124.2 million, from $79.5 million in the first quarter of

2005, and increased its gross margin to 16.5% of revenue from 13.6%

in the first quarter of 2005.

- The Engineered Systems backlog grew by 234% over the segment's

backlog at March 31, 2005, and by 22% over December 31st, 2005. New

order bookings in the quarter increased by 95% when compared to the

first quarter of 2005.

- The Service segment achieved a 24% increase in revenue to

$74.4 million during the first quarter of 2006, and a 142% increase

in income before interest and income taxes to $7.1 million.

FORWARD-LOOKING STATEMENTS

The following contains forward-looking statements. Certain statements containing words such as "anticipate", "could", "expect", "seek", "may", "intend", "will", "believe" and similar expressions, statements that are based on current expectations and estimates about the markets in which the Company operates and statements of the Company's belief, intentions and expectations about development, results and events which will or may occur in the future constitute "forward-looking statements" and are based on certain assumptions and analysis made by the Company derived from its experience and perceptions. Forward-looking statements include, but are not limited to: statements with respect to future capital expenditures, including the amount and nature thereof; oil and gas prices and demand; other development trends of the oil and gas industry; business strategy; expansion and growth of the Company's business and operations, including the Company's market share and position in the oilfield service markets; and other such matters. In addition, other written or oral statements which constitute forward-looking statements may be made from time to time by and on behalf of the Company. Such forward- looking statements are subject to important risks, uncertainties, and assumptions which are difficult to predict and which may affect the Company's operations, including, without limitations: the impact of general economic conditions; industry conditions, including the adoption of new environmental and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and gas prices; oil and gas product supply and demand; risks inherent in the Company's ability to generate sufficient cash flow from operations to meet its current and future obligations; increased competition; the lack of availability of qualified personnel or management; labor unrest; fluctuations in the foreign exchange or interest rates; stock market volatility, opportunities available to or pursued by the Company and other factors, many of which are beyond the control of the Company. The Company's actual results, performance, or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceeds, the Company will derive there-from. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

CONSOLIDATED RESULTS OF OPERATIONS

Enerflex generated net income for the three months ended March 31, 2006 of $12.9 million ($0.57 per common share) from revenue of $206.8 million. This represents an increase in net income of $5.5 million ($0.24 per common share) or 75% as compared to the same period in 2005. Revenue generated in the first quarter increased by $59.1 million or 40% as compared to the three month period ended March 31, 2005. International revenue increased by 55% or $20.4 million in the first quarter of 2006 as compared to 2005. Revenue improvements were most notable in the Compression and Power division, as a result of increased customer demand; in the Electrical Instrumentation & Controls ("EI&C") division which experienced increased electrical construction project activity as compared to 2005; in the Mechanical Service division which experienced significant revenue improvements due to an early start to the busy field maintenance season; and the Production and Processing division, due to a strong backlog at the beginning of the year and the acquisition of HPS in July of 2005, which added $20.5 million in revenue for the quarter. The Company's revenue in the Production Services segment was essentially unchanged as increases arising from a larger rental fleet were offset by lower equipment utilization during the period.

Gross margin for the three months ended March 31, 2006 was $46.6 million or 22.5% of revenue as compared to $31.5 million or 21.3% of revenue for the three months ended March 31, 2005, an increase of $15.1 million. The higher gross margin percentage was a result of price increases generated from the Company's Engineered Systems segment, increased activity levels which improved overhead utilization, and higher activity levels in the Service segment, partially offset by higher input costs.

Selling, general and administrative ("SG&A") expenses were $25.3 million or 12.2% of revenue during the three months ended March 31, 2006, compared with $19.7 million or 13.4% of revenue in the same period of 2005. The $5.6 million increase in SG&A expenses during the quarter, as compared to the same period in 2005, is a result of: $1.7 million resulting from the inclusion of HPS; increases in compensation costs of $1.5 million; increased bad debt expense of $0.7 million; increased intangible asset amortization of $0.5 million; increased stock-based compensation expense of $0.5 million; increased bonus accruals of $0.3 million; increased marketing expenditures of $0.2 million and increases in information technology costs, audit costs and employee training and recruitment costs of $0.1 million each, partially offset by a reduction in Bill 198 compliance costs of $0.3 million.

Operating margin assists the reader in understanding the net 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 March 31, 2006, Enerflex produced an operating margin of $21.6 million, or 10.4% of revenue, as compared to an operating margin of $11.7 million, or 7.9% of revenue, for the same three month period in 2005. The increase in operating margin percentage(1) for the quarter as compared to 2005 occurred as a result of the same factors contributing to the increased gross margin percentage and increased SG&A expenses. The foreign exchange gain during the quarter resulted primarily from the Company's hedging strategy and changes in the value of the Euro and U.S. dollar as compared to the Canadian dollar during the period.

Income before interest and income taxes totalled $22.4 million for the first quarter of 2006, as compared to $12.4 million for the same period in 2005, an increase of $10.0 million, or 81%. During the quarter, the Company experienced an effective income tax rate of 37.8% as compared to 35.3% for the same period in 2005. This increase is a result of the Company not recognizing the benefit of losses generated in certain foreign jurisdictions and a provision for the reassessment of prior year taxes.

During the first quarter of 2006, Enerflex increased its net income by $5.5 million to $12.9 million over the same period of 2005.

SERVICE

The Service business segment provides a complete line of mechanical, and electrical, instrumentation and controls services to the oil and gas industry through an extensive branch network in Canada, Germany, the Netherlands, Australia and Indonesia. Service is the Company's second largest business segment. It employs 40% of staff, holds 33% of the total assets, generates 36% of the Company's revenue and produces 32% of Enerflex's income before interest and income taxes. Key performance metrics include labour utilization, revenue, gross margin percent and income before interest and income taxes.

Enerflex, through various business units, is an authorized distributor for Waukesha engines and parts in Canada, Australia, Indonesia, Papua New Guinea, the Netherlands, Germany, Portugal, Poland and Spain. Mechanical Service revenues tend to be fairly stable as ongoing equipment maintenance is generally required to preserve the customer's natural gas production, with higher revenues in the first quarter. EI&C services are provided in Canada through Syntech where revenues are more cyclical as they are generated from both maintenance spending and from infrastructure investment.



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Three months ended
Service March 31
-------------------------------------------------------------------------
(unaudited) (thousands) 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 77,617 $ 63,698
Intersegment revenue (3,231) (3,517)
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Revenue 74,386 60,181
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Gross margin 20,777 15,558
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EBITDA 7,943 3,830
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Income before interest and income taxes $ 7,130 $ 2,949
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Service revenue was $74.4 million for the three months ended March 31, 2006 and comprised 36% of consolidated revenue. This compares to $60.2 million and 41% of consolidated revenue during the same period in 2005. Mechanical Service generated 56% of the segment's revenue in the first quarter of 2006 and 58% in the same period of 2005. EI&C contributed 44% of the segment's revenue in the first quarter of 2006 and 42% in the same period of 2005. The increase in segment revenue of 24%, or $14.2 million, was a result of higher demand for parts and services, improved inventory and supply chain management and strong oilfield service activity in Canada. Gross margin for the segment totalled $20.8 million, or 27.9%, as compared to $15.6 million or 25.9% in 2005. The increase in gross margin percent was caused by higher demand for the Company's services and increased utilization rates. In general, pricing increases were offset by increases in input costs, such as parts, materials, personnel costs and the costs associated with responding to supply chain management issues that arise in periods of high demand for these products. Income before interest and income taxes in the first quarter of 2006, as compared to the same period of 2005, increased by $4.2 million, or 142%, to $7.1 million as a result of these same factors. The improvement in the income before interest and income taxes of the segment from 4.9% of revenue for the three months ended March 31, 2005 to 9.6% of revenue in 2006 was due to the above factors, better leveraging of existing branch costs and a focus on improving execution of services.

Mechanical Service

Mechanical Service revenue for the first three months of 2006 was $41.6 million, or 20% higher than 2005 revenue of $34.7 million. In Canada, which accounted for 68% of the division's revenue in both 2006 and 2005, sales increased by 20% from 2005 as a result of strong utilization rates, an expansion of product offerings to include additional suppliers of equipment, increased efficiency in exchange parts due to the centralization of a rebuild facility in 2004, increased customer demand and modest price increases for parts and services. International revenue also increased by 20% in the first three months of 2006 over the same period in 2005. The increase in international revenue resulted from higher utilization, new maintenance contracts in Australia, increased service in Europe and engine sales to Indonesia.

Gross margins for Mechanical Service increased by $2.7 million or 26% in the first quarter of 2006 as compared to the same period in 2005. As a percentage of revenue, the gross margin increased from 29.1% to 30.7%. Increased customer demand accounted for the increase in gross margin with pricing increases offsetting the increase in costs of parts and personnel associated with the services. The division's income before interest and income taxes for the first three months of 2006 increased by $2.2 million, or 85%, as compared to the first quarter in 2005, as it leveraged its existing fixed branch and administrative services to meet the expanding demands of its customers.

Electrical, Instrumentation and Controls

The EI&C division continued to improve its gross margin as a percentage of revenue for the first three months of 2006. During the quarter, EI&C generated revenue of $32.8 million, an increase of $7.4 million, or 29%, as compared to $25.4 million in the first quarter of 2005. The EI&C business in Canada is highly competitive. Consequently, this division realizes lower margins than the Mechanical Service division and as such, it requires a focused and disciplined approach to the bidding and execution of the services provided. In 2006, the division focused the scope of contracts it would pursue to cost plus arrangements and on obtaining projects with higher margin potential. In addition, the division continued its efforts towards reducing the cost of maintaining the branch infrastructure requirements throughout Alberta, Saskatchewan and northeast British Columbia. Through this strategy and with the increase in demand for the division's services, its gross margin increased by $2.6 million or 47% in the first quarter of 2006 as compared to the same period in 2005. As a percentage of revenue, gross margin for the quarter was 24.4% as compared to 21.4% one year earlier. The division's earnings before interest and income taxes increased by $2.0 million and were 537% higher for the first three months of 2006 as compared to the same period in 2005.

ENGINEERED SYSTEMS

The Engineered Systems business segment engineers, fabricates and assembles standard and custom-designed compression packages, production and processing equipment and facilities, and power generation systems. The key performance metrics for this business segment are market share, plant utilization, overhead application rates and gross margin as a percentage of revenue. Engineered Systems is the Company's largest business segment. It employs 56% of staff, holds 46% of the total assets, generates 60% of the Company's revenue and produces 44% of Enerflex's income before interest and income taxes.

Engineered Systems' business tends to have more volatility in revenue, gross margin and income before interest and income taxes than Enerflex's other business segments. Revenues are derived primarily from the investments made in natural gas infrastructure by producers. Capital spending by Enerflex's customers was high in 2001, dropped sharply in 2002 and early 2003, increased in late 2003 and continued to grow throughout 2004 and 2005. It is presently estimated by industry commentators that this increased investment rate will continue in 2006. Factors expected to positively affect this include: increased investments in Canadian oil sands development projects; expansion of the Australian natural gas distribution system; the need for additional international natural gas processing facilities; and coal bed methane ("CBM") production in North America and Australia.



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Three months ended
Engineered Systems March 31
-------------------------------------------------------------------------
(unaudited) (thousands) 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 131,046 $ 84,359
Intersegment revenue (6,886) (4,858)
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Revenue 124,160 79,501
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Gross margin 20,531 10,821
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EBITDA 11,699 5,493
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Income before interest and income taxes $ 10,006 $ 4,419
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Engineered Systems continued to meet the challenges of significant supplier lead times and the high demand for skilled labour, and, combined with a strong market, achieved revenue growth and margin improvement. Engineered Systems' revenue totalled $124.2 million for the first three months of 2006 and comprised 60% of consolidated revenue. This compares to $79.5 million and 54% of consolidated revenue in the first three months of 2005. Compression and Power generated 61% of the segment's revenue for the first quarter of 2006 as compared to 71% in the same period of 2005. Production and Processing contributed 39% of the segment's revenue for the first three months of 2006 as compared to 29% in the same period of 2005. The increase of $44.7 million, or 56%, in segment revenue was a result of the acquisition of HPS, increased domestic revenue in the Production and Processing division, the continuation of the Production and Processing division's Egyptian project, increased demand for the Company's high horsepower compression products, the introduction of new products and increases in the pricing of the segment's products. Gross margin for the segment totalled $20.5 million, or 16.5%, for the three months ended March 31, 2006, as compared to 13.6% in the same period of 2005. The increase in gross margin of $9.7 million, or 90%, was a result of the same factors that improved the segment's revenue. Income before interest and income taxes increased by $5.6 million, or 126%, to $10.0 million for the three months ended March 31, 2006 as a result of the above-mentioned factors.

Compression and Power

The Compression and Power division contributed revenue of $76.3 million for the three months ended March 31, 2006, an increase of $20.1 million, or 36% over the same quarter of 2005. International revenue in the division totalled $6.3 million for the first three months of 2006, as compared to $9.7 million in the first quarter of 2005, due to a shift in timing of orders. This resulted in lower earned international revenue in 2006. Expanded product ranges for both reciprocating and screw compression applications, increased customer demand for compression equipment, increasing customer requirements for in-field compression refurbishment of legacy compression assets and pricing improvements accounted for the increased revenue. The development of five new models of screw compressors above 600 horsepower in 2005 resulted in the receipt of several orders totalling $45 million in the first quarter of 2006. While definitive market share data is difficult to obtain, Enerflex estimates that its Canadian large horsepower compressor package market share was increasing in the high horsepower screw compression market segment, but was constant overall in the first quarter of 2006 and 2005. The improvement in pricing leverage is attributed to the high levels of customer demand, concerns over the lead times associated with major component parts and the introduction of expanded product offerings that better suit the customers' changing compression requirements.

During the quarter, gross margin increased by $4.9 million, or 67% as compared to the first quarter of 2005, as a result of increased revenue, improved plant utilization and price increases. These were partially offset by increased component, material and personnel related costs, higher overhead rates and costs associated with the design and production of new products and services. At present, Enerflex owns approximately 370,000 square feet of compression shop floor space in North America and during the quarter management estimates that the average utilization rate, based on the theoretical plant capacity in labour hours, was 79% as compared to 64% in 2005. Increases in the utilization of the facilities, due to increased customer demand, were offset by increases in overhead costs, resulting in an increase in overhead costs per hour of 6%, as compared to 2005. Compression and Power's income before interest and income taxes increased by 144% in the first quarter of 2006 as compared to the same period in 2005 as a result of the factors mentioned above.

Production and Processing

The Production and Processing division contributed revenue of $47.9 million for the three months ended March 31, 2006, an increase of $24.6 million, or 106% over the same period in 2005. While definitive market share data is difficult to obtain, Enerflex estimates that it has maintained its domestic and international market share, and through the acquisition of HPS, Enerflex has increased its market share in Australia. In each market segment competition remains strong. The increase in the division's revenues was generated $20.5 million in Australia, $1.1 million in other international markets and $3.0 million from domestic markets. During the quarter, domestic demand continued to be strong. The international backlog is also solid, and includes natural gas processing facilities under construction for Egypt and Indonesia, and a significant project for installation of compressor stations in Western Australia.

During the quarter, gross margin also increased by $4.8 million, or 136% as compared to the first quarter of 2005 as a result of $3.8 million from the addition of HPS and higher Canadian demand for the division's products. At present, Enerflex owns approximately 100,000 square feet of production and processing shop floor space in Alberta, Canada and 62,000 square feet of shop floor space in Perth, Western Australia. During the quarter, management estimates that the average utilization rate, based on available labour hours, was 92% as compared to 94% in 2005 in its Canadian based facilities and 90% in its Australian based facilities. The division's income before interest and income taxes increased by 98% during the quarter as compared to the same period in 2005, as a result of the acquisition of HPS and additional domestic projects.

Engineered Systems Segment Bookings

During the quarter, Enerflex increased its order bookings in the Engineered Systems segment to record levels. Bookings during the first three months of 2006 increased by approximately 95% as compared to bookings recorded in the first quarter of 2005. The Engineered Systems segment's order backlog at March 31, 2006 was approximately 234% above the segment's order backlog at March 31, 2005, and 22% above the order backlog at December 31, 2005.

PRODUCTION SERVICES

The Production Services business segment provides a variety of rental and leasing alternatives for natural gas compression, power generation and processing equipment. As of March 31, 2006, Production Services' rental fleet was comprised of approximately 365 compression units, representing 99,000 horsepower, and 160 processing units. This compared with 350 compression units, or 97,000 horsepower, and 140 processing units as at March 31, 2005. This resulted in an average compression fleet of 366 units and 102,000 horsepower for the three months ended March 31, 2006. The key performance metrics in this business are fleet size, utilization rates and rental rates. The Production Services segment employs 1% of Enerflex's employees, holds 19% of the total assets, generates 4% of the Company's revenue and produces 24% of Enerflex's income before interest and income taxes.

The Company's rental fleet is located principally in western Canada. Expansion in international markets commenced during 2004, and is presently being continued on a selective basis to minimize the risk from these new markets. As of March 31, 2006, Enerflex's compression rental fleet included 11 units located in the United States and 6 units in Australia.



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Three months ended
Production Services March 31
-------------------------------------------------------------------------
(unaudited) (thousands) 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 8,284 $ 8,039
Intersegment revenue (7) (32)
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Revenue 8,277 8,007
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Gross Margin 5,246 5,149
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EBITDA 7,423 6,912
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Income before interest and income taxes 5,307 5,009
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Capital expenditures, net of proceeds on
disposal $ 2,457 $ (1,372)
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Revenue for the first three months of 2006 increased by $0.3 million, or 3%, to $8.3 million, over the same period in 2005. The revenue increase experienced in the first quarter of 2006 over 2005 was a result of increased utilization rates in the power and processing fleet and increased capital deployed in both fleets. While the segment rents compression, power and processing equipment, the main driver for its revenue growth is the rental of compression equipment. During the quarter, the segment's revenue was generated 89% by compression and 11% by power and processing equipment. The segment experienced process fleet utilization rates, based on capital deployed, of 80.8% compared to 61.3% in 2005. Compression fleet utilization rates, based on capital deployed, decreased from 84.4% to 75.2% in 2006. The reduction in compression utilization rates was primarily attributed to rental units acquired at or subsequent to the end of the initial rental term by customers. With higher than anticipated energy prices resulting in stronger cash flows and working capital in the hands of the segment's customers, customers tended to acquire new compression assets, as exhibited through the increase in revenues generated by the Compression and Power division, and to purchase compression assets previously under rent.

During the quarter, Production Services sold 14 compression units and 4 power and process equipment units from its fleet, for gross proceeds of $7.5 million, of which $3.8 million was received by March 31, 2006, and a gain on sale of $1.2 million. This compares to 15 compression units and 15 power and process equipment units, for gross proceeds of $6.5 million and a gain on sale of $0.6 million in the first quarter of 2005. The sale of units generally occurs when customers exercise their contractual option to purchase equipment. In order to facilitate the expansion of Enerflex's rental fleet, the Company has altered the buyout provisions of new rental contracts in a manner which discourages renters from acquiring the rental assets subsequent to the end of the contract expiry date. To satisfy growing demand for rental compression, Enerflex added 10 compression units and 10 power and processing units to its fleet in the quarter, for an investment of $6.3 million. This turnover of assets renews the fleet, resulting in an average fleet age of less than five years.

Production Services expects continued growth in demand for its products in Canada, and has targeted specific geographic regions for expansion in the United States and abroad. Production Services does not generally increase the capital invested in its fleet unless it has rental contracts. Growth in the rental fleet is expected to be the largest internal capital investment opportunity for the Company in 2006. By the third quarter, Production Services will expand the scope of the process fleet by adding a refrigeration unit, currently under construction by the Production and Processing division. As at March 31, 2006, the segment had approximately 7,500 horsepower of additional committed compression equipment under construction.

Variable Cost Compression ("VCC") is an initiative which involves Enerflex owning, operating, maintaining and optimizing field equipment on behalf of producers for a variable fee based on throughput and uptime. This initiative provides Enerflex the opportunity to combine the strength of its balance sheet with its expertise in compression optimization in order to improve the returns generated from existing compression assets for both its customers and its shareholders. Enerflex is pleased with the initial level of interest in this new offering and the Company presently estimates that it could deploy $10.0 million in capital towards this endeavor during 2006. In April of 2006, a letter of intent was received for the first VCC contract.

Notice of Dividend

On April 20, 2006, the Company declared a quarterly dividend equal to $0.125 per common share, which equates to an annualized dividend payment to shareholders of $0.50 per common share, payable on July 7, 2006 to shareholders of record June 22, 2006.

Conference Call and Webcast Notice

Enerflex Systems Ltd. (TSX:EFX) will host a conference call for analysts and investors on Friday, May 5, 2006 at 9:00 a.m. MDT (11:00 a.m. EDT) to discuss the Company's 2006 first quarter results, which will be released on Thursday, May 4, 2006. The call will be hosted by John Aldred, Enerflex's Chairman and Chief Executive Officer.

If you wish to participate in this conference call, please call, 1.800.814.4861 or 1.416.644.3414. Please call at least ten minutes ahead of time.

Participants who wish to listen to a recording of the conference call may do so by calling 1.877.289.8525 or 1.416.640.1917 (passcode: 21184274 followed by the number sign) approximately one hour after the completion of the call. The recording will be available until the end of day Friday, May 12, 2006.

A live audio webcast of the conference call will be available on our internet site at www.enerflex.com in the Investor Relations section under Webcasts on May 5, 2006 at 9:00 a.m. MDT (11:00 a.m. EDT). Approximately one hour after the call, a recording of the event will be available on our internet site.

Enerflex is a leading supplier of products and services to the global oil and natural gas production industry. The Company's core expertise lies in its ability to provide products and services to the industry segment that operates between the wellhead and the pipeline. Enerflex's primary products and services are: natural gas compression, power generation and process equipment for sale, rent or lease; hydrocarbon production and processing equipment and 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 believes it offers its global customers a unique value proposition.

Headquartered in Calgary, Canada, the Company has approximately 2,600 employees worldwide. Enerflex, its subsidiaries, interests in affiliates and joint-ventures, operate in Canada, Australia, the Netherlands, the United States, Germany, Pakistan, Egypt, Indonesia and Poland. The Company's common shares trade on the Toronto Stock Exchange under the symbol "EFX".



CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(Thousands) 2006 2005
-------------------------------------------------------------------------

Assets
Current assets
Cash $ 12,090 $ 16,350
Accounts receivable 165,736 163,899
Inventory 92,539 84,378
Future income taxes 3,909 3,983
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Total current assets 274,274 268,610

Rental equipment 88,158 90,348
Property, plant and equipment 65,515 65,585
Assets under construction 5,369 3,374
Investment in affiliates 2,933 2,797
Future income taxes 4,869 4,868
Intangible assets 8,553 7,355
Goodwill 119,719 121,378
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$ 569,390 $ 564,315
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LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Operating bank loans $ 32,382 $ 43,310
Accounts payable and accrued liabilities 86,628 90,561
Accrued dividends payable 2,832 2,260
Income taxes payable 9,611 7,612
Current portion of long-term debt 20,712 12,717
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Total current liabilities 152,165 156,460

Long-term debt 62,136 63,587
Other long-term liabilities 2,568 1,969
Future income taxes 12,658 13,042
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229,527 235,058
Shareholders' equity
Share capital 185,139 184,151
Cumulative translation adjustment (6,681) (6,250)
Contributed surplus 1,912 1,739
Retained earnings 159,493 149,617
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339,863 329,257
-------------------------------------------------------------------------
$ 569,390 $ 564,315
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See accompanying note to the Consolidated Financial Statements.



CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31
(Thousands, except share amounts) 2006 2005
-------------------------------------------------------------------------
Revenue $ 206,823 $ 147,689
Cost of goods sold 160,269 116,161
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Gross margin 46,554 31,528
Selling, general and administrative expenses 25,325 19,726
Foreign currency (gains) losses (212) 97
Gain on sale of assets (867) (672)
Equity earnings from affiliates (135) -
-------------------------------------------------------------------------
Income before interest and taxes 22,443 12,377
Interest 1,694 962
-------------------------------------------------------------------------
Income before income taxes 20,749 11,415
Income taxes 7,845 4,033
-------------------------------------------------------------------------
Net income $ 12,904 $ 7,382
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-------------------------------------------------------------------------
Net income per common share - basic $ 0.57 $ 0.33
- diluted $ 0.57 $ 0.33
Weighted average number of common shares 22,645,451 22,408,621
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
Three Months Ended March 31
(Thousands) 2006 2005
-------------------------------------------------------------------------
Retained earnings, beginning of period $ 149,617 $ 118,540
Normal course issuer bid (196) -
Net income 12,904 7,382
Dividends (2,832) (2,247)
-------------------------------------------------------------------------
Retained earnings, end of period $ 159,493 $ 123,675
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying note to the Consolidated Financial Statements.



CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31
(Thousands) 2006 2005
-------------------------------------------------------------------------
Operating Activities
Net income $ 12,904 $ 7,382
Depreciation and amortization 4,622 3,858
Future income taxes (334) (3,268)
Gain on sale of assets (867) (672)
Equity earnings from affiliates (135) -
Stock option expense 311 135
-------------------------------------------------------------------------
16,501 7,435
Changes in non-cash working capital and other (4,702) (8,944)
-------------------------------------------------------------------------
Cash flow from operations 11,799 (1,509)
-------------------------------------------------------------------------

Investing Activities
Purchase of:
Rental equipment (6,274) (5,096)
Property, plant and equipment (2,319) (1,322)
Assets under construction (1,996) (579)
Proceeds on disposal of:
Rental equipment 3,832 6,453
Property, plant and equipment 19 66
-------------------------------------------------------------------------
(6,738) (478)
Changes in non-cash working capital and other (3,802) (384)
-------------------------------------------------------------------------
(10,540) (862)
-------------------------------------------------------------------------

Financing Activities
Decrease in operating bank loans (10,927) (1,357)
Advance of long-term debt 6,568 -
Stock options exercised 932 2,160
Normal course issuer bid (278) -
Dividends (2,260) (2,234)
-------------------------------------------------------------------------
(5,965) (1,431)
Changes in non-cash working capital and other 446 76
-------------------------------------------------------------------------
(5,519) (1,355)
-------------------------------------------------------------------------
Decrease in cash (4,260) (3,726)
Cash, beginning of period 16,350 12,840
-------------------------------------------------------------------------
Cash, end of period $ 12,090 $ 9,114
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying note to the Consolidated Financial Statements.



Note 1. Segmented Information

The Company has three reportable segments: Service, Engineered Systems
(formerly Fabrication) and Production Services (formerly Leasing). The
Service reportable segment is the aggregation of the Mechanical Service
and Syntech divisions. The Engineered Systems reportable segment is the
aggregation of the Production & Processing, Compression and Power
divisions.

(Unaudited) ($ Thousands) Service Engineered Systems
----------------------------------------------
Three months ended March 31 2006 2005 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 77,617 $ 63,698 $ 131,046 $ 84,359
Intersegment revenue (3,231) (3,517) (6,886) (4,858)
-------------------------------------------------------------------------
External revenue 74,386 60,181 124,160 79,501
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 20,777 15,558 20,531 10,821
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization 813 881 1,693 1,074
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before interest and
income taxes 7,130 2,949 10,006 4,419
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment assets 137,735 121,449 198,868 133,831
Corporate
Goodwill 50,528 52,686 61,835 52,086
-------------------------------------------------------------------------
Total segment assets 188,263 174,135 260,703 185,917
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures 996 769 2,307 791
Corporate
-------------------------------------------------------------------------

-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proceeds on disposal
of assets $ 3 $ 45 $ 16 $ 21
Corporate
-------------------------------------------------------------------------

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


(Unaudited) ($ Thousands) Production Services Consolidated
----------------------------------------------
Three months ended March 31 2006 2005 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 8,284 $ 8,039 $ 216,947 $ 156,096
Intersegment revenue (7) (32) (10,124) (8,407)
-------------------------------------------------------------------------
External revenue 8,277 8,007 206,823 147,689
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 5,246 5,149 46,554 31,528
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization 2,116 1,903 4,622 3,858
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before interest and
income taxes 5,307 5,009 22,443 12,377
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment assets 102,642 91,717 439,245 346,997
Corporate 10,426 14,848
Goodwill 7,356 7,356 119,719 112,128
-------------------------------------------------------------------------
Total segment assets 109,998 99,073 569,390 473,973
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures 6,289 5,081 9,592 6,641
Corporate 997 356
-------------------------------------------------------------------------
10,589 6,997
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proceeds on disposal
of assets $ 3,832 $ 6,453 $ 3,851 $ 6,519
Corporate - -
-------------------------------------------------------------------------
$ 3,851 $ 6,519
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Revenue from foreign countries was:
-------------------------------------------------------------------------
Three months
ended March 31
-------------------------------------------------------------------------
(Unaudited) (Thousands) 2006 2005
-------------------------------------------------------------------------
Australia $ 24,804 $ 11,818
Egypt 8,591 318
Indonesia 990 531
Netherlands 4,512 5,347
Pakistan 1,771 5,896
United States 3,599 2,980
Other 13,007 10,033
-------------------------------------------------------------------------
$ 57,274 $ 36,923
-------------------------------------------------------------------------

Included in these amounts are
gross exports from domestic operations of: $ 20,820 $ 22,662
-------------------------------------------------------------------------

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

Contact Information