Norex Exploration Services Inc.
TSX : NRX

Norex Exploration Services Inc.

March 14, 2007 08:00 ET

Norex's Reports Continued Growth in the Two and Eight Months Ended December 31, 2006

CALGARY, ALBERTA--(CCNMatthews - March 14, 2007) - Norex Exploration Services Inc. ("Norex" or the "Company") (TSX:NRX) announced results for the two and eight months ended December 31, 2006.

"Norex achieved significant progress in the eight month period ended December 31, 2006. We attained remarkable revenue and profitability growth while successfully integrated our operations with Conquest Seismic Services which was purchased February 1, 2006. We also continued to expand our operations in the U.S. I am extremely proud of the achievements of our team." commented Paul Crilly, President and CEO.

Two months ended December 31, 2006 highlights:

- Revenue for the two months ended December 31, 2006 increased 171% to $18.1 million compared to $6.7 million for the two months ended December 31, 2005.

- The Company continued the successful execution of its strategy of growth in the United States and eastern Canada. Approximately 65% of its revenue growth in the period was derived from these regions.

- EBITDA for the two months ended December 31, 2006 increased to $2.4 million ($0.07 per share) compared to EBITDA of $1.0 million ($0.06 per share) for the two months ended December 31, 2005.

- Despite challenges from adverse weather conditions and personnel shortages in western Canada that affected field productivity, net earnings increased to $0.9 million ($0.03 per share) in the two months ended December 31, 2006 compared to $0.7 million ($0.04 per share) in the two months ended December 31, 2005.

- The Company successfully met the listing requirements of the Toronto Stock Exchange (the "TSX") and its shares began trading on the TSX January 16, 2007. This listing was an important milestone in the evolution of the Company, as it elevates its profile in the capital markets accordingly.

Eight months ended December 31, 2006 highlights:

- Revenue for the eight months ended December 31, 2006 increased 414% to $60.9 million compared to $11.8 million for the same period of the prior year. Approximately 45% of this growth came from our operations in eastern Canada and the United States.

- EBITDA for the eight month period ended December 31, 2006 increased to $6.8 million ($0.19 per share) compared to EBITDA of $1.0 million ($0.08 per share) for the same period of the prior year. Net earnings increased to $2.4 million ($0.07 per share) for the eight month period ended December 31, 2006 compared to breakeven in the prior year.

- Norex's subsidiary, Conquest Seismic Services, Inc. established a strong operational presence in the United States as it secured and completed several large 3 Dimensional ("3D") seismic recording contracts in Pennsylvania and New York State.

- The Company replaced its older model recording equipment with newer model ARAM-ARIES® recording equipment. The Company now owns and operates over 12,000 channels of ARAM-ARIES® recording equipment.

- Norex continued its strategy of expanding its vibroseis capability. In the second quarter, the Company took delivery of four new I/O® ("Input/Output") vibroseis machines. These state-of-the-art vibrators provide field- proven reliability and the ability to deliver more than 62,000 lbs of source energy bringing the Company's fleet of vibroseis machines to twelve. Vibroseis machines provide an alternative to dynamite based seismic acquisition. Utilizing vibroseis equipment results in less land owner issues and concerns, provides the Company with more scheduling control over the recording phase of the program, and generally results in better field margins.

Twelve months ended December 31 highlights:

- Consolidated revenue for the calendar year ended December 31, 2006 increased to $115.4 million.

- EBITDA for the twelve month period ended December 31, 2006 increased to $19.0 million ($0.55 per share). Net earnings for the same period were $9.3 million ($0.27 per share).

- Revenue from the Company's United States and eastern Canada ("USEC") division increased to $27.7 million. This significant growth in revenue was due in part to the purchase of Geophysical Applications Processing Services Inc. ("GAPS") in May, 2005. GAPS, which operated in the northeastern United States and central and eastern Canada was acquired to strategically balance the Company's activity levels more evenly throughout the year. This strategy proved successful in 2006 as demonstrated by the Company's revenue and profitability in the summer and fall period, a period that is seasonally slower in western Canada.

- On February 1, 2006 the Company merged with Conquest Seismic Services Ltd. ("Conquest") to create one of the largest seismic acquisition companies operating in Canada. We are now the largest operator of state-of-the-art ARAM-ARIES® equipment in Canada.

Financial Overview

The Company changed its fiscal year from April 30 to December 31, effective December 31, 2006. For purposes of this news release, comparisons are made to the two and eight month periods ending December 31, 2005. These prior year periods have not been audited or reviewed by the Company's external auditors. These prior year periods were also not aligned with the Company's normal year or quarter end. Readers are advised to take these limitations into consideration when reviewing the comparative information for the two and eight month periods ended December 31, 2005.



Eight Months Ended Fiscal Year
(000's $ except per share December 31, Ended April
amounts) 2006 2005 % Increase 30, 2006
------------------------------------------------------------------------
Revenue $ 60,872 $ 11,835 414% $ 66,340
Gross Profit $ 9,809 $ 1,956 401% $ 15,662

EBITDA $ 6,802 $ 969 602% $ 13,254
Per share $ 0.19 $ 0.08 138% $ 0.75

Net Earnings $ 2,363 $ 19 $ 6,938
Per share basic $ 0.07 $ 0.00 $ 0.39
Per share diluted $ 0.06 $ 0.00 $ 0.39

Capital Expenditures $ 12,405 $ 3,327 $ 5,434


Two Months Ended Three Months
December 31, Ended
(000's $ except per share January 31,
amounts) 2006 2005 % Increase 2006
------------------------------------------------------------------------
Revenue $ 18,081 $ 6,678 171% $ 13,161
Gross Profit $ 3,078 $ 1,376 124% $ 1,009

EBITDA $ 2,359 $ 1,009 134% $ 3,376
Per share $ 0.07 $ 0.06 17% $ 0.17

Net Earnings $ 895 $ 704 27% $ 2,043
Per share basic $ 0.03 $ 0.04 -25% $ 0.10
Per share diluted $ 0.02 $ 0.04 -50% $ 0.10

Capital Expenditures $ 3,989 $ 3,275 $ 3,323


Forward-looking Statements

Certain information set forth in this news release, including management's assessment of the Company's future plans and operations, contains forward-looking statements, which are based on the Company's current internal expectations, estimates, projections, assumptions and beliefs, which may prove to be incorrect. Some of the forward-looking statements may be identified by words such as "expects", "anticipates", "believes", "projects", "plans" and similar expressions. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause the Company's actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. The Company provides seismic data acquisition services and is exposed to a number of risks and uncertainties that are common to companies in the same business. These risks and uncertainties include demand for the Company's services which is affected by, among other things, the speculative nature of resource exploration and development activities, changes in commodity prices, general economic, market and business conditions; competition for capital and skilled personnel and shortages thereof; the ability to comply with current and future health, safety, environmental and other laws; actions by governmental or regulatory authorities including increasing taxes and changes in other regulations; and the occurrence of unexpected events involved in resource exploration including, but not limited to, adverse weather conditions and wind. Adverse weather or field operating conditions can also negatively impact field productivity and, as a result, the Company's overall profitability. Certain jobs awarded to the Company are on a "turnkey" pricing basis where the Company bears the risk of lost productivity, increased input and/or subcontractor costs. As a result, factors reducing field productivity and any in increases in the Company's input costs could have a material affect on the Company's profitability.

This news release should not be considered all-inclusive as it excludes changes that may occur in general economic, political and environmental conditions. The Company cautions that actual performance will be affected by a number of factors, many of which are beyond its control. Investors are cautioned against attributing undue certainty to forward-looking statements. Subject to its obligations under applicable law, the Company does not intend, and does not assume any obligation, to update these forward looking statements if conditions or opinions should change.

Non-GAAP Financial Measures

This new release includes references to financial measures commonly used in the oil and gas service industry. EBITDA is provided to assist investors in determining the ability of Norex to generate cash from operations and is calculated from the statement of operations as net income for the period plus interest on debt and capital leases, income taxes, foreign exchange gains and losses, amortization, gains and losses from the sale of property and equipment and stock-based compensation expense. Gross profit is provided to assist investors in determining Norex's ability to generate earnings from its field operations and is calculated by subtracting direct field expenses from revenue. These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies.

Two Months Ended December 31, 2006 Review

Results of Operations

The Company changed its fiscal year from April 30 to December 31, effective December 31, 2006. For purposes of the following discussion and analysis, comparisons are made to the two month period ended December 31, 2005 and the three month period ended January 31, 2006. Due to the seasonality of the Company's operations in the Western Canadian Sedimentary Basin ("WCSB") the Company has historically earned a substantial portion of its revenue and profitability in the four month period from January to April. As such, the omission of January in the two month period ended December 31, 2006 may reduce the comparability of the two month period to the three months ended January 31, 2006. Readers are cautioned to take this into consideration when reviewing the results and analysis.

Revenue

During the two months ended December 31, 2006, the Company deployed up to 19,000 owned and rented seismic recording channels and concurrently operated up to six crews in western Canada and three crews in eastern Canada and the northeastern United States.

Revenue for the two months ended December 31, 2006 increased to $18.1 million compared to $6.7 million for the two months ended December 31, 2005 and $13.2 million for the three months ended January 31, 2006. This substantial increase in revenue for the two months ended December 31, 2006 as compared to the prior periods can be attributed to several factors, including, the acquisition of Conquest Seismic Services Ltd. ("Conquest") which was purchased February 1, 2006 and higher activity levels in the United States and eastern Canada ("USEC").

The Company's western Canadian operations generated $9.9 million of revenue for the two months ended December 31, 2006, compared to $6.0 million for the two months ended December 31, 2005 and $11.6 million for the three months ended January 31, 2006. For the two months ended December 31, 2006, the Company's revenue from its western Canadian operations was lower than management's expectations. This lower revenue was due to a number of reasons. First, the Company experienced lower pricing for seismic acquisition services as a result of natural gas price volatility. The volatility in natural gas prices has created industry uncertainty with respect to exploration spending and resulted in downward pressure on the pricing of the Company's services. In addition, shortages of field personnel, adverse weather and wind conditions reduced our field productivity and resulted in longer job completion times. However, the Company continued to execute on its strategy to grow its operations in the United States and its USEC operations posted record results for that same time period.

During the two months ended December 31, 2006, $8.2 million of the Company's revenue was generated from its USEC operations compared to $0.7 million in the two months ended December 31, 2005 and $1.6 million in the three months ended January 31, 2006. Due to a number of reasons, revenue from USEC operations rose significantly in the two months ended December 31, 2006 in comparison to the prior periods. First, the Company has expanded its operations in the United States and as a result its market share is increasing. There has also been a resurgence in activity in the Appalachian basin of the United States. The Company is well established in that area and as a result secured and completed several large 3D jobs in the northeastern United States. As a result of its incremental activity levels in the United States the Company achieved strong revenue growth in comparison to the respective prior periods.

Gross Profit

Gross profit for the two months ended December 31, 2006 was $3.1 million or 17.0% of revenue as compared to $1.4 million or 20.6% of revenue for the two months ended December 31, 2005. While gross profit increased as a result of higher revenue, the gross profit percentage decreased due primarily to the performance of our western Canadian operations. Gross profit was negatively impacted by the challenges of a competitive industry landscape and adverse weather conditions as discussed above in the revenue section. In addition, this division was negatively impacted by increased labour costs required to attract and retain field personnel in the highly competitive labour market in the oil field services industry in western Canada. The strong performance of our USEC operations helped to partially offset the weaker than anticipated performance of our western Canadian operations.

On a comparative basis, gross profit for the three months ended January 31, 2006 was $3.8 million or 29.2% of revenue. Gross profit for the two months ended December 31, 2006 was lower than the three months ended January 31, 2006 due to the omission of January from the two month period and the performance of our western Canadian operations as discussed above.

General and Administrative Expenses

General and administrative expenses in the two months ended December 31, 2006 were $0.7 million (3.9% of revenue) compared to $0.4 million (6% of revenue) in the two months ended December 31, 2005 and $0.5 million (3.8% of revenue) in the three months ended January 31, 2006. General and administrative expenses increased in the two months ended December 31, 2006 due to the acquisition of Conquest and its general and administrative expenses, growth in the Company's USEC operations, various marketing initiatives, increased legal costs relating to the Company's listing on the Toronto Stock Exchange ("TSX"), increased public company costs and increased variable compensation.

Depreciation and Amortization

Depreciation and amortization expense for the two months ended December 31, 2006 increased to $1.0 million compared to $0.2 million for the two months ended December 31, 2005 and $0.5 million in the three months ended January 31, 2006. The increased depreciation and amortization expense for the two months ended December 31, 2006 reflects amortization on $23.4 million of property and equipment and $3.2 million of amortizable intangible assets acquired in the prior fiscal year and $12.4 million of capital expenditures incurred in the eight month period ended December 31, 2006.

Interest Expense

As a result of additional term debt and capital leases related to the Conquest acquisition and the Company's subsequent capital asset purchases, interest expense increased to $0.2 million in the two months ended December 31, 2006 compared to $30,000 in the two months ended December 31, 2005 and $52,000 in the three months ended January 31, 2006.

Stock Based Compensation Expense

Stock options granted to directors, officers and employees during the twelve months ended December 31, 2006, resulted in an increase to the Company's stock based compensation expense to $0.1 million in the two months ended December 31, 2006, as compared to $27,000 for the two months ended December 31, 2005 and $40,000 for the three months ended January 31, 2006.

Foreign Exchange Gains and Losses

During the two months ended December 31, 2006, the Company recorded $0.2 million in foreign exchange gains as compared to losses of $2,000 in the two months ended December 31, 2005 and $5,000 in the three months ended January 31, 2006. These foreign exchange gains and losses relate primarily to the translation of the net working capital of the Company's US subsidiary.
Income Taxes

The Company recorded a provision for income taxes of $0.4 million in the two months ended December 31, 2006 of which $0.2 million is related to current taxes and $0.2 million is related to future income taxes. The Company's combined income tax rate for the two months ended December 31, 2006 was 30.3% which is lower than the statutory rate of 33.6% . This lower rate was as a result of rate adjustments relating to the Company's change in year end and the resulting allocations of taxes between various provinces and states. For the three months ended January 31, 2006, the Company incurred an income tax expense of $0.8 million of which $0.5 million was current and $0.3 million related to future income taxes. The Company did not incur a current tax expense in the two months ended December 31, 2005 due to the utilization of tax losses carried forward from previous periods.

Net Earnings

Net earnings were $0.9 million ($0.03 per share) in the two months ended December 31, 2006 as compared to $0.7 million ($0.04) in the two months ended December 31, 2005 and $2.0 million ($0.10 per share) in the three month period ended January 31, 2006. Net earnings increased in the two month period ended December 31, 2006 in comparison to the same period in 2005 due to the revenue and gross profit growth factors outlined above. Net earnings were lower in the two month period ended December 31, 2006 compared to the three months ended January 31, 2006 due to a shorter period and the margin compression issues discussed above.

Year-to-Date Review

Results of Operations

The Company changed its fiscal year from April 30 to December 31, effective December 31, 2006. For purposes of the following discussion and analysis, comparisons are made to the eight month period ended December 31, 2005 and the prior fiscal year ended April 30, 2006. Due to the seasonality of the Company's operations in the WCSB, the Company has historically earned a substantial portion of it's revenue and profitability in the four month period from January to April. As such, the omission of January to April results in the four months ended December 31, 2006 when compared to the fiscal year ended April 30, 2006 may reduce the comparability of the eight month period to the fiscal year ended April 30, 2006. Readers are cautioned to take this into consideration when reviewing the results and analysis.

Revenue

Revenue for the eight months ended December 31, 2006 was $60.9 million compared to $11.8 million for the eight months ended December 31, 2005 and $66.3 million for the fiscal year ended April 30, 2006. This substantial increase in revenue for the eight months ended December 31, 2006 as compared to the eight months ended December 31, 2005 can be attributed to several factors, including, the acquisition of Conquest which was purchased February 1, 2006 and higher activity levels in the Company's USEC operations. Revenue for the eight months ended December 31, 2006 was lower than the twelve months ended April 30, 2006 due to the seasonality of Norex's operations in the WCSB. Partially offsetting this seasonality of Norex's western Canadian operations was the significant growth of Norex's USEC operations.

The Company's western Canadian operations generated $36.6 million of revenue for the eight months ended December 31, 2006, compared to $9.5 million for the eight months ended December 31, 2005 and $60.6 million for the fiscal year ended April 30, 2006. For the eight months ended December 31, 2006, the performance of the Company's western Canadian operations was mixed. During the summer months, the Western operations performed extremely well, especially given the highly seasonal nature of the Company's operations in the WCSB. However, productivity in the last two months of the fiscal period ended December 31, 2006 was hampered by shortages of field personnel, adverse weather and wind conditions. The lower productivity in the WCSB resulted in longer job completion times which had a negative impact on revenue and profitability. In addition, the Company experienced lower pricing for seismic acquisition services as a result of natural gas price volatility. The volatility in natural gas prices has created industry uncertainty with respect to exploration spending and resulted in downward pressure on the pricing of the Company's services. As a result of these issues, the Company's revenue from its western Canadian operations fell short of expectations. However, the Company experienced a significant increase in its revenue from the United States which helped offset some of the revenue shortfall from its western Canadian operations.

During the eight months ended December 31, 2006, $24.3 million of the Company's revenue was generated from its USEC operations compared to $2.3 million in the eight months ended December 31, 2005 and $5.7 million in the fiscal year ended April 30, 2006. In comparing the Company's revenue from its USEC operations for the eight months ended December 31, 2006 to the eight months ended December 31, 2005 and fiscal year ended April 30, 2006, the Company's revenue from its USEC operations grew by 949% and 327% respectively. This significant growth came as a result of a number of reasons. First, the Company has expanded its operations in the United States and as a result its market share has increased. There has also been a resurgence in activity in the Appalachian basin of the United States. The Company is well established in that area and as a result secured and completed several large 3D jobs in the northeastern United States. This growth in activity further supports the Company's ongoing strategy to expand into the United States.

Gross Profit

Gross profit for the eight months ended December 31, 2006 was $9.8 million or 16.1% of revenue as compared to $2.0 million 16.5% of revenue for the eight months ended December 31, 2005. While gross profit increased as a result of higher revenue, the gross profit percentage decreased, due in part to the performance of our western Canadian operations. As discussed above in the revenue section, gross profit was negatively impacted by the challenges of a competitive industry landscape and adverse weather conditions. In addition, this division was negatively impacted by increased labour costs required to attract and retain field personnel in the highly competitive labour market in the oil field services industry in western Canada. As a result of these challenges, the Company's revenue and gross profit from its western Canadian operations fell short of expectations. However, the Company's USEC operations performed better than expectations which helped offset some of the revenue and gross profit shortfall from our western Canadian operations.

On a comparative basis, gross profit for the fiscal year ended April 30, 2006 was $15.7 million or 23.6% of revenue. Gross profit for the eight months ended December 31, 2006 was lower than the fiscal year ended April 30, 2006 due to the seasonality of the Company's operations in the WCSB and the performance of the Company's western Canadian operations as discussed above.

General and Administrative Expenses

General and administrative expenses in the eight months ended December 31, 2006 were $3.0 million (4.9% of revenue) compared to $1.0 million (8.5% of revenue) in the eight months ended December 31, 2005 and $2.4 million (3.6% of revenue) in the fiscal year ended April 30, 2006. Relative to the comparison periods, general and administrative expenses increased in the eight months ended December 31, 2006 due to the acquisition of Conquest and its general and administrative expenses, growth in the Company's USEC operations, various marketing initiatives, increased legal costs relating to the Company's listing on the TSX, increased public company costs and increased variable compensation.

Depreciation and Amortization

Depreciation and amortization expense for the eight months ended December 31, 2006 increased to $3.4 million compared to $0.8 million for the eight months ended December 31, 2005 and $2.0 million in the fiscal year ended April 30, 2006. The increased depreciation and amortization expense for the eight months ended December 31, 2006 reflects amortization on $23.4 million of property and equipment and $3.2 million of amortizable intangible assets acquired in the prior fiscal year and $12.4 million of capital expenditures incurred in the eight month period ended December 31, 2006.

Interest Expense

As a result of additional term debt and capital leases related to the Conquest acquisition and the Company's subsequent capital asset purchases, interest expense increased to $0.6 million in the eight months ended December 31, 2006 compared to $0.1 million in the eight months ended December 31, 2005 and $0.4 million in the fiscal year ended April 30, 2006.

Stock Based Compensation Expense

Stock options granted to directors, officers and employees during the twelve months ended December 31, 2006, resulted in an increase to the Company's stock based compensation expense to $0.4 million in the eight months ended December 31, 2006, as compared to $58,000 for the eight months ended December 31, 2005 and $0.1 million for the fiscal year ended April 30, 2006.

Gain on Sale of Equipment

A gain on the sale of fixed assets of $0.9 million was reported in the eight months ended December 31, 2006 related primarily to the sale of older model recording equipment. The Company strives to operate with a consistent equipment platform across all its operations, and accordingly, replaced this older equipment with state-of-the-art ARAM-ARIES® recording equipment.

Foreign Exchange Gains and Losses

During the eight months ended December 31, 2006, the Company recorded $0.2 million in foreign exchange gains as compared to losses of $17,000 in the eight months ended December 31, 2005 and $46,000 in the fiscal year ended April 30, 2006. These foreign exchange gains and losses relate primarily to the translation of the net working capital of the Company's US subsidiary.

Income Taxes

The Company recorded a provision for income taxes of $1.1 million in the eight months ended December 31, 2006 of which $0.7 million is related to current taxes and $0.4 million is related to future income taxes. The Company's combined income tax rate for the eight months ended December 31, 2006 was 31.6% which is lower than the statutory rate of 33.6% . This lower rate was as a result of a rate reduction on the Company's future income taxes. For the fiscal year ended April 30, 2006, the Company incurred an income tax expense of $3.7 million of which $3.0 million was current and $0.7 million related to future income taxes. The Company did not incur a current tax expense in the eight months ended December 31, 2005 due to the utilization of tax losses carried forward from previous periods.

Net Earnings

Net earnings were $2.4 million ($0.07 per share) in the eight months ended December 31, 2006 as compared to $19,000 ($nil per share) in the eight months ended December 31, 2005 and $6.9 million ($0.39 per share) in the fiscal year ended April 30, 2006. Net earnings increased in the eight month period ended December 31, 2006 in comparison to the same period in 2005 due to the revenue and gross profit growth factors outlined above. Net earnings were lower in the eight month period ended December 31, 2006 compared to the fiscal year ended April 30, 2006 due to the seasonally and margin compression issues discussed above.

Liquidity and Capital Resources

As at December 31, 2006, the Company had working capital of $2.8 million compared to $3.0 million at April 30, 2006. During the eight months ended December 31, 2006, the Company generated $2.6 million of cash from the exercise of common share purchase warrants and stock options, $2.8 million from operations and the Company borrowed $1.4 million from its operating line. The Company utilized this cash to purchase capital assets of $3.6 million (net of trade-ins) and $4.1 was used to pay down long-term debt (including capital leases).

As at December 31, 2006, the Company has a revolving line of credit to a maximum of $10,000,000 due on demand and bearing interest at the bank prime rate plus 0.5% per annum. In addition, as at December 31, 2006, the Company has a revolving line of credit to a maximum of $5,000,000 due on demand and bearing interest at the bank prime rate plus 0.5% per annum, which is available from December 1 to June 30 each year. These facilities are secured by a general security agreement and are subject to an annual review which is scheduled for August, 2007. As at December 31, 2006, $1.4 million (April 30, 2006 - $nil) had been drawn on these facilities.

Off Balance Sheet Arrangements

The Company has lease commitments for its premises and equipment which total $1.1 million over the course of the next four years fiscal years. These commitments are outlined in note 17 of the audited December 31, 2006 consolidated financial statements. In addition, the Company has entered into a commitment to purchase $1.9 million of recording equipment in January, 2007. Other than operating lease commitments relating to its premises and equipment and the commitment to purchase $1.9 million of recording equipment in January, the Company has no off-balance sheet arrangements.

The Company has budgeted (net of sale of older equipment), up to $17.0 million for capital expenditures primarily related to field equipment and vehicles for the upcoming fiscal year ending December 31, 2007. The Company's capital expenditure budget is based on the Company achieving certain growth and revenue targets. Throughout the year, the Company will adjust the amount of its capital purchases based on industry activity levels and achievement of the Company's plans. The Company intends to finance additional capital expenditures in the future through a combination of internally generated cashflow, additional term indebtedness and capital leases. The Company may also raise additional equity to fund its capital expenditures.

Capital Spending

During the eight months ended December 31, 2006, the Company incurred $12.4 million ($10.9 million net of trade-ins) on capital expenditures comprised primarily of seismic recording equipment, vehicles and other ancillary field equipment. The Company strives to operate with state-of-the-art equipment and a consistent equipment platform across all its operations, and accordingly, replaced its older equipment with newer model ARAM -ARIES® recording equipment. The Company now owns and operates over 12,000 channels of recording equipment. In addition, the Company has purchased four large buggy vibrators which were received in September, 2006. This increased vibroseis capacity, bringing Norex's fleet of vibroseis machines to twelve, will allow the Company to bid on additional vibroseis jobs in both Canada and the United States.

Share Capital

As at December 31, 2006, the Company's issued share capital consisted of 38,495,985 common shares (April 30, 2006 - 35,393,693).

As at the date of this news release, the Company has 38,600,985 common shares outstanding.

As at December 31, 2006, the Company had 2,260,667 stock options outstanding (April 30, 2006 - 2,265,000) with a weighted average exercise price of $1.44 each. Subsequent to December 31, 2006, 105,000 stock options were exercised and 3,000 stock options were cancelled, resulting in 2,152,667 stock options outstanding as at the date of this news release.

Seasonality of Operations

The Company provides seismic data recording services in western Canada, central and eastern Canada and the United States. As a result of having the majority of its operations in western Canada, the Company's earnings follow the seasonal activity pattern of western Canada's oil and gas exploration industry. In northern Alberta and British Columbia, certain areas can only be accessed and seismic activities completed in the winter months creating seasonally higher revenues and earnings for the Company. Conversely, in spring and early summer, industry oil and gas exploration and development activity levels decrease due to wet spring conditions and the planting of crops in the prairie regions. The Company's earnings typically decline in the spring and summer as a result of these seasonal conditions. Partially offsetting this decline is a seasonal increase in activity in the Company's eastern Canada and the northeastern regions of the United States operations. These areas typically experience an increase in industry activity in the spring and summer months as snowfall and unpredictable weather patterns inhibit seismic work in winter months.

Outlook

The oilfield service industry in Canada can be cyclical as commodity price fluctuations can be compounded with seasonal trends. From December 1, 2006 to February 28, 2007 Henry Hub natural gas spot prices have fluctuated from a low of $5.40 per MMBtu to a high of $9.07 per MMBtu. Over that same time period, the West Texas Intermediate crude oil spot price fluctuated from a low of $50.49 per barrel to a high of $63.43 per barrel. The significant price fluctuations, particularly with natural gas, have created uncertainty in the WCSB. Oil and gas producers are also experiencing inflationary pressures with respect to their oilfield services which has caused a temporary reduction in their capital spending. Thirdly, proposed legislative changes to the taxation of trusts in Canada has reduced the flow of equity capital into the industry. As a result, the Company is foreseeing a reduction in near-term exploration capital spending by its clients. This decrease will result in greater competition in the seismic industry in western Canada and may result in near-term lower pricing of services. Cushioning the impact of more competitive industry conditions in the first quarter of 2007, is the Company's growing presence in the oilsands region of northern Alberta. The Company has operated as many as five crews in this region and expects to continue to grow its revenue base in this area. Customers are using Norex's high resolution 3D seismic acquisition capability to delineate their existing reserves. These oilsands developments are large capital investment, multi year projects that provide tremendous opportunity for the Company's growth. Additionally, the Company is seeing opportunities in the mining sector which also diversifies the Company's revenue base.

Norex has created the largest seismic acquisition Company in Canada. The Company believes that its strong competitive position will allow it not only to weather the inevitable cycles in our industry, but potentially take advantage of these cycles to grow its business further.

Looking beyond the current winter season, Norex continues to focus on growth in the United States. The United States does not appear to be experiencing the same competitive pressures or curtailment of activity as the Company foresees in the WCSB. As such, Norex has recently expanded its operational presence in the United States by opening offices in Houston, Texas and Denver, Colorado. The northeastern United States and eastern Canada regions with their concentration of seismic activities in the warmer months are a perfect fit to offset the activity in Norex's traditional core, the winter months in the WCSB.

During the winter of 2007, the Company operated up to eight crews in western Canada and up to two crews in eastern Canada and the United States. The Company also utilized up to 26,000 channels of owned and rented recording equipment.

Business Risks and Uncertainties

The Company is exposed to several operational risks inherent in the acquisition of seismic data. These risks include: commodity prices received by customers which impacts their decision to acquire new seismic data in combination with the competitive bidding process for the Company's services; the seasonality of field operations and the impact of adverse weather conditions; land access constraints which influence the timing and nature of the Company's services; cost of capital risk associated with securing the required capital to carry out the Company's operations; risk of environmental impact; competition from companies increasing their seismic equipment and crew capacities; and credit risk of non-payment for sales contracts.

The Company maintains a comprehensive insurance program to reduce risk to an acceptable level and to protect it against significant losses. The Company's risk in regards to financial instruments is detailed in Note 16 of the audited December 31, 2006 consolidated financial statements.

NOTICE OF NO AUDITOR REVIEW OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS

In accordance with National Instrument 51-102 released by the Canadian Securities Administrators, the Company discloses that its external auditors have not reviewed the unaudited interim consolidated financial statements for the two months ended December 31, 2006 and three months ended January 31, 2006.



NOREX EXPLORATION SERVICES INC.
Consolidated Balance Sheets
As at December 31, 2006 and April 30, 2006

(in thousands of dollars)

----------------------------------------------------------------------
----------------------------------------------------------------------
December 31 April 30
2006 2006
----------------------------------------------------------------------

Assets

Current assets:
Cash $ 1,251 $ 2,136
Accounts receivable 24,365 29,838
Prepaid expenses and deposits 333 843
Income taxes receivable 625 -
----------------------------------------------------------------------
26,574 32,817

Property and equipment, net 31,890 23,731
Goodwill 7,097 7,097
Intangible assets, net 2,721 3,031
----------------------------------------------------------------------
$ 68,282 $ 66,676
----------------------------------------------------------------------
----------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Operating lines of credit $ 1,390 $ -
Accounts payable and accrued liabilities 15,355 20,301
Income taxes payable 351 3,612
Current portion of long-term debt 1,412 1,163
Current portion of capital lease obligations 5,232 4,739
----------------------------------------------------------------------
23,740 29,815

Long-term debt 702 1,720
Capital lease obligations 6,413 3,496
Future income taxes 3,018 2,654
----------------------------------------------------------------------
33,873 37,685

Shareholders' equity:
Share capital 23,246 19,535
Warrants - 1,083
Contributed surplus 566 139
Retained earnings 10,597 8,234
----------------------------------------------------------------------
34,409 28,991

----------------------------------------------------------------------
$ 68,282 $ 66,676
----------------------------------------------------------------------
----------------------------------------------------------------------



NOREX EXPLORATION SERVICES INC.
Consolidated Statements of Earnings and Retained Earnings

(in thousands of dollars, except per share amounts)
(unaudited)

-------------------------------------------------------------------------
-------------------------------------------------------------------------
2 months 3 months 8 months Year
ended ended ended ended
December 31 January 31 December 31 April 30
2006 2006 2006 2006
-------------------------------------------------------------------------

Revenue $ 18,081 $ 13,161 $ 60,872 $ 66,340

Expenses:
Direct costs 9,787 5,103 27,204 23,880
Subcontractors 5,216 4,222 23,859 26,798
-------------------------------------------------------------------------
Earnings before the
undernoted 3,078 3,836 9,809 15,662

General and
administrative
expenses 719 461 3,007 2,408
Depreciation and
amortization 990 451 3,381 2,030
Interest expense 179 52 597 376
Stock-based
compensation 124 40 432 139
Gain on disposal of
equipment (32) - (854) (2)
Foreign exchange
(gain) loss (186) 5 (209) 46
-------------------------------------------------------------------------
1,794 1,009 6,354 4,997

-------------------------------------------------------------------------
Earnings before
income taxes 1,284 2,827 3,455 10,665

Income taxes:
Current 180 514 728 3,022
Future 209 270 364 705
-------------------------------------------------------------------------
389 784 1,092 3,727

-------------------------------------------------------------------------
Net earnings 895 2,043 2,363 6,938

Retained earnings,
beginning of period 9,702 615 8,234 1,296
-------------------------------------------------------------------------

Retained earnings,
end of period $ 10,597 $ 2,658 $ 10,597 $ 8,234
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net earnings per
share:
Basic $ 0.03 $ 0.10 $ 0.07 $ 0.39
Diluted 0.02 0.10 0.06 0.39
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Weighted-average
number of shares:
Basic 35,249,519 19,585,474 35,425,336 17,716,175
Diluted 37,074,401 20,068,638 37,812,536 17,964,934
-------------------------------------------------------------------------


NOREX EXPLORATION SERVICES INC.
Consolidated Statements of Cash Flows

(in thousands of dollars)
(unaudited)

--------------------------------------------------------------------------
--------------------------------------------------------------------------
2 months ended 3 months ended 8 months ended Year ended
December 31 January 31 December 31 April 30
2006 2006 2006 2006
--------------------------------------------------------------------------

Cash provided by
(used in):

Operations:
Net earnings $ 895 $ 2,043 $ 2,363 $ 6,938
Items not
involving cash:
Depreciation and
amortization 990 451 3,381 2,030
Stock-based
compensation 124 40 432 139
Gain on disposal
of equipment (32) - (854) (2)
Future income
taxes 209 270 364 705
--------------------------------------------------------------------------
2,186 2,804 5,686 9,810
Change in non-cash
operating
working capital (4,585) (3,289) (2,847) 2,775
--------------------------------------------------------------------------
(2,399) (485) 2,839 12,585

Investing:
Acquisition of
property and
equipment (901) (3,323) (5,178) (3,871)
Proceeds on
disposal of
equipment 37 - 1,532 2
Cash held in trust - (7,500) - -
Business
acquisitions - (115) - (8,938)
Bank indebtedness
on acquisitions - - - (6,984)
--------------------------------------------------------------------------
(864) (10,938) (3,646) (19,791)

Financing:
Proceeds on issue of
common shares 2,615 12,412 2,623 13,047
Proceeds
(repayment) of
operating
lines of credit 1,390 (704) 1,390 (1,828)
Proceeds of
long-term debt - - - 1,500
Repayment of
long-term debt (195) (125) (769) (1,484)
Repayment of capital
lease obligations (747) (291) (3,322) (1,891)
Repayment of
shareholder loans - (2) - (2)
--------------------------------------------------------------------------
3,063 11,290 (78) 9,342

Increase
(decrease) in cash (200) (133) (885) 2,136
Cash, beginning of
period 1,451 - 2,136 -
--------------------------------------------------------------------------
Cash (bank overdraft),
end of period $ 1,251 $ (133) $ 1,251 $ 2,136
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Supplemental cash
flow information:
Interest paid $ 157 $ 53 $ 575 $ 376

Income taxes paid - - 4,614 -
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Norex, and its divisions Conquest Seismic Services and US subsidiary, Conquest Seismic Services, Inc., provide premium 2D, 3D and 4D land based seismic data acquisition services in Canada and the United States. Norex is the largest operator of ARAM-ARIES® recording equipment in Canada and provides state-of-the-art technology to the North American oil and gas industry. Norex trades on the TSX under the symbol "NRX".

The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of this news release.

Contact Information

  • Norex Exploration Services Inc.
    Mr. Paul Crilly
    President and CEO
    (403) 216-5929
    or
    Norex Exploration Services Inc.
    Mr. Bharat Mahajan, CA
    Vice President of Finance and CFO
    (403) 216-5904