Peak Energy Services Trust
TSX : PES.UN

Peak Energy Services Trust

May 13, 2008 19:47 ET

Peak Energy Services Trust Reports Its Financial Results for the Three Months Ended March 31, 2008

CALGARY, ALBERTA--(Marketwire - May 13, 2008) - Peak Energy Services Trust (TSX:PES.UN) -



Financial Highlights

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(in '000 of CAD, Three months ended March 31
except otherwise noted) 2008 2007 Change
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Revenue 37,867 36,151 5%
EBITDA (1) 9,691 12,967 -25%
Per unit - diluted 0.30 0.47 -36%
As a percentage of revenue 26% 36%
Net income 3,131 5,348 -41%
Per unit - diluted 0.10 0.19 -47%
Standardized distributable cash (1) 1,230 5,044 -76%
Per unit - diluted 0.04 0.18 -78%
Adjusted distributable cash (1) 8,095 13,003 -38%
Per unit - diluted 0.25 0.47 -47%
Distributions declared - 5,817 -100%
Per unit - 0.21 -100%
Payout ratios (2)
Standardized distributable cash 0% 115%
Adjusted distributable cash 0% 45%
Drilling rig operating days (3) 45,336 45,406 0%
Service rig utilization (3) 64% 72% -11%
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(1) Refer to the "Non-GAAP Measures" section for further details.

(2) Payout ratio is calculated as distributions declared divided by either
standardized distributable cash or adjusted distributable cash.

(3) Sources: Canadian Association of Oilwell Drilling Contractors ("CAODC"),
the Daily Oil Bulletin ("DOB") and Petroleum Services Association of
Canada ("PSAC")


INDUSTRY ACTIVITY

For the first quarter of 2008, industry activity levels played out as management expected with a lower Canadian drilling rig utility of 56 percent as compared to the past five year first quarter range of between 56 percent and 81 percent. Canadian service rig utility experience a similar decline with a current quarter utility level of 64 percent as compared to the past five year first quarter range of between 64 percent and 84 percent. During late 2007, when producers were finalizing their winter programs the following negative factors were adversely influencing their decisions which translated into the activity levels experienced for the quarter:

- near-term weakness in natural gas pricing driven primarily by the larger than historical norm of natural gas inventory in North America. The Western Canadian Sedimentary Basin ("WCSB") recent years' drilling activity have been between 60 and 70 percent natural gas oriented;

- significant appreciation in value of the Canadian dollar against the American dollar as hydrocarbon commodities produced in Canada are primarily priced in American dollars, hence negatively impacting Peak's customers' revenues; and

- the Alberta provincial government's decision to increase the Alberta royalty rates paid by producers effective January 1, 2009. The increased royalty rates will reduce producers' return on Alberta related investments. Historically, approximately 75 percent of Canadian drilling rig operating days have been generated in Alberta.

Partially offsetting the above negative factors was that recent oil prices are at all time highs and this has motivated some producers to focus their efforts towards oil related activities, partially offsetting the lack of natural gas related activities.

From the industry's perspective, North American natural gas inventory levels and related natural gas pricing have improved significantly since the end of 2007. As of the end of April 2008, inventory levels were slightly below the five year average and AECO spot prices were above $9.50 (for second half of 2007, inventory was at the top of the five year range and prices were in the range of $5.00 to $7.00). These positive underlying factors have increased optimism for the industry that higher activity levels are on the not too distant horizon, however there is concern that these supply / demand fundamentals may not be sustainable and many producers are taking a wait and see approach before they significantly increase their capital expenditure programs. Some industry analysts have recently increased their well count forecast for fiscal 2008, however this will likely not come to fruition until the fourth quarter of this year as changes to producer's capital programs are not as nimble to change. Management believes the outlook for the oil and gas industry in North America remains very positive for the mid and longer term, however for at least the second and third quarter of 2008, it will continue to experience lower levels of activity until the underlying natural gas fundamentals firm up over a more sustainable period.

DESCRIPTION OF BUSINESS

Peak Energy Services Trust ("Peak" or the "Trust") is a diversified energy services organization operating in western Canada and the mid-west United States of America. Through its various operating divisions, the Trust provides drilling and production services to its customers both in the conventional oil and gas industry as well as the oil sands regions of western Canada. The Trust also provides water technology solutions to a variety of customers throughout North America.

As a result of the merger with Wellco Energy Services Trust ("Wellco") which took effect on March 12, 2008, Peak realigned its reporting segments as follows:

Drilling Services

The Trust's Drilling Services reporting segment provides a broad range of equipment and services that play a key role in the drilling phase of a well bore. The objective of this reporting segment is to continue to foster customer relationships and to provide a high level of service and quality equipment that will ultimately help the Trust's customers enhance their drilling programs and reduce costs at the wellhead. The three operating divisions within this reporting segment are Surface Rentals, Camps and Catering and Remote Waste Water Systems. The Trust's main competitive advantage in the Drilling Services area is its ability to put together comprehensive packages for its customers over a broad geographic region.

Production Services

The Trust's Production Services reporting segment provides a broad range of equipment and services that play a key role in the production and completion phases of a well bore. The objective of this reporting segment is to continue to foster customer relationships and to provide a high level of service and quality equipment that will ultimately help Peak's customers enhance their production programs and reduce costs at the wellhead. The three operating divisions within this reporting segment are Fluids Handling, Wireline Services and Surface Rentals. The Trust's main competitive advantage in the Production Services area is its ability to put together comprehensive packages for its customers over a broad geographic region.

Oil Sands

The Trust's Oil Sands reporting segment provides services supporting customer's activities focused on the extraction of hydrocarbons from the oil sands. The three operating divisions within this reporting segment are Camps and Catering, Remote Waste Water Systems and Fluids Handling. In addition, certain Surface Rentals operating division activities are associated with the oil sands, however this currently is not a major source of revenue for the Trust.

Water Technology

The Water Technology reporting segment operates under the Sanitherm trade name and is engaged in the design and assembly of both permanent and portable water and waste water treatment systems.

Within Peak's four reporting segments, it has six operating divisions that provide equipment and services to one or more of its reporting segments. These operating divisions are:

Surface Rentals - within this operating division the following equipment and services are provided:

- Solids control - the rental of sumpless drilling systems comprised of a series of tanks and centrifuges that are used primarily for the removal of drill cuttings from the drilling fluid as it is circulated out of the well bore;

- Well-site accommodations - the rental of high-quality well-site accommodation units used as office and living quarters for personnel on drilling rig locations;

- Access matting - the rental of access matting used to construct roads, pipeline rights-ofway and drilling rig locations; and

- Production equipment - the rental of frac/production tanks, blow-back tanks, flare stacks, light towers, service rig equipment and miscellaneous production and completion equipment.

Camps and Catering - the provision of camp accommodations for drilling, pipeline and oil sand related crews, including full-service on-site catering, water supply and housekeeping in remote locations.

Remote Waste Water Systems - the rental of waste water management systems for the processing of grey and black water effluent in remote locations.

Fluids Handling - tank truck and related services for production and completion activities.

Wireline Services - the provision of slick line and electric line services for down hole production and completion activities.

Water Technology - this operating division offers water and waste water treatment design and fabrication services. Water Technology operates under the trade name Sanitherm and includes design, assembly and sales of both permanent and portable water and waste water treatment systems.

FINANCIAL SUMMARY

For the first quarter of 2008, Canadian drilling rig operating days were flat with the same quarter of 2007 at 45,336 days. Although Canadian drilling rig operating days were flat, Canadian drilling rig utilization decreased from 59 percent for the first quarter of 2007 to 56 percent for the current quarter. Meanwhile, Canadian service rig utility decreased by 11 percent quarter-over-quarter with overall utilization of 64 percent. For the three months ended March 31, 2008, Peak:

- generated revenue of $37.9 million which was a 5 percent or $1.7 million increase over the 2007 first quarter revenue of $36.2 million;

- realized earnings before interest, taxes, depreciation, amortization and certain other items ("EBITDA") of $9.7 million ($0.30 per Unit diluted or 26 percent of revenue), a decrease of 25 percent or $3.3 million over EBITDA for the three months ended March 31, 2007 of $13.0 million ($0.47 per Unit diluted or 36 percent of revenue);

- realized EBITDA adjusted for financing and succession planning costs indirectly associated with the merger with Wellco of $11.7 million ($0.36 per Unit diluted or 31 percent of revenue), a decrease of 10 percent or $1.3 million over EBITDA of $13.0 million ($0.47 per Unit diluted or 36 percent of revenue) for the first quarter of the prior year;

- posted an income adjusted for financing and succession planning costs indirectly associated with the merger with Wellco of $4.6 million ($0.14 per Unit diluted), a decrease of $0.7 million or 13 percent from $5.3 million adjusted income from the first quarter of 2007;

- posted a net income of $3.1 million ($0.10 per Unit diluted), which was a decrease of 41 percent or $2.2 million as compared to net income for the first quarter of 2007 of $5.3 million ($0.19 per Unit diluted);

- generated adjusted distributable cash of $8.1 million or $0.25 per Unit diluted (March 31, 2007 - $13.0 million or $0.47 per Unit diluted), of which zero distributions ($0.00 per Unit) were made to Unitholders during the quarter resulting in a payout ratio of zero percent (March 31, 2007 - $5.8 million ($0.21 per Unit) or 115 percent);

- increased working capital by $27.9 million to $46.7 million;

- increased tangible capital assets by $37.4 million to $239.4 million;

- increased net funded debt by $28.6 million to $97.7 million; and

- increased Unitholders' equity by $43.0 million to $181.8 million.

RESULTS OF OPERATIONS

Revenue

For the three months ended March 31, 2008, Peak generated revenue of $37.9 million compared to $36.2 million for the prior year period representing an increase of 5 percent compared to no change in Canadian drilling rig operating days and an 11 percent decrease in Canadian service rig activity over this time period. Included in the total revenue are the activities of Wellco as a result of the merger which contributed revenue of $2.6 million for the 19 days of the first quarter that Peak included the former Wellco activities. Exclusive of the former Wellco activities included in the first quarter, Peak stand-alone generated revenue of $35.3 million representing a decrease of 2 percent over the prior year period.

Total Canadian drilling rig operating days for the first quarter of 2008 were 45,336 days compared to 45,406 days for the first quarter of 2007. Meanwhile Canadian service rig utilization was 64 percent for first quarter of 2008, compared to 72 percent for the prior year period.

Drilling Services revenue increased by $0.5 million or 2 percent as it generated $22.3 million in revenue or 59 percent of the Trust's total revenue for the three months ended March 31, 2008, compared to $21.8 million or 60 percent for the prior year period. Exclusive of the $1.7 million of former Wellco revenue activities included in the first quarter, Peak stand-alone generated revenue of $20.6 million representing a decrease of 6 percent or $1.2 million over the prior year period. The marginal decrease in Peak's stand-alone revenue for the first quarter of 2008 was mostly the result of an increase in pricing discounts from book pricing that was partially offset by a significant increase in the utility of assets deployed in the mid-west United States of America (approximately 15 percent of Drilling Services revenue was derived from the United States of America).

Production Services revenue increased by $0.2 million or 1 percent as it contributed $12.7 million in revenue or 33 percent of the Trust's total revenue for the three months ended March 31, 2008, compared to $12.5 million or 35 percent for the prior year period. The marginal increase was significantly better that the 11 percent decrease in Canadian service rig activity and was the result of strong growth in activity within the Trust's Fluids Handling and Surface Rentals operating divisions more than offsetting the decrease in activity and increase in pricing discounts from book pricing within the Wireline Services operating division.

Oil Sands revenue increased by $0.8 million or 40 percent as it contributed $2.7 million in revenue or 7 percent of the Trust's total revenue for the three months ended March 31, 2008, compared to $1.9 million or 5 percent for the prior year period. Exclusive of the $0.6 million of former Wellco revenue activities included in the first quarter, Peak stand-alone generated revenue of $2.1 million representing an increase of 11 percent or $0.2 million over the prior year period which was a direct result of the Trust's contracted Fluid Handling operating division's activities within this reporting segment. The Trust created this reporting segment as a direct result of the Wellco merger and expects this reporting segment to be a significant area of focus and growth for Peak in the future. The results for the first quarter of 2008 are relatively insignificant as they only reflect 19 days of the first quarter that Peak incorporated the former Wellco activities.

Water Technology revenue was $0.3 million for the first quarter of 2008 are relatively insignificant as they only represent 19 days of the first quarter that Peak included the former Wellco activities.

Expenses

Operating expenses - For the three months ended March 31, 2008, operating expenses were higher than the prior year period by $2.0 million or 12 percent. As a percentage of revenue, operating expenses were 50 percent compared to the prior year period of 47 percent. The primary drivers of the increase in operating expenses as a percentage of revenue were:

- an increase in repairs and maintenance ("R&M") costs as the prior year's selective R&M program deferred certain R&M costs until the equipment was utilized during the current period;

- an increase in employee variable compensation and R&M costs associated with addressing equipment operating challenges during the prolonged severe winter conditions experienced during the current fiscal quarter as compared to the prior year period;

- an increase in heavy truck and equipment fuel costs, as a percentage of revenue, primarily driven by a significant increase in the cost of fuel and revenue activities related to longer distance fluids handling work; and

- the timing of the Wellco merger resulted in Peak recognizing, on a percentage of revenue basis, more of the first quarter operating costs which are relatively fixed as compared to the associated revenue which was generated and recognized prior to the merger date due to winter break-up which occurred in mid March, adversely impacting revenues for this stub period.

General and administrative expenses - For the first quarter of 2008, general and administrative expenses (G&A) were $3.0 million or 47 percent higher than the prior year period. As a percentage of revenue, G&A increased to 24 percent for the current quarter of 2008 as compared to 17 percent for the prior year period. The primary factors negatively impacting G&A were:

- $1.3 million in severance resulting from the implementation of Peak's succession plan associated with the post Wellco merger senior management team structure;

- $0.7 million in financing costs directly associated with restructuring the Trust's debt to complete the Wellco merger; and

- $1.0 million in increased facility costs (rent, utilities and property taxes) resulting from the Wellco merger and the recent build out of "super shops" in Red Deer, Alberta, new shops in Slave Lake, Alberta and Estevan, Saskatchewan and head office in Calgary, Alberta to support Peak's operations.

Exclusive of the succession plan and financing costs that were indirectly related to the Wellco merger but not included as transaction costs of the merger for accounting purposes, adjusted G&A increased $1.0 million or 15 percent to $7.2 million and adjusted G&A as a percentage of revenue was 19 percent.

EBITDA - EBITDA decreased $3.3 million or 25 percent to $9.6 million for the three months ended March 31, 2008, meanwhile EBITDA as a percentage of revenue, was 26 percent for the current fiscal period as compared to 36 percent for the comparative prior period of 2007. The primary drivers of the year-overyear decrease are detailed above. Exclusive of the succession plan and financing costs that were indirectly related to the Wellco merger but not included as transaction costs of the merger for accounting purposes, adjusted EBITDA decreased $1.3 million or 10 percent to $11.7 million ($0.36 per unit diluted) and adjusted EBITDA as a percentage of revenue was 31 percent.

Depreciation and amortization expenses - For the three months ended March 31, 2008, depreciation and amortization expenses were relatively consistent with the prior year period.

Interest on long-term debt expense - Interest on long-term debt expense increased to $1.2 million for the three months ended March 31, 2008, representing an increase of $0.1 million or 11 percent over the same period of 2007. The interest cost (expressed as a percentage of the average long-term debt outstanding during the period) was 6.0 percent for the first quarter of 2008, compared to 6.1 percent for the first quarter of 2007.

Provision for income taxes - The current tax expense of $0.3 million and future tax expense of $0.6 million, resulted in a net income tax expense of $0.9 million and an effective income tax rate of 22 percent for the three months ended March 31, 2008.

The effective income tax rate differs significantly from the statutory corporate rate of 29.5 percent as the result of the Trust's legal structure. As a mutual fund trust for purposes of the Income Tax Act (Canada), the Trust is only subject to statutory income taxes on taxable income not distributed to Unitholders.

The federal government's announced intentions to require income trusts to pay taxes at rates consistent with corporations was enacted into law during June 2007. Commencing in fiscal 2011, Peak will be required to pay a tax of 28 percent on distributions it makes to Unitholders. This change in the tax laws will materially reduce the cash available to distribute to Unitholders. This has had a significant impact on existing trusts', including Peak's, enterprise values and their ability to access debt and equity financing at previously experienced levels. Despite this, Peak's underlying business activities remain the same and management is evaluating its options to determine the optimal capital structure for the Trust on a go-forward basis.

Income

Net income and comprehensive income - Exclusive of the succession plan and financing costs that were indirectly related to the Wellco merger but not included as transaction costs of the merger for accounting purposes, adjusted income for the first quarter of 2007 decreased $0.7 million or 13 percent to $4.6 million ($0.14 per Unit diluted) quarter-over-quarter. Meanwhile, for the three months ended March 31, 2008, net income and comprehensive income decreased 41 percent to $3.1 million ($0.10 per Unit diluted) compared to net income and comprehensive income of $5.3 million ($0.19 per Unit diluted) for the comparative prior year period.

LIQUIDITY

Operating activities - For the first quarter of 2008, cash provided by operating activities was $6.4 million or $0.20 per Unit diluted (March 31, 2007 - $8.9 million or $0.32 per Unit diluted).

Investing activities -Net cash used in investing activities for the three months ended March 31, 2008 was $1.4 million (March 31, 2007 - $4.4 million). The activities were the result of:

- the merger with Wellco Energy Services Trust ("Wellco") for total consideration of $31.6 million, which was comprised of $1.6 million in cash and the issuance of 16,565,851 Trust Units with a fair market value of $30.0 million. The merger was accomplished by way of a plan of arrangement (the "Arrangement") under the Business Corporations Act (Alberta) where by Wellco unitholders received 0.9 of a Trust Unit of Peak for each unit of Wellco held. Wellco provides camps and catering, well-site accommodations, remote waste water systems, surface rentals and water technology services. Management believes the Arrangement will provide an increased enterprise value that will enhance liquidity, provide a more competitive cost of capital and improve financing flexibility for future growth opportunities. Furthermore, Peak retains a strong and experienced management team that will be able to take advantage of the improved economies of scale through operational and general and administrative synergies estimated to be $5.5 million on an annualized basis. As one of the first to initiate consolidation in the fragmented Canadian energy services sector, the combined entity will be well positioned to take advantage of higher activity levels that are expected to occur in the later part of 2008 or early 2009. Lastly management believes the Arrangement will be accretive to all unitholders of the combined entity.

Peak accounted for the Wellco merger as a business acquisition for which the total consideration was allocated as follows:



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(in '000 of CAD) Total
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Equipment 41,517
Proprietary technology 1,000
Future income taxes 8,483
Working capital 24,024
Debt assumed (43,457)
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Net assets acquired 31,567
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Consideration was comprised of the following:

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(in '000 of CAD) Total
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Fair value of Trust Units issued 29,984
Transaction costs 1,583
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Total consideration 31,567
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- $1.1 million of gross equipment purchases and a net disposal of $0.2 million including proceeds on sale of equipment of $1.3 million.

Financing activities - Net cash used in financing activities for the three months ended March 31, 2008 was $2.9 million (March 31, 2007 - $2.7 million). The activities were the result of:

- an increase in long-term debt of $64.3 million from a new syndicated extendable term revolving acquisition loan facility used to partially retire the former debt facilities detailed below;

- the $77.1 million repayment of long-term debt primarily the result of repayment of $30.8 million for the former outstanding extendable term revolving acquisition loan facility and the former debt facility of $43.5 million assumed on closing of the Wellco merger; and

- the issuance of 4,133,859 million Trust Units for net proceeds of $9.9 million used to partially retire the former debt facilities detailed above.

Working capital - The Trust had net working capital (defined as current assets less current liabilities excluding current portion of long-term debt) of $46.7 million at March 31, 2008, compared to $18.8 million at December 31, 2007. The significant increase in net working capital was the result of the Wellco merger contributing $24.0 million and the seasonal increase in accounts receivable associated with the winter drilling season which is typically the highest level of revenue activity during the year for the Trust. The Trust's current ratio (defined as current assets divided by current liabilities excluding current portion of long-term debt) remained strong over the period, increasing slightly to 2.99 to 1.00 at March 31, 2008, from 2.66 to 1.00 at December 31, 2007.

CAPITAL RESOURCES

Capital Expenditures

During the first quarter of fiscal 2008, the Trust expended a total of $42.6 million on gross asset additions and $41.4 million on net asset additions (includes mergers, business acquisitions and purchase of equipment, net of proceeds on the sale of equipment) compared to $3.8 million and $2.6 million, respectively, for the prior year period. Included in the net asset additions is the Wellco merger whereby Peak paid total consideration of $31.6 million, which was comprised of $1.6 million in cash and the issuance of 16,565,851 million Trust Units with a fair market value of $30.0 million in exchange of all of the issued and outstanding trust units of Wellco.



By operating segment, the expenditures were:

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Three months
ended March 31, 2008 Drilling Production Water
(in '000 of CAD) Services Services Oil Sands Technology Total
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Growth 65 395 - - 460
Maintenance 135 145 - - 280
Infrastructure - - - - 363
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200 540 - - 1,103
Proceeds on sale of
equipment - - - - (1,255)
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Net disposal of assets - - - - (152)
Wellco merger impact 30,064 1,152 10,046 255 41,517
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30,264 1,692 10,046 255 41,365
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Peak's capital expenditure program, exclusive of the Wellco merger, for fiscal 2008 has not changed materially from what was disclosed in the 2007 Annual Report. In addition to the planned capital expenditures for fiscal 2008, the Trust intends on continuing to identify, evaluate and acquire oil and gas service companies and/or service assets that complement Peak's business model. The Trust plans to use cash generated from operating activities to fund maintenance capital expenditures and to utilize its existing debt and equity facilities outlined below to fund growth capital expenditures and any strategic business acquisitions contemplated for fiscal 2008.

Long-term debt

The Trust's long-term debt (including current portion) increased to $101.4 million at March 31, 2008, as compared to $70.8 million at December 31, 2007. Meanwhile, net funded debt (defined as long-term debt including the current portion of long-term debt less cash) was $97.7 million at March 31, 2008 as compared to $69.1 million at December 31, 2007. The long-term debt to equity ratio increased to 0.56 to 1.00 at March 31, 2008 (December 31, 2007 - 0.51 to 1.00). Of the Trust's $180.0 million long-term debt facilities at March 31, 2008, $82.3 million was available for use by the Trust for future capital expenditures and strategic business acquisitions at the sole discretion of the lender and subject to certain lending ratios being maintained.

The Trust's available and utilized long-term debt facilities at March 31, 2008 consist of:

- Pursuant to an agreement dated March 12, 2008 the Trust negotiated a syndicated new extendable term revolving loan facility of $100.0 million with an additional $40.0 million accordion option, at the sole discretion of the lender, that is intended to be utilized to fund capital expenditures and strategic business acquisitions as required, subject to certain lending ratios being maintained. On March 12, 2008, $75.0 million was provided to repay Wellco's former loan facility as part of the Wellco merger and Peak's former extendable term revolving acquisition loan facility of $60.0 million, of which $30.8 million was outstanding at December 31, 2007. Furthermore, this facility replaces Peak's current $5.0 million operating line of credit, of which nil was outstanding at December 31, 2007. At a subsequent date, a further $65.0 million may be available if the lead arranger is successful in syndicating to other lenders. The terms of the facility require no set principal payments during the term, bearing interest at bank prime plus up to 1.25 percent or at banker's acceptance rates plus a variable stamping fee of 1.25 to 2.50 percent plus a 0.20 percent standby fee. The facility is renewable on May 31, 2009, at the lender's option, for an additional 364 day period. If not renewed, the loan is repayable over three years amortized over four years;

- Pursuant to an agreement dated August 31, 2005, the Trust has a term loan of $30.0 million with terms of no set principal payments during the seven year term bearing interest at 6.3 percent; and

- Pursuant to an agreement dated June 26, 2006, the Trust has a term loan of $10.0 million with terms of no set principal payments during the seven year term bearing interest at 7.2 percent.

All covenants were satisfied at March 31, 2008 and all banking requirements were up to date.

Unitholders' equity

Unitholders' equity increased $43.0 million to $181.8 million at March 31, 2008 from $138.7 million at December 31, 2007. The increase over the prior year-end was the result of:

- a net income of $3.1 million incurred;

- the issuance of 4,133,859 million Trust Units for net cash proceeds of $9.9 million; and

- the issuance of 16,565,851 million Trust Units with a fair market value of $30.0 million for all of the issued and outstanding trust units of Wellco.

DISTRIBUTABLE CASH

Standardized distributable cash - Standardized distributable cash is defined as cash flow from operating activities less adjustments for total capital expenditures, as reported in the Canadian GAAP financial statements, and restrictions on distributions arising from compliance with financial covenants restrictive as of the date of the calculation.

The following was the Trust's standardized distributable cash and associated payout ratio of distributions declared:



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Three months ended
March 31
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(in '000 of CAD, except otherwise noted) 2008 2007
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Cash flow from operating activities 6,399 8,871
Less adjustments for:
Business acquisitions (1,583) -
Purchase of equipment (1,103) (3,827)
Distribution restrictions caused by
financial covenant (2,483) -
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Standardized distributable cash 1,230 5,044
Distributions declared to Unitholders - (5,817)
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Distribution surplus (deficit) 1,230 (773)
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Payout ratio of standardized distributable cash 0% 115%
Standardized distributable cash
Per unit - basic 0.04 0.18
Per unit - diluted 0.04 0.18
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Standardized distributable cash for the three months ended March 31, 2008 was $1.2 million or $0.04 per Unit diluted (March 31, 2007 - $5.0 million or $0.18 per Unit diluted). Meanwhile distributions declared for the first quarter of 2008 were nil (March 31, 2007 - $5.8 million). The payout ratio of standardized distributable cash was zero percent (2007 - 115 percent). The $1.2 million distribution surplus was retained to repay outstanding debt facilities. It is important to note that the Trust's activities are significantly influenced by the seasonal activity in the WCSB whereby activity typically begins to increase in the summer/fall, peaks in the winter and decreases in the spring. Additional non-cash working capital is required during the increase in activity as a result of the increase in revenue and associated operational expenses. Revenue will exceed operational expenses during this increase in activity, hence the "net revenue" results in a build up of non-cash working capital in the form of a net increase in accounts receivable less accounts payable. Subsequently, in the spring during the decrease in activity, non-cash working capital decreases as the increase in accounts receivable associated with winter are collected. Overall, non-cash working capital will fluctuate due to the seasonal effects of the industry, however it should not materially change on a year-over-year basis.

Adjusted distributable cash - Adjusted distributable cash is defined as standardized distributable cash adjusted for business acquisitions, growth and infrastructure capital expenditures and seasonal changes in non-cash working capital. Adjusted distributable cash is used by management to measure the Trust's ability to generate the cash necessary to make distributions, repay debt or fund future growth through capital investment.

It is management's strategy to fund business acquisitions, growth and infrastructure capital expenditures from additional long-term debt or equity financing as these activities are enhancing the Trust's overall productive capacity. Furthermore, management's non-cash working capital strategy is to maintain a consistent long-term balance, however non-cash working capital is subject to seasonal fluctuations. As a result of these strategies, the aforementioned items are adjusted for in determining adjusted distributable cash.

Effectively, adjusted distributable cash is the same as the Trust's former disclosed measure of funds from operations less maintenance capital expenditures. Management views maintenance capital expenditures as an operating expenditure required to maintain the Trust's productive capacity, hence does not adjust for maintenance capital expenditures in determining adjusted distributable cash.

The following was the Trust's adjusted distributable cash and associated payout ratio of distributions declared:



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Three months ended
March 31
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(in '000 of CAD, except otherwise noted) 2008 2007
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Standardized distributable cash 1,230 5,044
Adjusted for:
Business acquisitions 1,583 -
Growth capital expenditures 1,578 1,921
Infrastructure capital expenditures 1,381 1,615
Seasonal change in non-cash working capital 2,323 4,423
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Adjusted distributable cash 8,095 13,003
Distributions declared to Unitholders - (5,817)
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Distribution surplus 8,095 7,186
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Payout ratio of adjusted distributable cash 0% 45%
Adjusted distributable cash
Per unit - basic 0.25 0.47
Per unit - diluted 0.25 0.47


The adjusted distributable cash payout ratio was zero percent (March 31, 2007 - 45 percent) for the three months ended March 31, 2008. The distribution surplus between adjusted distributable cash and distributions declared was $8.1 million (March 31, 2007 - $7.2 million) for the first quarter of fiscal 2008 and was used to reduce the Trust's long-term debt outstanding. The Trust's Indentures (for both Peak and Peak Commercial Trust) govern the amounts that the Trustee and the Administrator, Peak Energy Services Ltd. ("PESL"), can distribute to Unitholders. These Indentures give management the latitude to withhold reasonable reserves for operations. Management's long-term objective has been to pay in the range of 65 to 75 percent of the Trust's adjusted distributable cash on an annual basis. Formerly, management disclosed its objective was to distribute 50 to 60 percent of fund from operations. Adjusted distributable cash is effectively funds from operations less maintenance capital expenditures, hence the increase in the percentage range is to reflect the impact of maintenance capital expenditures.

Since the changes in tax laws regarding trusts was announced by the federal government in late 2006, it has become increasing more difficult to raise equity capital as a trust. In addition, the current downturn in industry activity levels has adversely impacted the Trust's adjusted distributable cash. Consequently, management has shifted its financing strategy to using its adjusted distributable cash to reduce the Trust's core long-term debt to create additional facilities to be available for when future business acquisitions and growth capital expenditure opportunities present themselves. Commencing with the December 2007 distribution period, Peak ceased distributions for an indefinite period. Management believes that this financing strategy will allow it to fulfill its vision and execute on its corporate strategy, while maintaining a stable financial position. It should be noted that there can be no absolute assurances made that the Trust will make any future distributions.

SUBSEQUENT EVENTS

On May 2, 2008, the Trust sold all of its cased hole (electric line) assets that were part of the Production Services reporting segment and Wireline Services operation division for gross proceeds of $6.5 million. The carrying value of these assets were approximately $6.7 million.

CORPORATE GOVERNANCE

The regulatory and statutory compliance environment in Canada is rapidly evolving to ensure effective corporate governance frameworks exist within publicly held entities. These standards involve ensuring more timely, accurate and complete financial reporting and disclosures. Of the recently added compliance requirements, the most significant expenditure of resources for the Trust has and will involve the requirements of Multilateral Instrument ("MI") 52-109. Peak's CEO and CFO have filed the necessary certifications to March 31, 2008.

NON-GAAP MEASURES

EBITDA and Adjusted EBITDA are defined as earnings before interest, taxes, depreciation and amortization and other items. EBITDA is not a recognized measure under Canadian GAAP. Management believes, in addition to net income, EBITDA is a useful supplemental measure as it provides an indication of the results generated by Peak's principle business activities prior to consideration of how these activities are financed or how the results are taxed in various jurisdictions. Readers should be cautioned that EBITDA should not be construed as an alternative to net income determined in accordance with Canadian GAAP as an indicator of the Trust's performance. Peak's method of calculating EBITDA may differ from other companies and, accordingly, EBITDA may not be comparable to measures used by other companies.

Adjusted income is defined as net income adjusted for financing and succession planning costs indirectly associated with the merger with Wellco. Adjusted income is not a recognized measure under Canadian GAAP. Management believes, in addition to net income, adjusted income is a useful supplemental measure as it provides an indication of income before unusual items. Readers should be cautioned that adjusted income should not be construed as an alternative to net income determined in accordance with Canadian GAAP as an indicator of the Trust's performance. Peak's method of calculating adjusted income may differ from other companies and, accordingly, adjusted income may not be comparable to measures used by other companies.

Standardized distributable cash is defined as cash flow from operating activities less adjustments for total capital expenditures, as reported in the GAAP financial statements, and restrictions on distributions arising from compliance with financial covenants restrictive as of the date of the calculation. Standardized distributable cash is not a recognized measure under Canadian GAAP, however standardized distributable cash is in accordance with the recommendations provided by the CICA's publication "Standardized Distributable Cash in Income Trusts and Other Flow-Through Entities: Guidance on Preparation and Disclosure". Readers should be cautioned that standardized distributable cash should not be construed as an alternative to cash flow from operating activities, as an indicator of the Trust's performance. Peak's method of calculating standardized distributable cash may differ from other companies and, accordingly, standardized distributable cash may not be comparable to measures used by other entities.

Adjusted distributable cash is defined as standardized distributable cash adjusted for business acquisitions, growth and infrastructure capital expenditures and seasonal changes in non-cash working capital. Adjusted distributable cash is not a recognized measure under Canadian GAAP. Management believes, in addition to standardized distributable cash, adjusted distributable cash is a useful supplemental measure as it demonstrates the Trust's ability to generate the cash necessary to make distributions, repay debt or fund future growth through capital investment. Readers should be cautioned that adjusted distributable cash should not be construed as an alternative to standardized distributable cash, determined in accordance with the recommendations provided by the CICA's publication "Standardized Distributable Cash in Income Trusts and Other Flow-Through Entities: Guidance on Preparation and Disclosure", as an indicator of the Trust's performance. Peak's method of calculating adjusted distributable cash may differ from other companies and, accordingly, adjusted distributable cash may not be comparable to measures used by other entities.

OUTLOOK

Drilling activity levels during the first quarter of 2008 were marginally higher than expected and were consistent with the same period of 2007. The flat industry activity was reflected in Peak's first quarter financial results with revenue increasing by 5 percent that was primarily attributed to the results of the former Wellco activities for the post merger period of 19 days of the first quarter of 2008. Although we are currently experiencing the expected seasonally lower levels of activity during the early stages of the second quarter of 2008; management concurs with the growing consensus that the oil and gas industry may now be experiencing its first signs of recovery from the somewhat protracted downturn in drilling activity that has been lingering since the late summer of 2006.

As with the two previous downturns that Peak has experienced, management has continued to proactively manage its business by focusing internally on its systems and cost structure through this most recent low point in the cycle. Acting in a fiscally responsible manner on behalf of all of its stakeholders remains a high priority at Peak. Since its inception, Peak's management team has created a reputation of growing its business at the low point in the business cycle and realizing value at the high points. Once again this statement has held true as evidenced by the March 12, 2008 closing of the merger between Peak and Wellco.

Although the near term operating environment is still somewhat jaded by the uncertainty created by the Alberta Government's "New Royalty Framework" that was announced on October 25, 2007; Peak believes that the outlook for the oil and gas industry in North America remains very positive for the mid and longer term. Strong supply / demand fundamentals are driving higher hydrocarbon pricing and natural gas inventories are currently at the lowest levels seen over the past three years. As of April 30, 2008 AECO spot prices for natural gas were above $9.50 and WTI oil prices were above $110.00 as compared to average prices for fiscal 2007 of $6.47 and $72.18 respectively. These much improved commodity prices and strengthened industry fundamentals should be a harbinger for a return to more robust levels of drilling activity in western Canada during the second half of 2008 and in to 2009. Management believes that the significant growth and critical mass realized through its recent merger with Wellco; the significant growth capital of $160.0 million for the combined entities over the previous two years along with its reduced cost structure leaves the Trust in a position of strength and poised to take advantage as industry activity levels continue to improve over the long-term. Management will remain vigilant and believes that the remainder of 2008 could hold further opportunities for growth and consolidation within the oil and gas services industry.

CONFERENCE CALL

Management will hold a conference call to discuss the quarter end results at 9:30 a.m. MT (11:30 a.m. ET) on Wednesday, May 14, 2008. To participate, please dial 1 (866) 223-7781 or 1 (416) 641-6136. Participants are asked to call at least 10 minutes before the start of the call. For those unable to participate in the live call, a replay will be available until Tuesday, May 27, 2008 by dialing 1 (800) 408-3053 or 1 (416) 695-5800, verbal pass code 3260592.

FINANCIAL RESULTS

The following selected financial information summarizes Peak's consolidated financial results for the three months ended March 31, 2008. Peak's quarterly report, including the consolidated interim financial statements and management's discussion and analysis for the quarters ended March 31, 2008 and 2007 will be available at www.sedar.com on or about May 14, 2008.



CONSOLIDATED STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME AND DEFICIT
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended March 31,
(in thousands of CAD, except per Unit amounts) -----------------------------
(unaudited) 2008 2007
----------------------------------------------------------------------------

Revenue $ 37,867 $ 36,151

Expenses:
Operating 18,970 16,941
General and administrative 9,206 6,243
Depreciation and amortization 4,791 4,854
Interest on long-term debt 1,176 1,060
----------------------------------------------------------------------------
34,143 29,098

----------------------------------------------------------------------------
Income before other items 3,724 7,053

Other items:
Loss (gain) on sale of equipment (122) 755
Foreign exchange gain (149) -
----------------------------------------------------------------------------
(271) 755

----------------------------------------------------------------------------
Income before income taxes 3,995 6,298

Provision for income taxes:
Current 250 375
Future 614 575
----------------------------------------------------------------------------
864 950

----------------------------------------------------------------------------
Net income and comprehensive income 3,131 5,348

Deficit, beginning of period

As previously reported (50,186) (25,192)

Change in method of accounting for deferred
financing costs - (372)
----------------------------------------------------------------------------

As restated (50,186) (25,564)

Distributions declared to Unitholders - (5,817)

----------------------------------------------------------------------------
Deficit, end of period $ (47,055) $ (26,033)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Earnings per Unit:
Basic $ 0.10 $ 0.19
Diluted $ 0.10 $ 0.19
----------------------------------------------------------------------------
----------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended March 31,
-----------------------------
(in thousands of CAD) (unaudited) 2008 2007
----------------------------------------------------------------------------

Operating activities:
Net income $ 3,131 $ 5,348
Add (deduct) items not affecting cash:
Depreciation and amortization 4,791 4,854
Loss (gain) on sale of equipment (122) 755
Unrealized foreign exchange gain 334 -
Future income taxes 614 575
----------------------------------------------------------------------------

8,748 11,532

Changes in non-cash working capital items (2,349) (2,661)
----------------------------------------------------------------------------

6,399 8,871

Investing activities:
Business acquisition (1,583) -
Purchase of equipment (1,103) (3,827)
Proceeds on sale of equipment 1,255 1,235
----------------------------------------------------------------------------

(1,431) (2,592)

Changes in non-cash working capital items 26 (1,762)
----------------------------------------------------------------------------

(1,405) (4,354)

Financing activities:
Increase in long-term debt 64,268 3,000
Repayment of long-term debt (77,107) -
Repayment of obligations under capital lease - (103)
Issue of Trust Units, net of costs 9,923 1,041
Distributions paid to Unitholders - (6,627)
----------------------------------------------------------------------------
(2,916) (2,689)

Foreign exchange gain on cash held in foreign
currency (12) -

Increase in cash and cash equivalents 2,066 1,828
Cash and cash equivalents, beginning of period 1,617 3,856
----------------------------------------------------------------------------

Cash and cash equivalents, end of period $ 3,683 $ 5,684
----------------------------------------------------------------------------
----------------------------------------------------------------------------


CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
March 31, December 31,
(in thousands of CAD) (unaudited) 2008 2007
----------------------------------------------------------------------------

ASSETS
Current assets:
Cash and cash equivalents $ 3,683 $ 1,617
Accounts receivable 63,646 27,041
Prepaid expenses 1,564 1,477
Inventory 1,245 -
----------------------------------------------------------------------------
70,138 30,135

Property and equipment 239,390 201,980

Intangibles 9,232 8,797

----------------------------------------------------------------------------
$ 318,760 $ 240,912
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 22,920 $ 11,056
Income taxes payable 311 63
Current portion of long-term debt - 3,562
Current portion of deferred lease inducements 201 201
----------------------------------------------------------------------------
23,432 14,882

Long-term debt 101,368 67,188

Deferred lease inducements 2,074 2,124

Future income taxes 10,111 17,981

Unitholders' equity:
Trust Unit capital 227,347 187,440
Contributed surplus 1,483 1,483
Deficit (47,055) (50,186)
----------------------------------------------------------------------------
181,775 138,737

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$ 318,760 $ 240,912
----------------------------------------------------------------------------
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About Peak Energy Services Trust

Peak Energy Services Trust is a diversified energy services organization operating in western Canada and the mid-west United States of America. Through its various operating divisions, Peak provides drilling and production services to its customers both in the conventional oil and gas industry as well as the oil sands regions of western Canada. The Trust also provides water technology solutions to a variety of customers throughout North America. Peak's units are listed on the Toronto Stock Exchange under the symbol "PES.UN".

Certain information set forth in this document, including management's assessment of Peak's future plans and operations, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond these parties' control, including the impact of general economic conditions, industry conditions, currency fluctuations, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Peak's actual results, performance or achievement 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 that Peak will derive there from.

The TSX have neither approved nor disapproved the information contained herein.

Contact Information

  • Peak Energy Services Trust
    Mr. Curtis W. Whitteron
    President and Chief Executive Officer
    (403) 543-7325
    (403) 543-7335 (FAX)
    or
    Peak Energy Services Trust
    Mr. Monty R. Balderston
    Chief Financial Officer
    (403) 543-7325
    (403) 543-7335 (FAX)
    or
    Peak Energy Services Trust
    Livingston Place, South Tower
    Suite 900, 222 - 3rd Avenue SW
    Calgary, Alberta T2P 0B4