Peak Energy Services Trust
TSX : PES.UN

Peak Energy Services Trust

March 14, 2008 18:40 ET

Peak Energy Services Trust Reports Its Financial Results for the Three and Twelve Months Ended December 31, 2007

CALGARY, ALBERTA--(Marketwire - March 14, 2008) - Peak Energy Services Trust (TSX:PES.UN) -



Financial Highlights

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Three months ended Twelve months ended
December 31 December 31
(in '000 of CAD, ----------------------------------------------------
except otherwise noted) 2007 2006 Change 2007 2006 Change
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Revenue 27,511 30,454 -10% 108,957 127,670 -15%
EBITDA (1) 5,109 6,652 -23% 24,300 37,751 -36%
Per unit - diluted 0.18 0.24 -25% 0.88 1.41 -38%
As a percentage of
revenue 19% 22% 22% 30%
Normalized income (1) 996 3,437 -71% 7,234 22,564 -68%
Per unit - diluted 0.04 0.13 -69% 0.26 0.84 -69%
Net income (loss) 996 (15,646) 106% (7,726) 3,481 -322%
Per unit - diluted 0.04 (0.57) 107% (0.28) 0.13 -315%
Standardized
distributable cash (1) 205 (5,937) 103% 9,675 (12,041) 180%
Per unit - diluted 0.01 (0.22) 105% 0.35 (0.45) 178%
Adjusted distributable
cash (1) 3,126 4,483 -30% 19,688 30,359 -35%
Per unit - diluted 0.11 0.16 -31% 0.71 1.13 -37%
Distributions declared 2,216 7,369 -70% 16,896 28,836 -41%
Per unit 0.080 0.270 -70% 0.610 1.075 -43%
Payout ratios (2) (3)
Standardized
distributable cash 1081% N/C 175% N/C
Adjusted
distributable cash 71% 164% 86% 95%
Drilling rig operating
days (4) 30,841 35,682 -14% 120,961 158,427 -24%
Service rig
utilization (4) 58% 66% -12% 57% 68% -16%
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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) Not calculable ("N/C") as standardized distributable cash was negative.

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


Financial Summary

For fiscal 2007, natural gas prices showed near-term weakness 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, hence depressed natural gas prices have had a significant adverse impact on drilling activity. Furthermore, it is not expected that producers will be motivated to increase their natural gas directed drilling programs until natural gas prices improve significantly, which is not anticipated to occur until the later part of 2008 or early 2009 when supply / demand of natural gas fundamentals in North America support sustained increased pricing. Conversely, oil prices have shown relative strength and this has motivated some producers to focus their efforts towards oil related activities and is partially offsetting the lack of natural gas related activities. Also adversely impacting the Canadian oil industry is the recent 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. Adding further uncertainty to the industry was the mid September 2007 Alberta Royalty Review report and subsequent October 2007 Alberta provincial government announced increases to Alberta royalty rates paid by producers. The increased royalty rates will reduce producers' return on Alberta related investments, adversely impacting expectations of WCSB industry activity levels (historically, approximately 75 percent of Canadian drilling rig operating days have been generated in Alberta).

For the fourth quarter of 2007, Canadian drilling rig operating days were down 14 percent or 4,841 days as compared to the prior year period. Furthermore, Canadian service rig utilization decreased from 66 percent in the fourth quarter of 2006 to 58 percent for the fourth quarter of this year. Peak Energy Services Trust ("Peak" or the "Trust") revenue for the three months ended December 31, 2007, as compared to the prior year period, decreased by $2.9 million or 10 percent to $27.5 million. For the fourth quarter of 2007, as compared to the prior year period, EBITDA decreased $1.5 million or 23 percent to $5.1 million and as a percentage of revenue decreased to 19 percent, while adjusted distributable cash decreased $1.4 million or 30 percent to $3.1 million. Meanwhile, Peak recorded a normalized income of $1.0 million ($0.04 per Unit diluted) for the fourth quarter of 2007, a decrease of $2.4 million or 71 percent over the fourth quarter of 2006. Lastly, the Trust recorded a net income and comprehensive income of $1.0 million ($0.04 per Unit diluted) for the three months ended December 31, 2007, an increase of $16.6 million or 106 percent over the prior year period.

For fiscal 2007, Canadian drilling rig operating days were 120,961 days, falling short of the fiscal 2006 total of 158,427 days which translated into a decrease in drilling activity of 24 percent. Meanwhile, Canadian service rig activity decreased 16 percent from 68 percent in fiscal 2006 to 57 percent in fiscal 2007. Peak's revenue for the year ended December 31, 2007 as compared to the prior year period, decreased by $18.7 million or 15 percent to $109.0 million. EBITDA decreased $13.5 million or 36 percent to $24.3 million, while adjusted distributable cash decreased $10.7 million or 35 percent to $19.7 million. The Trust recorded normalized income of $7.2 million ($0.26 per Unit diluted) a decrease of $15.3 million or 68 percent and a net loss and comprehensive loss of $7.7 million (loss of $0.28 per Unit diluted) a decrease of $11.2 million or 322 percent.

Distributions declared to Unitholders were $16.9 million (2006 - $28.8 million) or $0.610 per Unit (2006 - $1.075 per Unit), which represented 86 percent (2006 - 95 percent) of adjusted distributable cash for the year ended December 31, 2007.

The Trust's balance sheet remains strong with working capital (defined as current assets less current liabilities excluding current portion of long-term debt) of $18.8 million, net debt (defined as interest bearing debt less cash and cash equivalents) of $69.1 million on tangible assets of $202.0 million and Unitholders' equity of $138.7 million at December 31, 2007.

On December 19, 2007, the Trust entered into an agreement with Wellco Energy Services Trust ("Wellco") to merge the two entities. As previously announced, the merger was completed effective March 12, 2008. Wellco provides the following products and services that complement the product offering that Peak already offers:

- Camps and catering - the provision of high-efficiency accommodations for oilfield personnel, including full-service on-site catering, water supply and housekeeping;

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

- Environmental services - the rental of wastewater management systems for the processing of grey and black water effluent in remote locations, wastewater containment systems and garbage disposal systems;

- Surface rentals - the rental of a suite of drilling and production related assets; and

- Water technology services - the supply of water and wastewater treatment design and fabrication services.

Revenue

For the three months ended December 31, 2007, Peak generated revenue of $27.5 million compared to $30.5 million for the same period of 2006, representing a decrease of 10 percent compared to a decrease of 14 percent in Canadian drilling rig operating days and a 12 percent decrease in Canadian service rig activity over this time period. Total Canadian drilling rig operating days for the fourth quarter of fiscal 2007 were 30,841 days compared to 35,682 days for the same period of 2006. Meanwhile Canadian service rig utilization was 58 percent for the three months ended December 31, 2007, compared to 66 percent for the prior year period.

For the year ended December 31, 2007, Peak generated revenue of $109.0 million compared to $127.7 million for the prior year representing a decrease of 15 percent compared to a 24 percent decrease in Canadian drilling rig operating days and a 16 percent decrease in Canadian service rig activity over this time period. Total Canadian drilling rig operating days for fiscal 2007 were 120,961 days compared to 158,427 days for fiscal 2006. Meanwhile Canadian service rig utilization was 57 percent for fiscal 2007, compared to 68 percent for the prior period.

Drilling Services

In the fourth quarter, Drilling Services revenue decreased by $0.5 million or 3 percent as it generated $17.0 million in revenue or 62 percent of the Trust's total revenue for the three months ended December 31, 2007, compared to $17.4 million or 57 percent for the prior year period. Peak's Drilling Services operating segment faired well against the fourth quarter Canadian industry decrease of 14 percent in drilling rig operating days.

For fiscal 2007, Drilling Services revenue decreased by $12.7 million or 16 percent as it generated $64.9 million in revenue or 60 percent of the Trust's total revenue for the year ended December 31, 2007, compared to $77.6 million or 61 percent for the prior year. The decrease in revenue was better than the 24 percent decrease in Canadian drilling rig operating days.

The primary reasons for Peak's fourth quarter and annual revenue variance not being as drastic as the Canadian industry activity level decline, were the significant net capital expenditures made throughout fiscal 2006 to expand Peak's drilling equipment product offering more than offsetting the decrease in overall equipment utilization in Canada and a significant increase in the utility of assets deployed in the mid-west United States of America (approximately 16 percent of fiscal 2007 Drilling Services revenue was derived from the United States of America).

Production Services

In the fourth quarter, Production Services revenue decreased $2.5 million or 19 percent as it contributed $10.5 million in revenue or 38 percent of the Trust's total revenue for the three months ended December 31, 2007, compared to $13.0 million or 43 percent for the prior year period. Peak's Production Services operating segment performance was weaker than the fourth quarter industry decrease of 12 percent in Canadian service rig activity. There were a number of factors partially offsetting each other which ultimately resulted in the net decrease. Consistent with annual revenues significant net capital expenditures made throughout fiscal 2006 to expand Peak's production equipment product offering helped offset the decrease in overall equipment utilization. However, pricing and utility within the Trust's Wireline product line experienced significant downward pressure as this segment of the industry has been significantly over built for current industry activity levels.

For fiscal 2007, Production Services revenue decreased by $6.0 million or 12 percent as it contributed $44.1 million in revenue or 40 percent of the Trust's total revenue for the year ended December 31, 2007, compared to $50.1 million or 39 percent for the prior year. Consistent with the Drilling Services' revenue variance, the decrease was not as drastic as the 16 percent decrease in Canadian service rig activity as significant net capital expenditures made throughout fiscal 2006 to expand Peak's production equipment product offering helped offset the decrease in overall equipment utilization.

Expenses

Operating expenses - For the three months ended December 31, 2007, operating expenses were lower than the prior year period by $2.3 million or 13 percent. As a percentage of revenue, operating expenses were 56 percent compared to the prior year period of 58 percent. In the fourth quarter of 2006, due to higher expected industry levels not materializing, management actively responded by reducing personnel by approximately 10 percent in early December 2006. This resulted in an additional operating expense of approximately $0.7 million relating to severance being incurred in the fourth quarter of fiscal 2006. Excluding this cost operating expenses, as a percentage of revenue, were consistent quarter-over-quarter.

For the year ended December 31, 2007, operating expenses were lower than the prior year by $7.1 million or 11 percent. As a percentage of revenue, operating expenses were 54 percent compared to the prior year of 52 percent. The primary drivers of the increase in operating expenses as a percentage of revenue were:

- the lower revenue performance in fiscal 2007 not offsetting the relatively high fixed portion of Peak's operating expenses;

- an increase in employee related compensation costs, as a percentage of revenue, incurred as a result of the western Canada (especially Alberta) wide increase in demand for skilled employees placing upward pressure on these costs;

- an increase in vehicle and related costs, as a percentage of revenue, incurred; and

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

Partially offsetting the net increase in operating expenses, as a percentage of revenue, were lower repairs and maintenance ("R&M") costs. Management implemented a selective R&M program, whereby equipment identified as not likely to be utilized in the near-term, due to lower industry activity levels, are having their required R&M deferred until the equipment is expected to be utilized.

General and administrative expenses - For the fourth quarter of fiscal 2007, G&A were $0.9 million or 14 percent higher than the prior year period. As a percentage of revenue, G&A increased to 26 percent for the current year period as compared to 20 percent for the prior year period. The primary reason for the quarter-over-quarter net dollar increase was increased facility costs (rent, utilities and property taxes) resulting from the recent build out of a "super shop" in Red Deer, Alberta, new shops in Slave Lake, Alberta and Estevan, Saskatchewan and head office in Calgary, Alberta to support Peak's operations.

For fiscal 2007, general and administrative expenses (G&A) were $1.8 million or 8 percent higher than the prior year. As a percentage of revenue, G&A increased to 24 percent for the current year as compared to 19 percent for the prior year. In addition to the above fourth quarter factor, the primary contributors to the net dollar increase were:

- increased employee related compensation costs, as a percentage of revenue, incurred as a result of the western Canada (especially Alberta) wide increase in demand for skilled employees placing upward pressure on these costs; and

- increased financing costs related to Peak's financing facilities.

Partially offsetting the fiscal 2007 increase in G&A were:

- lower advertising and promotion costs, as management focused on reducing these costs to be consistent with revenue levels being achieved;

- lower professional consulting fees associated with the Trust's regulatory compliance activities, as management has employed more "in-house" expertise to better manage these costs; and

- lower employee relations costs, as the second quarter of fiscal 2006 had certain nonrecurring costs associated with celebrating Peak's 10th anniversary.

Earnings before interest, taxes, depreciation and amortization ("EBITDA") - EBITDA decreased $1.5 million or 23 percent to $5.1 million for the three months ended December 31, 2007. EBITDA as a percentage of revenue, was 19 percent for the current quarter as compared to 22 percent for same quarter of fiscal 2006. The primary drivers of the quarter-over-quarter decrease are detailed above.

EBITDA decreased $13.5 million or 36 percent to $24.3 million for the year ended December 31, 2007. EBITDA as a percentage of revenue, was 22 percent for the current fiscal period as compared to 30 percent for fiscal 2006. The primary drivers of the year-over-year decrease are detailed above.

Depreciation and amortization expenses - For the three months ended December 31, 2007, depreciation and amortization expenses were higher than the prior year period by $0.8 million or 23 percent. As compared to the prior year period, the primary driver of the increase in the expense was the significant capital expenditures made throughout the later part of fiscal 2006, significantly increasing the asset base to be depreciated and more than offset the overall decrease in utilization based depreciation of certain Peak equipment.

For the year ended December 31, 2007, depreciation and amortization expenses were slightly lower than the prior year period by $0.4 million or 2 percent. As compared to the prior year period, the Trust incurred lower amortization expenses of $0.3 million on intangible assets consisting of customer relationships, non-compete covenants and patents associated with certain previous strategic business acquisitions being fully amortized. In addition, the significant capital expenditures made throughout the later part of fiscal 2006, significantly increased the asset base to be depreciated and more than offset the overall decrease in utilization based depreciation of certain Peak equipment.

Interest on long-term debt expense - Interest on long-term debt expense was $1.0 million for the three months ended December 31, 2007, which was relatively consistent with the same period of fiscal 2006. Interest on long-term debt expense increased to $4.4 million for the year ended December 31, 2007, representing an increase of $1.4 million or 49 percent over 2006. The interest cost (expressed as a percentage of the average long-term debt outstanding during the period) was 6.3 percent for fiscal 2007, compared to 6.3 percent for fiscal 2006. The year-over-year consistency in the percentage was representative of the Trust's debt structure remaining consistent with a combination of fixed and floating rate structure and a relative consistency in the bank prime lending rate.

Foreign exchange loss - For the three and twelve months ended December 31, 2007, the Trust incurred a foreign exchange loss of $0.7 million. The loss primarily related to the change in value, measured in Canadian dollars, of working capital within Peak's United States of America operations due to the significant appreciation in value of the Canadian dollar against the American dollar.

Impairment loss on goodwill - Goodwill is recorded at cost and is not amortized. The annual goodwill impairment test was performed during the third quarter of fiscal 2007. The results determined that the carrying amount of the Production Services operating segment assets exceeded their fair value. The conditions which precipitated the impairment of goodwill were:

- the mid September 2007 Alberta Royalty Review report and subsequent late October 2007 Alberta provincial government announced increases to Alberta royalty rates paid by producers that will reduce producers' return on Alberta related investments, adversely impacting expectations of WCSB industry activity levels;

- near-term commodity price weakness of natural gas negatively impacting expectations of industry activity levels;

- recent changes to tax laws and rates for trusts commencing in 2011 reducing after tax cash flows the Trust; and

- upward cost pressures experienced by the industry adversely impacting operating margins.

The culmination of these conditions has decreased the fair value of the Trust, which is reflected in the market value of the Trust at September 30, 2007. Accordingly, a goodwill impairment loss of $15.6 million was recognized in the Production Services operating segment as an impairment loss on goodwill.

Loss on sale of equipment - For the three months ended December 31, 2007, the loss on sale of equipment amounted to $0.9 million compared to a loss of $0.4 million for the prior year period. For the year ended December 31, 2007, the loss on sale of equipment amounted to $2.2 million compared to a loss of $0.8 million for the prior year. The losses were the result of the Trust's ongoing asset rationalization program, whereby equipment identified during the period not generating an appropriate rate of return was disposed of and the proceeds were reinvested in equipment that is expected to generate improved returns on invested capital.

Provision for income taxes - The current tax recovery of $0.2 million and future tax recovery of $2.6 million, resulted in a net income tax recovery of $2.8 million and an effective income tax rate of 154 percent for the three months ended December 31, 2007. The current tax expense of $0.6 million and future tax recovery of $8.7 million, resulted in a net income tax recovery of $8.1 million and an effective income tax rate of 51 percent for the year ended December 31, 2007.

The effective income tax rate differs significantly from the statutory corporate rate of 32 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. Factors contributing to the significant current year income tax recovery were:

- the $5.3 million reduction as a result of the taxable income sheltering through distributions made to unitholders;

- a $2.1 million reduction of the future income tax liability to reflect the impact of the federal government's enactment of reductions in the general corporate tax rates to be phased in over the next five years; and

- the $4.4 million increase resulting from the non-deductible tax impact of the impairment loss on goodwill.

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 (loss)

Normalized income - For the fourth quarter of fiscal 2007, normalized income for impairment losses on goodwill and equipment was $1.0 million ($0.04 per Unit diluted) which represented a 71 percent decrease from the prior year period amount of $3.4 million ($0.13 per Unit diluted). For the year ended December 31, 2007, normalized income for impairment loss on goodwill and equipment was $7.2 million ($0.26 per Unit diluted) which represented a 68 percent decrease from the prior year amount of $22.6 million ($0.84 per Unit diluted).

Net income (loss) and comprehensive income (loss)- For the three months ended December 31, 2007, net income and comprehensive income increased 106 percent to a net income and comprehensive income of $1.0 million ($0.04 per Unit diluted) compared to a net loss and comprehensive loss of $15.6 million (loss of $0.57 per Unit diluted) for the prior year period. For the year ended December 31, 2007, net income and comprehensive income decreased 322 percent to a loss of $7.7 million (a loss of $0.28 per Unit diluted) compared to net income and comprehensive income of $3.5 million ($0.13 per Unit diluted) for the prior year.

Balance Sheet

Total assets decreased by $30.8 million or 11 percent from $271.7 million at December 31, 2006 to $240.9 million at December 31, 2007. The change was the result of the $17.2 million purchase of property and equipment, offset by an impairment loss on goodwill of $15.6 million, depreciation and amortization of $17.3 million, a $6.5 million net decrease in current assets, $8.0 million in disposals of property and equipment and a net decrease in deferred financing costs of $0.6 million.

Total liabilities decreased $6.8 million or 6 percent from $109.0 million at December 31, 2006 to $102.2 million at December 31, 2007. The change was the result of the $3.0 million net increase in long-term debt (including current portion of long-term debt) and an increase in deferred lease inducements of $2.1 million offset by the $3.0 million net decrease in current liabilities (exclusive of the current portion of long-term debt) and the $8.9 million net decrease in future income taxes.

Unitholders' equity decreased $24.0 million or 15 percent from $162.7 million at December 31, 2006 to $138.7 million at December 31, 2007. The change was the result of the issuance of Trust Units related to Peak's Distribution Reinvestment Plan ("DRIP") and Premium DRIP in the amount of $1.0 million offset by a net loss of $7.7 million, distributions to Unitholders of $16.9 million and a $0.4 million change in method of accounting for deferred financing costs.

Cash Flow

For fiscal 2007, net cash provided by operating activities was $26.8 million (2006 - $38.2 million). Net cash provided by operating activities are heavily dependent on the generation of sufficient income before non-cash items. As such, changes in the level of industry drilling activities will significantly affect net cash provided by operating activities.

Net cash used in investing activities for fiscal 2007 was $13.6 million (2006 - $48.7 million). The activities were the result of:

- $11.3 million of net equipment purchases including proceeds on sale of equipment of $5.8 million; and

- a $2.3 million net working capital decrease in accounts payable and accruals.

Net cash used in financing activities for the year ended December 31, 2007 was $15.4 million (2006 - net cash provided by financing activities was $8.5 million). The activities were the result of:

- an increase in long-term debt of $3.0 million used to fund internal capital expenditures;

- the issuance of Trust Units in the amount of $1.0 million associated with the Trust's DRIP and Premium DRIP; and

- the payment of $19.4 million in Trust distributions to Unitholders.

Capital Expenditure Program

During fiscal 2007, the Trust expended a total of $17.2 million on gross asset purchases and $11.3 million on net asset purchases (includes business acquisitions and purchase of equipment, net of proceeds on sale of equipment) compared to $50.2 million and $46.4 million, respectively, for the prior year.



By operating segment, the expenditures were:

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Year ended December 31, 2007 Drilling Production
(in '000 of CAD) Services Services Total
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Growth 718 2,832 3,550
Maintenance 1,092 476 1,568
Infrastructure - - 12,034
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1,810 3,308 17,152
Proceeds on sale of equipment (5,826)
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11,326
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Peak's capital expenditure program for fiscal 2008 is not very significant as compared to prior years. The primary driver of the small capital expenditure program is that it is expected industry activity levels will be lower than fiscal 2007 and this does not warrant building additional revenue generating assets that will further dilute existing asset utility. Management expects to expend the following for fiscal 2008:



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Fiscal 2008 capital expenditure program Drilling Production
(in '000 of CAD) Services Services Total
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Growth 477 1,022 1,499
Maintenance 2,044 834 2,878
Infrastructure - - 1,219
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2,521 1,856 5,596
Wellco capital expenditure program
(subsequent to merger) 4,423
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10,019
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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. On December 19, 2007, the Trust announced its intentions to merge with Wellco. The merger was completed effective March 12, 2008. The merger is effectively a business acquisition of Wellco by Peak, however is not included in the above fiscal 2008 capital expenditure program.

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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Year ended December 31
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(in '000 of CAD, except otherwise noted) 2007 2006
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Cash flow from operating activities 26,829 38,152
Less adjustments for:
Business acquisitions - (4,106)
Purchase of equipment (17,154) (46,087)
Distribution restrictions caused by
financial covenant - -
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Standardized distributable cash 9,675 (12,041)
Distributions declared to Unitholders (16,896) (28,836)
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Distribution deficit (7,221) (40,877)
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Payout ratio of standardized
distributable cash (1) 175% N/C
Standardized distributable cash
Per unit - basic 0.35 (0.45)
Per unit - diluted 0.35 (0.45)
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(1) Not calculable ("N/C") as standardized distributable cash was negative.


Standardized distributable cash for the year ended December 31, 2007 was $9.7 million or $0.35 per Unit diluted (2006 - negative $12.0 million or negative $0.45 per Unit diluted). Meanwhile distributions declared for fiscal 2007 were $16.9 million (2006 - $28.8 million). The payout ratio of standardized distributable cash was 175 percent (2006 - not calculable as standardized distributable cash was negative). The $7.2 million distribution deficit between standardized distributable cash and distributions declared was primarily funded by $5.8 million in proceeds on the sale of equipment and issuance of $3.0 million in long-term debt. 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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Year ended December 31
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(in '000 of CAD, except otherwise noted) 2007 2006
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Standardized distributable cash 9,675 (12,041)
Adjusted for:
Business acquisitions - 4,106
Growth capital expenditures 3,550 33,888
Infrastructure capital expenditures 12,034 5,617
Seasonal change in non-cash
working capital (5,571) (1,211)
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Adjusted distributable cash 19,688 30,359
Distributions declared to Unitholders (16,896) (28,836)
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Distribution surplus 2,792 1,523
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Payout ratio of adjusted
distributable cash 86% 95%
Adjusted distributable cash
Per unit - basic 0.71 1.13
Per unit - diluted 0.71 1.13
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The adjusted distributable cash payout ratio was 86 percent (2006 - 95 percent) for the year ended December 31, 2007. The distribution surplus between adjusted distributable cash and distributions declared was $2.8 million (2006 - $1.5 million) for fiscal 2007 and was used for funding growth and infrastructure capital expenditures. 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. The current adjusted distributable cash payout ratio is higher than management's long-term objective of 65 to 75 percent, due to the current downturn in industry activity levels adversely impacting the Trust's financial results. Management and the Board of Directors closely monitor the adjusted distributable cash payout ratio and will make adjustments to the monthly distributions declared, if any, based on its expectations of the Trust's forecasted financial performance. It should be noted that there can be no absolute assurances made that the Trust will make any future distributions.

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.

Subsequent Events

Merger - On December 19, 2007, the Trust entered into an agreement (the "Combination Agreement") with Wellco Energy Services Trust ("Wellco") to merge the two entities. Under the terms of the Combination Agreement, 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.

Management believes the Arrangement will provide the following strategic benefits:

- an increased enterprise value will enhance liquidity, provide a more competitive cost of capital and improve financing flexibility for future growth opportunities;

- a strong and experienced management team;

- 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; and

- the Arrangement is accretive to all unitholders of the combined entity.

Wellco provides the following products and services:

- Camps and catering - the provision of high-efficiency accommodations for oilfield personnel, including full-service on-site catering, water supply and housekeeping;

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

- Environmental services - the rental of wastewater management systems for the processing of grey and black water effluent in remote locations, wastewater containment systems and garbage disposal systems;

- Surface rentals - the rental of a suite of drilling and production related assets; and

- Water technology services - the supply of water and wastewater treatment design and fabrication services.

On March 6, 2008, the Arrangement was approved by 99 percent of the holders of Wellco units and the holders of Wellco options voting as a single class. The Arrangement was approved by all necessary parties on March 12, 2008.

Long-term Debt - As part of the Arrangement, 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 existing loan facility and Peak's current 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. After completion of the Arrangement, a further $25.0 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 annually renewable, at the lender's option, for an additional 364 day period. If not renewed, the loan is repayable over an amortized period of three years.

Unitholders' Equity - On February 28, 2008, the Trust secured a commitment for a private placement ("Private Placement") of Peak Units at a price of $2.54 per unit generating gross proceeds of $10.5 million and net proceeds of $10.0 million. The net proceeds will be used to reduce the long-term debt of the Trust. 4,133,859 Trust Units were issued upon closing on March 12, 2008. This transaction was completed through Grafton Capital Corporation ("GCC") and the Trust will pay finder's fees of $0.5 million to GCC. A member of PESL's Board of Directors is a director and officer of GCC. The fees to be paid were evaluated and considered by management and PESL's Board of Directors, exclusive of the GCC director and officer, to be at fair market value.



The following is the number of Trust Units outstanding after the closing of
the Arrangement and Private Placement:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number of Units
-----------------
Balance, December 31, 2007 27,698,386
Units issued on closing of Wellco Arrangement 16,556,851
Units issued on closing of Private Placement 4,133,859
----------------------------------------------------------------------------
Balance, March 14, 2008 48,389,096
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 December 31, 2007.

Outlook

Despite the short-term weakness currently being experienced in our industry, Peak continues to believe that the outlook for the oil and gas industry in North America remains very positive for the longer term. Management concurs with industry analysts and their consensus estimates that more robust drilling activity levels in Canada are expected for the latter stages of 2008 or early 2009. For the first time in recent history natural gas inventory levels are trending down which could be a harbinger for stronger natural gas pricing and higher levels of drilling activity by the latter stages of 2008. The early stages of 2008 have materialized much as expected with drilling activity picking up significantly from the low levels of activity that were experienced during the fourth quarter of 2007. That being said, activity levels remain approximately 5 to 10 percent below that of the prior year period. Management concurs with consensus estimates that drilling activity for the year will be down approximately 10 to 15 percent from the activity levels experienced in 2007 due to the lingering affects of weak natural gas pricing created in part by the overhang in natural gas inventory.

As previously stated; Peak's management team has a proven track record of growing its business at the low point in the business cycle and realizing value at the high points. In keeping with this statement, management believes that the Trust remains in a longer term position of strength with the significant growth capital it has expended over the previous two years giving it a significantly larger base of revenue generating assets to be deployed. Peak has also realized on significant growth in its U.S. operations during 2007 where it generated approximately 16 percent of the Trust's 2007 drilling revenue base. Management expects to see the continuation of this growth profile during the 2008 fiscal year, including the high probability of expansion in to a new geographic region outside of our current operation in Rock Springs, Wyoming. The above statement is further evidenced by the Trust's significant December 19, 2007 announcement that it had entered into an agreement with Wellco to merge the two entities. In an effort to conserve cash flow and in concert with the press release outlining the merger, both entities also announced the suspension of all distributions being paid until further notice. 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 an impending return to higher activity levels. The merged entity's increased enterprise value will enhance liquidity, provide a more competitive cost of capital and improve financing flexibility that will allow it to better compete for larger and higher quality growth opportunities. The merger closed on March 12, 2008 with Peak's senior management being the successor team.

During fiscal 2008, Peak will continue to focus on its internal efficiencies and actively manage its cost structure as it has in the past; management will also execute on its plan for the successful integration of Wellco's operation. The Trust plans to stay the course on its "best practices" approach to creating operational efficiencies in all of its products offerings which will ultimately drive profitability and enhanced returns for its Unitholders. In keeping with management's belief that 2008 will be significantly slower on a year-over-year basis in terms of drilling activity, the Trust has budgeted for net capital expenditures of just $10.0 million during the year; of this amount $4.4 million is from Wellco's capital expenditure plan in addition to Peak's original capital expenditure plan of $1.5 million in growth, $1.2 million for infrastructure and $2.9 million for maintenance.

As has been the trend in recent years, 2007 was another year wrought with significant challenges as the oil and gas industry in western Canada continued to react negatively to weakened natural gas pricing along with fiscal policy changes imposed by both our federal and provincial governments. Having said this, the impending merger with Wellco along with the recent trends in natural gas inventory possibly signaling a return to higher levels of drilling activity in the latter stages of 2008 will no doubt make this a very exciting year for Peak and all of its stakeholders.

Non-GAAP Measures

EBITDA is 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.

Normalized income is defined as net income before the after-tax impact of impairment loss on goodwill and equipment. Normalized income is not a recognized measure under Canadian GAAP. Management believes, in addition to net income, normalized income is a useful supplemental measure as it provides an indication of income before unusual items. Readers should be cautioned that normalized 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 normalized income, may differ from other companies and, accordingly, normalized 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.

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 Monday, March 17, 2008. To participate, please dial 1-866-898-9626 or 1-416-340-2216. 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 Monday, March 31, 2008 by dialing 1-800-4083053 or 1-416-695-5800, verbal pass code 3255236.

Financial Results

The following selected financial information summarizes Peak's consolidated financial results for the three and twelve months ended December 31, 2007. Peak's annual report, including the consolidated financial statements and management's discussion and analysis for the years ended December 31, 2007 and 2006 will be available at www.sedar.com on or about March 25, 2008.



CONSOLIDATED STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME (LOSS) AND
DEFICIT
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------
(in thousands of CAD, except per
Unit amounts) (unaudited) 2007 2006 2007 2006
----------------------------------------------------------------------------

Revenue $ 27,511 $ 30,454 $108,957 $127,670

Expenses:
Operating 15,335 17,628 59,044 66,107
General and administrative 7,067 6,174 25,613 23,812
Depreciation and amortization 4,321 3,515 17,285 17,721
Interest on long-term debt 996 966 4,419 2,973
Foreign exchange loss 723 - 723 -
----------------------------------------------------------------------------
28,442 28,283 107,084 110,613

----------------------------------------------------------------------------
Income (loss) before other items (931) 2,171 1,873 17,057

Other items:
Impairment loss on goodwill - 19,504 15,559 19,504
Loss on sale of equipment 916 448 2,177 838
Impairment loss on equipment - 900 - 900
----------------------------------------------------------------------------
916 20,852 17,736 21,242

----------------------------------------------------------------------------
Loss before income taxes and
non-controlling interest (1,847) (18,681) (15,863) (4,185)

Provision for income taxes:
Current (233) 77 604 321
Future (reduction) (2,610) (3,112) (8,741) (8,057)
----------------------------------------------------------------------------
(2,843) (3,035) (8,137) (7,736)

----------------------------------------------------------------------------
Income (loss) before
non-controlling interest 996 (15,646) (7,726) 3,551

Income attributable to
non-controlling interest - - - 70
----------------------------------------------------------------------------

Net income (loss) and comprehensive
income (loss) 996 (15,646) (7,726) 3,481

Retained earnings (deficit),
beginning of period

As previously reported (31,675) (2,177) (25,192) 163

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

As restated (31,675) (2,177) (25,564) 163

Distributions declared to
Unitholders (6,094) (7,369) (16,896) (28,836)

----------------------------------------------------------------------------
Deficit, end of period $(36,773) $(25,192) $(50,186) $(25,192)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Earnings (loss) per Unit:
Basic $ 0.04 $ (0.59) $ (0.28) $ 0.13
Diluted $ 0.04 $ (0.59) $ (0.28) $ 0.13
----------------------------------------------------------------------------
----------------------------------------------------------------------------



CONSOLIDATED STATEMENTS OF CASH FLOWS

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------
(in thousands of CAD) (unaudited) 2007 2006 2007 2006
----------------------------------------------------------------------------

Operating activities:
Net income (loss) $ 996 $(15,646) $ (7,726) $ 3,481
Add (deduct) items not affecting
cash:
Amortization of deferred financing
costs - 70 - 247
Depreciation and amortization 4,321 3,515 17,285 17,721
Impairment loss on goodwill - 19,504 15,559 19,504
Loss on sale of equipment 916 448 2,177 838
Impairment loss on equipment - 900 - 900
Unrealized foreign exchange loss 409 - 409 -
Future income taxes (reduction) (2,610) (3,112) (8,741) (8,057)
Income attributable to
non-controlling interest - - - 70
----------------------------------------------------------------------------

4,032 5,679 18,963 34,704

Changes in non-cash working capital
items (1,604) 652 7,866 3,448
----------------------------------------------------------------------------

2,428 6,331 26,829 38,152

Investing activities:
Business acquisition - - - (4,106)
Purchase of equipment (2,223) (12,268) (17,154) (46,087)
Proceeds on sale of equipment 432 795 5,826 3,764
----------------------------------------------------------------------------

(1,791) (11,473) (11,328) (46,429)

Changes in non-cash working capital
items 367 (648) (2,295) (2,237)
----------------------------------------------------------------------------

(1,424) (12,121) (13,623) (48,666)

Financing activities:
Increase in deferred financing costs - - - (168)
Increase in long-term debt - 10,000 3,000 30,000
Repayment of obligations under
capital lease - (14) (103) (56)
Issue of Trust Units, net of costs - 2,728 1,041 7,383
Distributions paid to Unitholders (3,324) (7,330) (19,368) (28,615)
----------------------------------------------------------------------------
(3,324) 5,384 (15,430) 8,544

Foreign exchange loss on cash held in
foreign currency (15) - (15) -

Decrease in cash and cash equivalents (2,335) (406) (2,239) (1,970)
Cash and cash equivalents, beginning
of period 3,952 4,262 3,856 5,826
----------------------------------------------------------------------------

Cash and cash equivalents, end of
period $ 1,617 $ 3,856 $ 1,617 $ 3,856
----------------------------------------------------------------------------
----------------------------------------------------------------------------



CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, December 31,
(in thousands of CAD) (unaudited) 2007 2006
----------------------------------------------------------------------------

ASSETS
Current assets:
Cash and cash equivalents $ 1,617 $ 3,856
Accounts receivable 27,041 31,652
Income taxes recoverable - 283
Prepaid expenses 1,477 872
----------------------------------------------------------------------------
30,135 36,663

Property and equipment 201,980 207,849

Deferred financing costs - 547

Intangibles 8,797 11,063

Goodwill - 15,559

----------------------------------------------------------------------------
$ 240,912 $ 271,681
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities $ 11,056 $ 11,769
Distributions payable - 2,472
Income taxes payable 63 -
Current portion of long-term debt 3,562 3,213
Current portion of deferred lease
inducements 201 -
Current portion of obligations under
capital lease - 56
----------------------------------------------------------------------------
14,882 17,510

Long-term debt 67,188 64,537

Deferred lease inducements 2,124 -

Obligations under capital lease - 47

Future income tax 17,981 26,897

Unitholders' equity:
Trust Unit capital 187,440 186,399
Contributed surplus 1,483 1,483
Deficit (50,186) (25,192)
----------------------------------------------------------------------------
138,737 162,690

----------------------------------------------------------------------------
$ 240,912 $ 271,681
----------------------------------------------------------------------------
----------------------------------------------------------------------------


About Peak Energy Services Trust

Peak Energy Services Trust is a diversified energy services organization providing oilfield equipment and related services to the energy industry throughout western Canada and the mid-west United States of America. Peak Energy Services Trust 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. Peak disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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. Matthew J. Huber
    Executive Vice President
    (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