Phoenix Oilfield Hauling Inc.
TSX VENTURE : PHN

Phoenix Oilfield Hauling Inc.

April 30, 2007 13:41 ET

Phoenix Oilfield Hauling Inc. Announces Financial Results for the Fourth Quarter and Year Ended December 31, 2006

NISKU, ALBERTA--(CCNMatthews - April 30, 2007) -

THIS PRESS RELEASE IS NOT TO BE DISTRIBUTED TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES. ANY FAILURE TO COMPLY WITH THIS RESTRICTION MAY CONSTITUTE A VIOLATION OF U.S. SECURITIES LAW.

Phoenix Oilfield Hauling Inc. (TSX VENTURE:PHN) is pleased to announce its financial and operating results for the fourth quarter and the year ended December 31, 2006.

"Reader Advisory

This news release contains certain forward-looking statements, which include assumptions with respect to (i) future operations; (ii) future economic conditions; (iii) future capital expenditures; and (iv) cash flow. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. All such forward looking statements involve substantial known and unknown risks and uncertainties, certain of which are beyond the Company's control. Such risks and uncertainties include, without limitation, risks associated with oil and gas exploration, development, exploitation, production, loss of markets, volatility of commodity prices, currency fluctuations, environmental risks, competition from other companies, ability to access sufficient capital from internal and external sources, the impact of general economic conditions in Canada, the United States and overseas, industry conditions, changes in laws and regulations (including the adoption of new environmental laws and regulations) and changes in how they are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. The Company's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceeds, that the Corporation will derive therefrom. Readers are cautioned that the foregoing list of factors is not exhaustive. All subsequent forward-looking statements, whether written or oral, attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Furthermore, the forward-looking statements contained in this news release are made as at the date of this news release and the Corporation does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws."

Financial Summary

The following table summarizes selected financial data for:



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Five
months
Year ended ended Year ended
(In thousands of dollars, December 31, December 31, July 31,
except per share data) 2006 2005 2005
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Revenue $ 25,063 $ 8,168 $ 12,595
Operating expenses 14,374 4,730 7,995
Operating expenses, % of revenue 57.4% 57.9% 63.5%
Selling, general and administrative
expenses 3,604 838 3,369
Gain on disposal of assets (65) (46) (10)
EBITDA (1) 7,150 2,646 1,241
EBITDA % 28.5% 32.4% 9.9%
Net income 3,420 1,326 390
Earnings per share - basic 0.09 0.10 0.03
Earnings per share - diluted 0.09 0.10 0.03
Funds flow from operations $ 1,224 $ 1,027 $ 1,621
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December 31, December 31, July 31,
(In thousands of dollars) 2006 2005 2005
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Total assets $ 56,067 $ 11,129 $ 7,609
Long-term financial liabilities 1,861 2,191 1,967
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(1) EBITDA is not a recognized measure under GAAP and consequently does not
have a standard prescribed meaning. EBITDA is equal to Net Income
adjusted to exclude amortization expense, depreciation expense, interest
expense, and income taxes. EBITDA includes stock based compensation
expense. EBITDA is commonly used by investors and financial analysts in
the oilfield services industry as a supplementary non-GAAP financial
measure in order to evaluate a company's operating performance.
Phoenix's method of calculating EBITDA may differ from other companies,
and accordingly, it may not be comparable to a similarly described
measure used by another company.

EBITDA (1) is calculated by the Company as follows:

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Five
months
Year ended ended Year ended
December 31, December 31, July 31,
(In thousands of dollars) 2006 2005 2005
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Net income $ 3,420 $ 1,326 $ 390
Add (Deduct):
Depreciation 1,561 355 591
Interest on long-term debt 392 98 134
Other interest (income) (19) 8 57
Amortization of intangible assets 317 - -
Income taxes 1,479 859 69
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EBITDA (1) $ 7,150 $ 2,646 $ 1,241
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Significant Developments

Private Placement Financing completed May 5, 2006

In May 2006, the Company completed a brokered private placement financing for the issuance of 25.0 million common shares at a price of $1.00. The funds were raised to complete the acquisition of the Phoenix Group and for general working capital purposes. Working capital was subsequently used, in part, to fund the cash portion of the acquisition of Robin's.

Acquisition of Robin's

On June 12, 2006 the Company acquired all of the issued and outstanding shares of Robin's Oilfield Hauling and Hot Shot Service Ltd. ("Robin's"). The aggregate purchase price was approximately $21.3 million including approximately $11.8 million of cash and approximately 9.5 million common shares valued at $9.5 million. The value of the 9.5 million common shares issued was determined based on the market price of the Company's common shares before and after the terms of the acquisition were agreed to and announced. The results of operations of Robin's have been included in the annual consolidated financial statements from June 12, 2006. Robin's provides oilfield trucking and other related services to the oil and gas industry in Western Canada.

Acquisition of Ability

On October 27, 2006 the Company acquired the operating assets of Ability Hauling Ltd. ("Ability"), a company engaged in the contract transportation of products, materials, supplies and equipment required for the exploration, development and production of petroleum resources. The aggregate purchase price was approximately $11.3 million including approximately $6.5 million of cash and 5 million common shares valued at $4.8 million. The value of the 5 million common shares issued was determined based on the market price of the Company's common shares before and after the terms of the acquisition were agreed to and announced. The results of operations of Ability have been included in the consolidated financial statements from the acquisition date.

Seasonality of Business

The Company's earnings follow the seasonal activity pattern of western Canada's oil and gas industry. The oil and gas industry in western Canada is typically more active during the winter months as the movement of heavy equipment over frozen ground is generally easier. During the spring the effect of road bans that limit load weights and wet weather ("spring break-up") can adversely impact the Company's ability to generate revenue. Rain through the spring, summer and fall also reduces activity levels because of the weather's effect on ground conditions and consequently its load bearing capacity.

Results of Operations for the Year Ended December 31, 2006

The annual consolidated financial statements have been prepared with comparative figures and results up to the transaction date that combine Phoenix Oilfield Hauling Ltd. and Alberta Loader Rentals Inc. on a continuity of interests basis. Previously the reporting year for the Phoenix Group was July 31st and hence comparative figures are presented for the last full year of operations of the Phoenix Group, July 31, 2005, as well as the five month transitional stub period ended December 31, 2005. The reporting year for the Company is December 31st. Management comments below refer to these three financial periods.

Revenue

Revenue for the year ended December 31, 2006 was $25.1 million, versus $8.2 for the five months ended December 31, 2005, and an increase of approximately 100% over the $12.6 million in revenue recorded for the year ended July 31, 2005. The Company has changed significantly since its July 31, 2005 financial year having acquired Robin's and Ability as well as growing its own fleet in both its Nisku and Grande Prairie locations. Industry conditions were most active in the four sequential quarters from Q3 2005 through Q2 2006 (See - "Outlook") and hence utilization of the Company's equipment was lower in the last two quarters of 2006 than the first two quarters of 2006.

Operating Expenses

Operating expenses were $14.4 million or 57.4% of revenue for the year ended December 31, 2006. Comparable operating expenses were $4.7 million for the five month period ended December 31, 2005 or 57.9% of revenue and were $8.0 million for the year ended July 31, 2005 or 63.5% of revenue. The Company's operating costs were slightly improved over the five month period ended December 31, 2005 and significantly better than the July 31, 2005 financial year where start-up costs in Grande Prairie negatively influenced operating costs and margins. Operating expenses, which are not all variable costs, are highest in the second and third quarters when utilization of the fleet is at its lowest (see - "Seasonality of Business").

The Company's principle expenses are variable costs paid to owner operators, wages paid to drivers and the cost of insuring, maintaining and operating its fleet.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") were $3.6 million or 14.4% of revenue for the year ended December 31, 2006. Comparative SG&A expenses were $838,000 or 10.3% of revenue for the five month period ended December 31, 2005 and $3.4 million or 26.7% of revenue for the year ended July 31, 2005. The increase in SG&A expenses as a percentage of revenue versus the five month stub period relates to (i) lower utilization during softer industry conditions in the last two quarters of 2006 (see - "Outlook") where largely fixed SG&A increased in proportion to sales volumes and (ii) certain costs incurred in the process of going public and reorganizing the Company's legal structure, banking arrangements and other costs that management expects to be lower in future years. Phoenix Oilfield Hauling Ltd. (see - "Financial Summary") was a private company in the July 31, 2005 financial year and the results for that period include discretionary management bonuses paid to the principals of the company at that time.

Depreciation

Depreciation expense was $1.6 million for the year ended December 31, 2006 versus comparative expense of $355,000 for the five month period ended December 31, 2005 and $591,000 for the year ended July 31, 2005. Increased depreciation expense reflects the purchase of capital equipment and the purchase of equipment in connection with the acquisition of Robin's on June 12, 2006 and Ability on October 27, 2006.

Interest on Long-term Debt

Interest on long-term debt was $392,000 for the year ended December 31, 2006 versus comparative expense of $98,000 for the five month period ended December 31, 2005 and $134,000 for the year ended July 31, 2005. Interest expense reflects interest charges on debt used to fund that portion of equipment purchases and business acquisitions not funded through cash flow from operations. The Company has demand loans, long-term debt and obligations under capital lease, including current portion, of $11.1 million as at December 31, 2006.

Income taxes

Income taxes were $1,479,000 for the year ended December 31, 2006 or 30.2% of pre-tax income versus $859,000 or 39.3% of pre-tax income for the five months ended December 31, 2005. The income tax provision in 2006 reflects a reduction in tax expense of approximately $276,000 realized from the drawdown of the deferred credit resulting from the transaction with Marine. The future tax asset acquired in the transaction with Marine will be expensed based on the effective tax rate existing during each period in which the tax assets are utilized and the deferred credit will be amortized into income on a basis that is pro rata to utilization of the future income tax asset. The tax provision in the five month period ended December 31, 2005 includes the effect of rate changes from the Canadian Controlled Private Corporation ("CCPC") income tax rate to the public company income tax rate on, amongst other things, timing differences subject to future taxation. Income tax expense for the year ended July 31, 2005 reflects the income tax rate available to CCPC's which the Phoenix Group qualified for during the July 2005 financial year.

Net earnings

Net earnings for the year ended December 31, 2006 were $3.4 million or 13.7% of revenue versus $1.3 million or 16.2% of revenue for the five months ended December 31, 2005 and $390,000 or 3.1% of revenue for the year ended July 31, 2005.



Summary of Quarterly Results

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(In thousands of dollars, except per 2006
share data) Q4 Q3 Q2 Q1
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Revenue $ 7,572 6,018 4,605 6,868
Operating expenses 4,310 3,550 2,757 3,757
Operating expenses, % of revenue 56.9% 59.0% 59.9% 54.7%
Selling, general and administrative
expenses 1,415 970 643 576
Loss (gain) on disposal of assets 53 - (77) (41)
EBITDA (1) 1,794 1,498 1,282 2,576
EBITDA % 23.7% 24.9% 27.8% 37.5%
Net income (loss) 723 542 659 1,496
Weighted average shares - basic 52,228 48,641 30,605 13,912
Weighted average shares - diluted 52,228 48,830 30,674 13,912
Earnings (loss) per share - basic 0.01 0.01 0.02 0.11
Earnings (loss) per share - diluted 0.01 0.01 0.02 0.11
Funds flow from operations $ (538) 93 1,425 244
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(In thousands of dollars, except per 2005
share data) Q4 Q3 Q2 Q1
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Revenue $ 5,334 4,082 1,954 4,725
Operating expenses 3,034 1,972 1,419 2,952
Operating expenses, % of revenue 56.9% 48.3% 72.6% 62.5%
Selling, general and administrative
expenses 576 2,049 428 391
Loss (gain) on disposal of assets (46) - (3) (7)
EBITDA (1) 1,770 61 110 1,389
EBITDA % 33.2% 1.5% 5.6% 29.4%
Net income (loss) 976 (452) (126) 1,012
Weighted average shares - basic 13,912 13,912 13,912 13,912
Weighted average shares - diluted 13,912 13,912 13,912 13,912
Earnings (loss) per share - basic 0.07 (0.03) (0.01) 0.07
Earnings (loss) per share - diluted 0.07 (0.03) (0.01) 0.07
Funds flow from operations $ 547 738 1,321 409
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The Company's financial information for the past eight quarters is presented above. The information is that for the Phoenix Group (see- "Financial Summary") for the period up to the acquisition of the Phoenix Group by Marine on May 9, 2006. The results include the operations of Robin's from the date of acquisition on June 12, 2006 and the results of Ability from the date of acquisition on October 27, 2006. The Phoenix Group were CCPC's up to the date of their acquisition and as is typical for CCPC's, management bonuses were declared to reduce taxable income to limits of the favourable small business deduction. Selling, general and administrative expenses in the 3rd quarter of 2005 include management bonuses declared to the principals of Phoenix at that time.

The results of operations reflect, in general, increased revenue from a combination of growth in the Company's fleet of equipment, through purchase and business acquisition, and increased selling prices for its services as well as the normal seasonal and cyclical nature of the oilfield services business (see - "Seasonality of Business").



Fourth Quarter Discussion

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Three months ended December 31,
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2006 2005
(In thousands of dollars) (unaudited) (unaudited)
Revenue $ 7,572 $ 5,334
Operating expenses 4,310 3,034
Operating expenses, % of revenue 56.9% 56.9%
Selling, general and administrative
expenses 1,415 576
Loss (gain) on disposal of assets 53 (46)
EBITDA (1) 1,794 1,770
EBITDA % 23.7% 33.2%
Depreciation 595 200
Interest on long-term debt 176 70
Other interest 14 2
Amortization of intangible assets 159 -
Income taxes 127 522
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Net income $ 723 $ 976
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Revenue

Revenue for the fourth quarter increased 42.0% from $5.3 million in 2005 to $7.6 million in 2006. The acquisition of Robin's on June 12, 2006 and the acquisition of Ability on October 27, 2006 principally contributed to the increase. Before the effect of acquisitions revenue declined during the quarter reflecting softer industry conditions and in particular activity declines by some of the Company's typical principal accounts.

Operating Expenses

Operating expenses were $4.3 million or 56.9% of revenue in the fourth quarter versus comparable expenses of $3.0 million for the same period in 2005 or 56.9% of revenue. While utilization was reduced during the quarter the Company maintained a consistent operating cost ratio.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, including stock based compensation costs, were $1.4 million, 18.7% of revenue, in 2006 versus $576,000, 10.8% of revenue, in 2005. In addition to inflationary increases, the Company has also added or incurred certain costs with respect to its status as a public company. These costs include the addition of a Chief Financial Officer in January 2006 and normal listing, governance and compliance costs incurred by a public company. In addition, the increase in SG&A expenses as a percentage of revenue relates to (i) lower utilization during softer industry conditions in the last two quarters of 2006 (see - "Outlook") where largely fixed SG&A expenses increased in proportion to sales volumes and (ii) certain costs incurred in the process of going public and reorganizing the Company's legal structure, banking arrangements and other costs that management expects to be lower in future years.

Depreciation

Depreciation expense increased for the three months ended December 31st from $200,000 in 2005 to $595,000 in 2006. Increased depreciation expense reflects the purchase of capital equipment and the purchase of equipment in connection with the acquisition of Robin's on June 12, 2006 and Ability on October 27, 2006.

Interest on Long-term Debt

Interest on long-term debt increased for the three months ended December 31st from $70,000 in 2005 to $176,000 in 2006. Interest expense reflects interest charges on debt used to fund that portion of equipment purchases and business acquisitions not funded through cash flow from operations. The Company has demand loans, long-term debt and obligations under capital lease, including current portion, of $11.1 million as at December 31, 2006 ($3.3 million at December 31, 2005 and $3.0 million at July 31, 2005).

Income taxes

Income taxes were $127,000 for the three months ended December 31, 2006 or 14.9% of pre-tax income versus $522,000 or 34.8% of pre-tax income for the three months ended December 31, 2005. The income tax provision in 2006 reflects a reduction in tax expense of approximately $276,000 realized from the drawdown of the deferred credit resulting from the transaction with Marine. The future tax asset acquired in the transaction with Marine will be expensed based on the effective tax rate existing during each period in which the tax assets are utilized and the deferred credit will be amortized into income on a basis that is pro rata to utilization of the future income tax asset.

Net earnings

Net earnings for the three months ended December 31, 2006 were $723,000 or 9.5% of revenue versus net earnings of $976,000, or 18.3% of revenue, for the same period in 2005. Net earnings reflect the particularly high levels of industry activity during the last two quarters of 2005, including Q4 2005, and the first two quarters of 2006 and reduced drilling and completions activity experienced since Q2 2006 (see - "Outlook").

Liquidity & Capital Resources

Historically the oilfield services business has been cyclical and management of the Company has maintained an appropriate balance sheet to mitigate the risk of this volatility and to meet its obligations as they become due. As at December 31, 2006 the Company had bank indebtedness, net of cash balances, of $619,000, a working capital deficiency of $6.2 million, including demand loans with a Canadian chartered bank of $8.0 million, and long-term debt and obligations under capital lease of $3.1 million. Working capital, adjusted to include only scheduled annual principal repayments on demand loans, is an adjusted working capital surplus of $294,000. The Company does not expect demand loans to be called in 2007.

Phoenix generated cash flow from operations of $1.2 million for the year ended December 31, 2006, $1.0 million for the five months ended December 31, 2005, and $1.6 million for the year ended July 31, 2005.

At December 31, 2006 the Company had drawn $690,000 against an authorized line of credit totaling $1,500,000 which bears interest at a rate of prime plus 1.5%.

The Company has a longstanding relationship with its principal lender, a Canadian chartered bank, and has traditionally negotiated and obtained facilities, including those arranged for business acquisitions, which are by their terms demand loans. These facilities, in the absence of demand, have scheduled principal reductions, typically over a five year term. Classification of such loans under Canadian generally accepted accounting principles is to include the full amount of the liability as a current liability. In time the Company may seek to arrange its facilities where, in the absence of default, material adverse change or other specific events, the terms of the loan do not allow for demand and hence under Canadian generally accepted accounting principles only the principal due in the next year would be included as a current liability with the balance classified as non-current. The Company is not currently seeking such amendment to its facilities, nor is it assured of obtaining such amendment if requested. As noted above the Company does not expect demand loans to be called in 2007.

Investing Activities

The purchase of equipment and leasehold improvements, which principally relate to the acquisition of new trucks and trailers, was $4.4 million, and included $1.1 million of equipment acquired under capital lease for the year ended December 31, 2006, before the inclusion of equipment acquired in business acquisitions. Equipment acquired under capital lease includes $1.1 million of equipment purchased by the Company that was sold and immediately leased back by the Company. The Company acquired equipment with respect to the acquisition of Robin's of $5.4 million and with respect to the acquisition of Ability of $3.8 million during the year. The Company acquired equipment and leasehold improvements of $1.4 million, including $0.9 million of equipment acquired under capital lease, for the five months ended December 31, 2005. Equipment acquired under capital lease includes $0.9 million of equipment purchased by the Company that was sold and immediately leased back by the Company. The Company acquired $3.6 million, including $1.9 million of equipment acquired under capital lease, for the year ended July 31, 2005. Purchase of equipment and leasehold improvements per the consolidated statement of cash flows for the year ended July 31, 2005 of $1.7 million excludes the $1.9 million of equipment acquired directly under capital lease. For the five month period ended December 31, 2005 and the year ended December 31, 2006 equipment and leasehold improvements acquired equal amounts per the consolidated statement of cash flows because equipment was originally acquired by the Company and subsequently sold and leased back.

The Company has a capital expenditure program to acquire approximately $3.8 million in new equipment in fiscal 2007 principally during the second half of the year. The Company expects to fund the fiscal 2007 additions through a combination of cash flow from operations and through debt facilities that it intends to specifically arrange for that purpose. In the opinion of management the Company has sufficient resources to fund its business plan.

Acquisitions

During the year the Company acquired Robins and Ability (See note 4 to the annual consolidated financial statements). The total consideration of approximately $32.6 million was comprised of cash of approximately $18.3 million and the issuance of 14,458,200 common shares of the Company for approximately $14.3 million.

As at December 31, 2006 the Company had 53,640,774 common shares outstanding. The Company had 1,575,000 warrants to purchase common shares of the Company outstanding at December 31, 2006 and 1,715,000 stock options. No common shares were issued subsequent to December 31, 2006.

Transactions with Related Parties

All related party transactions are measured at the exchange amount, which is the amount agreed to by the related parties. Management has determined that these amounts approximate fair market value.



----------------------------------------------------------------------------
For the
For the five months For the
year ended months ended year ended
Period ended December 31, December 31, July 31,
2006 2005 2005
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Selling, general and administrative
expense:
i) 888018 Alberta Ltd. $ 112,500 $ 42,500 $ 90,000
ii) 1098872 Alberta Ltd. $ 32,000 $ - $ -
iii) Legal services $ 42,874 $ - $ -
Share issuance and acquisition
costs:
iv) Legal services $ 355,490 $ - $ -
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888018 Alberta Ltd.

The Company leases its facility in Nisku, Alberta from 888018 Alberta Ltd., which is owned by the President of the Company. The amounts paid for the periods noted are rental charges as per the terms of the lease agreement, which is currently month to month.
1098872 Alberta Ltd.

The Company leases its facility in Devon, Alberta from 1098872 Alberta Ltd., a company owned by one of its employees who is a significant shareholder. The amounts paid for the periods noted are rental charges per the terms of the lease.

Legal Services

The Company purchased legal services from a legal firm in which one of the Company's directors is a partner and the Board Secretary is an employee. Legal fees paid are for services rendered.

Subsequent Events

Subsequent to the year ended December 31, 2006, the Company sold certain equipment for gross proceeds of $798,098 and immediately leased the equipment back. The Company realized a gain of $25,288 which was deferred and is being amortized over the term of the 4 year lease.

Stock-based compensation expense

On August 11, 2006 the Company issued 1,755,000 stock options to various management and directors of Phoenix. The Company accounts for all stock-based compensation expense for stock options granted to employees, officers and directors using the fair value based method of accounting. Under this method, compensation cost is measured using the Black-Scholes model and stock based compensation expense is recorded over the vesting period of the option. The Company recorded $273,567 of compensation expense related to these stock options for the year ended December 31, 2006 as part of its selling, general and administrative expense for the period.

On November 13, 2006 the Company cancelled and re-issued the stock options originally granted on August 11, 2006. The Company granted 1,715,000 stock options in replacement of the options originally granted, with an exercise price of $1.00 and the same expiration date. The cancellation and re-issuance was accounted for as a modification of the original grant. Since the modified terms of the award did not make it more valuable than the original award, the Company will continue to amortize the cost of the original award as determined pursuant to the original issuance.

Adoption of New Accounting Pronouncements

Financial instruments:

In January 2005, the CICA issued Handbook Section 3855, "Financial Instruments - Recognition and Measurement", Handbook Section 1530, "Comprehensive Income", and Handbook Section 3865, "Hedges". The new standards are effective for interim and annual financial statements for fiscal years beginning on or after October 1, 2006, specifically for the fiscal year beginning on January 1, 2007 for the Company. Earlier adoption is permitted. The new standards will require presentation of a separate statement of comprehensive income under specific circumstances. Foreign exchange gains and losses on the translation of financial statements of self-sustaining subsidiaries previously recorded in a separate section of shareholder's equity will be presented in comprehensive income. Derivative financial instruments will be recorded in the balance sheet at fair value and the changes in fair value of derivatives designated as cash flow hedges will be reported in comprehensive income. The Company will apply the new standards effective January 1, 2007 but does not expect the impact of these new standards to be material at this time.

Disclosure and Internal Controls

Disclosure Controls

As of December 31, 2006 the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") have evaluated the design and effectiveness of the Company's disclosure controls and procedures. The small size of the current organization contributes in a large part to senior management being fundamentally aware of material information that would require disclosure by the Company and this, in part, supports management's assessment that its disclosure controls are adequate and effective.

Because of their inherent limitations, disclosure controls as well as internal controls over financial reporting may not prevent or detect fraud, misstatements, or errors. Control systems can provide only reasonable and not absolute assurance that the objectives of the control system and the Company are achieved.

Internal Controls over Financial Reporting

The Chief Executive Officer and the Chief Financial Officer are required, under their supervision, to cause to be designed a system of internal control over financial reporting that provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles ("GAAP"). Based on the CEO and CFO's review of the design of internal controls over financial reporting, the CEO and CFO have concluded that the Company has weaknesses in its internal control over financial reporting which include:

i) The Company operates a decentralized business organization where in certain processes, including purchasing and invoicing, there is a lack of segregation of duties. Compensating review procedures are intended to provide reasonable assurance that fraud, misstatements, or errors have not occurred however review procedures are inherently less likely to detect fraud, misstatements, or errors.

ii) Due to its size and limited staff, certain reconciliations, manual journal entries, estimates and calculations, and other similar accounting functions or procedures are performed where there is no secondary approval by someone independent of the preparer. Compensating review procedures are intended to provide reasonable assurance that fraud, misstatements, or errors have not occurred however review procedures are inherently less likely to detect fraud, misstatements, or errors.

iii) The Company does not have adequate controls with respect its revenue process, and bills of lading do not always have evidence of customer sign-off to support that a delivery has occurred. The nature of the industry is such that deliveries occasionally occur on site at times when it is not practical to obtain customer sign-off. Compensating review procedures are intended to provide reasonable assurance that fraud, misstatements, or errors have not occurred however review procedures are inherently less likely to detect fraud, misstatements, or errors.

iv) The Company does not have adequate documentation of certain policies and procedures including, amongst other things,:

a. Human resource policies that affect hiring, termination, compensation or disciplinary procedures;

b. Fraud or "whistle-blowing" protocols; and

c. A Code of Conduct that documents the Company's policies respecting ethical and appropriate conduct.

Management is committed to promoting ethical behaviour through its actions and believes that it supports an environment where fair dealing and ethical behaviour are encouraged through a positive "tone at the top". Management is committed to documenting these policies and philosophies.

v) The Company, despite its small size, has a complex legal structure and has grown through acquisition which cause it to account for complex and non-routine accounting and tax related transactions. Management generally engages third party consultants and other advisors when dealing with such matters however such transactions raise the risk of misstatements or errors.

vi) The Company has grown through acquisition, typically the acquisition of small owner managed operations which inherently have less formal control environments than mature public enterprises. This exposes the Company to inheriting weaknesses over financial reporting that are inherent in acquired enterprises. Management intends to develop more comprehensive due diligence techniques that will include an evaluation of the financial reporting controls of companies that it intends to acquire.

There was no change to the Company's internal controls over financial reporting that would materially affect, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Critical Accounting Estimates

This Management's Discussion and Analysis of Phoenix's financial condition and results of operations is based on its consolidated financial statements which are prepared in accordance with Canadian generally accepted accounting principles. The Company's significant accounting policies are described in Note 2 to its annual consolidated financial statements however inherent in the preparation of those statements are estimates and judgements that affect the reported assets, liabilities, revenues and expenses. These estimates and judgements are based on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Anticipating future events cannot be done with certainty, therefore these estimates may change as new events occur, more experience is acquired and as the Company's operating environment changes.

Identified below are the critical accounting policies and estimates that management believes require significant judgment in the preparation of results of operations and financial position.

Allowance for Doubtful Accounts

The Company performs ongoing credit evaluations of its customers and maintains an effective process to grant credit based upon a customer's credit history and financial condition. Notwithstanding this process the Company's customer base is generally engaged in some aspect of the exploration, development or production of hydrocarbons where a customer's ability to fulfill its obligations is affected by the business risks associated with the industry, including, but not limited to, success in finding new reserves, demand for drilling and completion services, and commodity prices. A customer's ability to fulfill its obligations can change suddenly and without notice.

Useful Life of Equipment and Leasehold Improvement and Intangible Assets

The Company depreciates its equipment and leasehold improvements and intangible assets using rates sufficient to amortize the asset's cost over its useful life. These estimates are made using historical experience and knowledge of current market conditions however are subject to change as market conditions shift or technological advances are made.

Income Taxes

The Company uses the asset and liability method to account for income taxes whereby future income tax assets and liabilities are recognized for temporary differences between the tax and accounting bases of assets and liabilities, as well as for the benefit of losses available to be carried forward to future years for tax purposes, to the extent that they are likely to be realized. Actual income taxes could vary from these estimates as a result of future events, including changes to income tax law or changes in the company's circumstances.

Goodwill

Goodwill represents the excess purchase price paid by the Company over the fair value of the tangible and identifiable intangible assets and liabilities acquired. Goodwill is not amortized but instead is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit, including goodwill, is compared with its fair value. When the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case, the implied fair value of the reporting unit's goodwill, determined in the same manner as the value of goodwill is determined in a business combination, is compared with its carrying amount to measure the amount of the impairment loss, if any.

The process of determining fair values is subjective and requires us to exercise judgment in making assumptions about future results, including revenue and cash flow projections at the reporting unit level, and discount rates.

Goodwill represents a significant component of the assets of the Company and its value can be materially impacted by changes in market conditions.

Off-Balance Sheet Arrangements

Operating Leases

We have entered into operating leases for the rental of premises and automotive equipment. The effect of terminating any one lease agreement would not have an adverse effect on the company as a whole.

Risks and Uncertainties

Sources, Pricing and Availability of Equipment and Equipment Parts

Phoenix sources its equipment and equipment parts from a variety of suppliers, most of whom are located in Canada and the United States. Should any suppliers of Phoenix be unable to provide the necessary equipment or parts or otherwise fail to deliver products in the quantities required, any resulting delays in the provision of services or in the time required to find new suppliers could have a material adverse effect on Phoenix's business, financial condition, results of operations and cash flows.

Government Regulation

The operations of Phoenix are subject to a variety of federal, provincial and local laws, regulations, and guidelines, including laws and regulations relating to health and safety, the conduct of operations, the protection of the environment, the operation of equipment used in its operations and the transportation of materials and equipment it provides for its customers. Phoenix believes that it is currently in compliance with such laws and regulations. Phoenix intends to invest financial and managerial resources to ensure such compliance and will continue to do so in the future. Although such expenditures historically have not been material to Phoenix, such laws or regulations are subject to change. Accordingly, it will be impossible for Phoenix to predict the cost or impact of such laws and regulations on Phoenix's future operations.

Environmental Regulations

The Government of Canada has put forward a Climate Change Plan For Canada which suggests further legislation will set greenhouse gases emission reduction requirements for various industrial activities, including oil and gas exploration and production. Future federal legislation, together with provincial emission reduction requirements, such as those which may be established under Alberta's Climate Change and Emissions Management Act, or other regulations, may require the reduction of emissions or emissions intensity from the oil and gas industry. Mandatory emissions reductions may result in increased operating costs and capital expenditures for oil and gas producers, thereby decreasing the demand for Phoenix's services. Management is unable to predict the impact of greenhouse gas emission legislation on Phoenix and it is possible that it will adversely affect Phoenix's business, financial condition, results of operations and cash flows.

Operating Risks and Insurance

Phoenix's operations are subject to hazards inherent in the oil and gas industry, such as equipment defects, malfunction and failures, and natural disasters which result in fires, vehicle accidents, explosions and uncontrollable flows of natural gas or well fluids that can cause personal injury, loss of life, suspension of operations, damage to formations, damage to facilities, business interruption and damage to or destruction of property, equipment and the environment. These risks could expose Phoenix to substantial liability for personal injury, wrongful death, property damage, loss of oil and gas production, pollution, and other environmental damages. The frequency and severity of such incidents will affect operating costs, insurability and relationships with customers, employees and regulators.

Phoenix monitors its activities for quality control and safety. However, there are no assurances that Phoenix's safety procedures will always prevent such damages. Although Phoenix maintains insurance coverage that it believes to be adequate and customary in the industry, there can be no assurance that such insurance will be adequate to cover its liabilities. In addition, there can be no assurance that Phoenix will be able to maintain adequate insurance in the future at rates it considers reasonable and commercially justifiable. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by Phoenix or a claim at a time when it is not able to obtain liability insurance, could have a material adverse effect on Phoenix's ability to conduct normal business operations and on its financial condition, results of operations and cash flows.

Agreements and Contracts

The business operations of Phoenix depend on verbal, performance based agreements with its customer base that are generally cancellable at any time by either Phoenix or its customers. The key factors which will determine whether a client continues to use Phoenix are service quality and availability, reliability and performance of equipment used to perform its services, technical knowledge and experience, reputation for safety and competitive price. There can be no assurance that Phoenix's relationship with its customers will continue, and a significant reduction or total loss of the business from these customers, if not offset by sales to new or existing customers, could have a material adverse effect on Phoenix's business, financial condition, results of operations and cash flows.

Key Personnel

The successful operation of Phoenix's business depends upon the abilities, expertise, judgment, discretion, integrity and good faith of Phoenix's executive officers, general managers, employees and consultants. In addition, the ability of Phoenix to expand its services will depend upon the ability of the Company to attract qualified personnel as needed. The demand for skilled oilfield employees is high, and the supply is limited. The unexpected loss of Phoenix's key personnel, or the inability to retain or recruit skilled personnel could have a material adverse effect on Phoenix's business, financial condition, results of operations and cash flows.

Competition

Phoenix operates in highly competitive segments of the economy - the oil and gas service industry and the oilfield transportation industry. As a result of the competitive nature of the business Phoenix must compete on price and quality of service. Furthermore, to remain competitive Phoenix must continue to upgrade and expand its fleet to meet customer requirements.

Phoenix also actively competes for acquisitions and skilled industry personnel with a substantial number of other oilfield transportation companies, many of which have significantly greater financial resources than Phoenix. Phoenix's competitors include major integrated trucking companies and numerous other independent trucking companies and individual operators.

Merger and Acquisition Risk

Merger and acquisition activity, in any of the segments in which Phoenix operates can impact the demand for services as customers concentrate on reorganization activities prior to proceeding with projects or committing to capital investment. While merger and acquisition activity may have a short-term impact on our business, management believes that in the long-term a more active, stronger market will result providing further opportunities for Phoenix.

Reduced levels of activity in the oil and natural gas industry can intensify competition and result in lower revenue to Phoenix. Variations in the exploration and development budgets of oil and natural gas companies which are directly affected by fluctuations in energy prices, the cyclical nature and competitiveness of the oil and natural gas industry and governmental regulation, will have an affect upon Phoenix's ability to generate revenue and earnings.

Outlook

The Company earns revenue by providing specialized contract transportation of products, materials, supplies and equipment required for the exploration,
development and production of petroleum resources. Demand for the Company's transportation services is therefore linked to the economic conditions of the energy industry and the general level of exploration, development and production of petroleum resources in Western Canada. Activity in the Western Canadian Sedimentary Basin ("WCSB") has in recent history been supported by record levels of oil and gas drilling. The last two quarters of 2005 and the first two quarters of 2006 were particularly active and demand for the Company's services was high. Lower natural gas prices and higher than normal natural gas inventories since the second quarter of 2006 however have affected the number of gas wells drilled in the WCSB and are likely, in the view of management, to impact drilling and activity levels in fiscal 2007. According to the Canadian Association of Oilwell Drilling Contractors ("CAODC"), there were 22,127 well completions in 2006. CAODC forecasts 19,023 well completions in 2007 with the principal reductions versus 2006 relating to reduced activity in shallow gas and coal bed methane production. While the Company maintains good relationships with its customers and has a balanced exposure to gas related drilling activity versus service work that is not as highly correlated to new drilling as other transportation services, the Company is likely to be affected by reduced capital spending and drilling activity.

The Company's financial statements are available on SEDAR.

The securities offered have not been registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. This press release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the securities in any State in which such offer, solicitation or sale would be unlawful.

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

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