Phoenix Technology Income Fund
TSX : PHX.UN

Phoenix Technology Income Fund

February 24, 2009 18:58 ET

Phoenix Reports Record Financial and Operational Results for the Year Ended December 31, 2008

CALGARY, ALBERTA--(Marketwire - Feb. 24, 2009) - Phoenix (TSX:PHX.UN) experienced increases in the demand for its services due to its success in strengthening market penetration in both Canada and the US. As a result, the Fund expanded its overall job capacity to achieve record financial and operating results. Phoenix's strategies in 2008 focused on maintaining a conservative balance sheet with no net debt while at the same time undertaking record capital expenditures of $33.9 million and rewarding unitholders with record cash distributions of $21.8 million. In 2008, Phoenix also continued to diversify and expand all operating locations organically and maintained its course of developing new technologies.

The Fund generated distributable cash of $11.1 million and paid $6.2 million, or $0.255 per unit, in distributions to unitholders for the three-month period ended December 31, 2008, which resulted in a cash payout ratio of 56 percent in that period.

Due to strong cash flows generated, working capital increased to $26.6 million as at December 31, 2008, up from $15.8 million at year end 2007.



(Stated in thousands of dollars except per unit amounts, cash payout ratios
and units outstanding)

Three-month periods ended
December 31, Years ended December 31,
% %
2008 2007 Change 2008 2007 Change
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Operating (unaudited) (unaudited)
Results
Revenue 48,065 31,018 55 164,345 115,548 42
Net
earnings 6,414 5,281 21 25,531 18,214 40
Earnings
per unit
- diluted (1) 0.26 0.23 13 1.07 0.81 32
EBITDA (1) 9,039 7,279 24 37,640 26,533 42
EBITDA
per unit
- diluted (1) 0.37 0.32 16 1.57 1.18 33
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Cash Flow
Cash flows
from operating
activities (1) 15,188 9,608 58 32,922 26,103 26
Distributable
cash (1) 11,053 7,904 40 36,329 29,421 23
Distributable
cash per unit
- diluted 0.45 0.35 29 1.52 1.31 16
Cash
distributions
made (2) 6,202 4,372 42 21,759 17,434 25
Cash
distributions
per unit(1) 0.255 0.195 31 0.92 0.78 18
Cash payout
ratio 56% 55% 60% 59%
Capital
expenditures 10,680 3,449 210 33,908 14,610 132
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Financial
Position,
December 31,
Working
capital 26,600 15,800 68
Long-term
debt 5,000 1,775 182
Unitholders'
equity 90,198 59,860 51
Fund units
outstanding 24,337,524 22,434,044 8
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(1) Refer to non-GAAP measures section
(2) Cash distributions on a per unit basis paid in the period.


Non-GAAP Measures

The Fund uses certain performance measures throughout its financial reporting that are not recognizable under Canadian generally accepted accounting principles ("GAAP"). These performance measures include earnings before interest, taxes, depreciation and amortization ("EBITDA"), EBITDA per unit, distributable cash, distributable cash per unit, and cash payout ratio. Management believes that these measures provide supplemental financial information that is useful in the evaluation of the Fund's operations. Investors should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with GAAP as an indicator of Phoenix's performance. Phoenix's method of calculating these measures may differ from that of other organizations, and accordingly, these may not be comparable. Please refer to the non-GAAP measures section.

Results of Operations

Consolidated revenue for the three-month period ended December 31, 2008 increased by 55 percent to $48.1 million from $31.0 million in the corresponding 2007 period. This revenue level was the second best quarterly result for the Fund. Consolidated operating days for the 2008 period increased to 4,393 days as compared to 3,242 days in the 2007 period, an increase of 36 percent. The Fund for the year ended December 31, 2008 increased its revenue by 42 percent to a record $164.3 million from $115.5 million in 2007. The Canadian and US regions both reported record activity levels in 2008 that resulted in consolidated MWD operating days increasing by 46 percent to 16,710 days as compared to 11,432 days in 2007. Phoenix continued to diversify its client base in 2008, and its top client represented only 11.5 percent of the Fund's consolidated revenue.

In 2008, Phoenix's job capacity increased by 18 to 108 concurrent jobs through the addition of nine Current Loop Telemetry Electromagnetic (CLT EM) measurement while drilling (MWD) systems and nine positive pulse MWD systems. This represents an increase of 20 percent over 2007. As at December 31, 2008, the Fund had a fleet of 55 CLT EM-MWD systems and 53 positive pulse MWD systems. Of these total systems, 63 were deployed in Canada and 45 were in the US. An additional five CLT EM-MWD systems and one positive pulse MWD system that were originally expected to be placed into service during the last quarter of 2008 were carried over into 2009. The majority of components used to manufacture these six systems were received prior to December 31, 2008 and correspondingly, these expenditures were part of the Fund's reported 2008 fourth quarter capital expenditure program. The Fund currently has no plans to add any further MWD systems in 2009; therefore, it is anticipated that by year end Phoenix's MWD fleet will be comprised of 60 CLT EM-MWD systems and 54 positive pulse MWD systems.

Revenue

The Fund reports one operating segment on a geographical basis throughout the Canadian provinces of Alberta, Saskatchewan, British Columbia, Ontario and Manitoba, and the Gulf Coast, Northeast and Rocky Mountain regions of the United States.

Canadian Revenue

Canadian revenue for the three-month period ended December 31, 2008 increased to $22.1 million as compared to $16.1 million in the 2007 period or by 38 percent. Despite the weakening of oil and natural gas prices during the fourth quarter of 2008, Canadian industry horizontal and directional activity increased by eight percent to 2,169 wells compared to 2,009 wells in the corresponding 2007 period. (Source: Daily Oil Bulletin)

In the three-month period, the Fund's Canadian operating days increased by 31 percent to 2,270 days in 2008 from 1,737 days in the comparable 2007 period. The Fund had an additional 60 operating days that related to its Albanian operations in the three-month period ended December 31, 2008. Included in Canadian revenue of $22.1 million is $1.3 million in revenue generated in Albania. If this revenue was excluded, Canadian revenue increased by 30 percent from $16.1 million in the 2007 period to $20.8 million in the 2008 period.

Diversification in oil well drilling services continued in the fourth quarter of 2008 with approximately 45 percent (2007 - 48 percent) of the Fund's Canadian revenue related to the drilling of oil wells, the majority of which were in southern Saskatchewan.

Phoenix's Canadian revenue for the year ended December 31, 2008 was a record $76.0 million compared to $60.1 million in the 2007-year, an increase of 27 percent. Included in Canadian revenue for 2008 was $2.0 million relating to the Fund's operations in Albania that commenced midway through the year. If the Albanian operations were excluded, 2008 Canadian year end revenue increased by 23 percent as compared to 2007.

Industry horizontal and directional drilling activity in Canada increased by 7 percent in 2008 to 7,502 wells drilled from 7,011 wells drilled in 2007. In addition, horizontal and directional wells drilled represented 44 percent of total 2008 wells drilled in the industry. (Source: Daily Oil Bulletin) In comparison, the Fund's Canadian drilling days increased by 34 percent to 8,186 days (excluding 132 drilling days in Albania) as compared to 6,097 days in 2007.

For the 2008-year, approximately 54 percent of the Fund's Canadian activity was represented by horizontal oil well drilling, compared to 45 percent in 2007. Phoenix realized significant increases in its drilling activity in several key operating areas as compared to 2007, namely: in the Montney region in northeastern British Columbia, where the number of wells drilled by the Fund increased by 142 percent; within its Remote Access Directional Drilling ("RADD") division whose shallow gas well drilling activity showed growth of 164 percent; and in horizontal oil well drilling that predominantly occurred in the Bakken region of southeastern Saskatchewan where 74 percent more wells were drilled.

Due to competitive market forces present in 2008, day rates realized were approximately 5 - 6 percent lower than that of 2007.

United States Revenue

Due to strong revenue growth in all of its regions, Nevis Energy Services Inc. ("Nevis"), the Fund's wholly-owned subsidiary, achieved record quarterly revenue of $26.0 million for the three-month period ended December 31, 2008 as compared to $15.0 million for the 2007 period, equating to an increase of 74 percent. Operating days for the 2008 period increased by 37 percent to 2,063 days from 1,505 days in the corresponding 2007 period. The increase in revenue was significantly higher than the increase in operating days due to more favorable exchange rates and less daily rentals present in the fourth quarter of 2008. Customer day rates in the 2008 period were flat when compared to 2007 rates.

In the fourth quarter of 2008, US revenue accounted for 54 percent of consolidated revenue, compared to 48 percent in 2007. The average number of active rigs in the US for the period increased by 26 percent to 996 rigs as compared to 789 rigs in 2007. (Source: Baker Hughes)

Nevis increased its revenue for the year ended December 31, 2008 by 59 percent to a record $88.3 million from $55.5 million in 2007. Nevis operates predominantly in the natural gas drilling market in the US through three distinct regions: Gulf Coast, Northeast and Rocky Mountain. In the 2008-year, each region posted record revenue levels and demonstrated continued growth in the key gas play areas within the US. The regional growth for all areas was accomplished through the expansion of key marketing personnel that occurred late in 2007 and early in 2008.

During the 2008-year, Nevis continued to be an active participant with coal bed methane ("CBM") de-gasification drilling services in West Virginia and Pennsylvania, and shale gas drilling in Kentucky, West Virginia and the Barnett Shale region in Texas.

US operating days increased by approximately 57 percent to 8,392 days in the 2008-year from 5,335 days in 2007. Due to the strength of drilling activity in the US industry, Nevis was able to maintain its customer day rates.

In comparison to Nevis' growth, industry activity, as measured by the average number of horizontal and directional rigs running on a daily basis, increased by 20 percent in 2008 to 925 rigs from 769 rigs in 2007. (Source: Baker Hughes) US producers, like their Canadian counterparts, were realizing the benefits of improved economics that utilize horizontal drilling in conjunction with advanced fracturing techniques in areas such as the Barnett Shale in Texas and the northeastern US.

Operating Costs and Expenses

Direct costs are comprised of field and shop expenses and include current period research and development ("R&D") expenditures. For the three-month period ended December 31, 2008, direct costs increased by 69 percent to $33.5 million compared to $19.8 million in the 2007 period. Gross profit as a percentage of revenue declined from 36 percent in 2007 to 30 percent in 2008, resulting primarily from:

- Canadian and US field labour costs continuing to increase in the 2008 period because of the tight labour markets that existed in both countries;

- some abnormally high US equipment repairs that were incurred in the 2008 period;

- a sales tax adjustment that was made in the fourth quarter of 2008 relating to transfer pricing updates; and

- research & development expenses increasing by 103% to $542,000 in the 2008 period from $267,000 in the corresponding 2007 period.

Direct costs for the year ended December 31, 2008 increased by 48 percent and gross profit as a percentage of revenue declined by three percentage points to 34 percent from 2007. This percentage decline in gross profit was due to:

- increases in Canadian and US field labour costs in 2008 that resulted from labour shortages and tight labour markets. Due to competitive market forces, these increases were not passed onto customers; however US customer day rates remained flat in 2008, whereas Canadian customer day rates were on average lower than 2007;

- the Fund realizing a significantly greater number of horizontal gamma operating days. These jobs require one to two additional personnel and the Fund typically makes little or no margins on these;

- Phoenix incurring higher performance drilling motor repair costs as a result of fewer charges being re-billed to customers; and

- increases in R&D projects and initiatives. Net R&D expenses increased by 64 percent to $1.8 million in 2008 as compared to $1.1 million in 2007.

SG&A costs increased by 71 percent for the three-month period ended December 31, 2008 to $5.6 million as compared to $3.3 million in the 2007 period. As a percentage of revenue, SG&A was 12 percent in the 2008 period as compared to 11 percent in the 2007 period. For the year ended December 31, 2008 SG&A costs increased by 45 percent to $18.3 million from $12.7 million in 2007. The increase in SG&A costs in both 2008 periods are a direct result of higher personnel and marketing related costs associated with increased activity. SG&A costs as a percentage of revenue were 11 percent for both years ended December 31, 2007 and 2008.

As a result of the large capital expenditure programs adopted in the past few periods, depreciation increased by 42 percent to $2.7 million in the fourth quarter of 2008 from $1.9 million in the 2007 quarter. For the year ended December 31, 2008, depreciation increased to $9.2 million from $7.2 million in 2007.

The Fund made a provision for bad debts of $0.4 million in the three-month period ended December 31, 2008 as compared to $0.7 million in the 2007 period. For the year ended December 31, 2008, bad debt expense decreased to $0.4 million as compared to $1.7 million 2007. The bad debt provision in 2008-year relates to a few Canadian and US customer accounts that are deemed uncollectable. A significant portion of the expense in 2007 was represented by one large US client that went into Chapter 11 bankruptcy. A further $0.4 million bad debt provision was added in the 2007-year for another US client that ran into cash flow problems.

Stock-based compensation costs decreased by 13 percent for the three-month period ended December 31, 2008 to $342,000 from $392,000 in the corresponding 2007 period. Stock-based compensation costs were $1.4 million for the years ended December 31, 2007 and 2008. These costs relate to the amortization of the fair values of issued Fund options in previous periods using the Lattice-Binomial model.

A foreign exchange gain of $5,000 was reported for the three-month period ended December 31, 2008, as compared to foreign exchange loss of $103,000 in the 2007 period. For the year ended December 31, 2008 the foreign exchange loss was $333,000 versus $576,000 in 2007. Foreign exchange losses are shown net of any gains and result primarily from the translation of US and Canadian-denominated trade receivables and payable balances, and movements in US and Canadian dollar exchange rates. The unfavorable result in 2007 and the first nine-months of 2008 was due primarily to the strengthening Canadian dollar and the loss on translation of the Canadian-denominated inter-company loan between Phoenix and its US subsidiary.

The Fund realized a gain on disposition of drilling equipment of $0.8 million in the three-month period ended December 31, 2008, compared to $0.5 million in the 2007 period. For the year ended December 31, 2008, a gain of $2.4 million was reported as compared to a gain of $0.6 million in 2007. The disposals relate primarily to equipment lost in well bores that are uncontrollable in nature. The gain reported is net of any asset retirements that are made before the end of the equipment's useful lives and self-insured downhole equipment losses, if any. The gains result from insurance programs undertaken whereby proceeds for the lost equipment are at current replacement values which are higher than the respective equipment's book value.

Income Taxes

The effective income tax rate for the year ended December 31, 2008 was 10 percent compared to an expected US-Canada consolidated income tax rate of 29.5 percent. The difference in the two rates is primarily due to the deductibility of declared cash distributions that are allowable in calculating taxable income of the Fund. Under the Income Tax Act, as an investment trust, the Fund is subject to income taxes only on income not distributed to its unitholders. For the three-month period ended December 31, 2008, the Fund reported a recovery for income taxes of $0.1 million as compared to a provision of $0.1 million in the 2007 period. The recovery in the 2008 period relates to adjustments to the Fund's income tax rate, which was estimated to be 14 percent in the third quarter of 2008 as compared to the actual year end rate of 10 percent.

Investments

In order for the Fund to continue to meet increasing customer demand, Phoenix invested a further $10.7 million in capital equipment for the three-month period ended December 31, 2008 as compared to $3.5 million in the comparable period in 2007. This was offset somewhat by proceeds received on involuntary disposals of drilling equipment of $2.1 million in the 2008 period versus $0.9 million in the corresponding 2007 period.

For the year ended December 31, 2008, the Fund invested a record $33.9 million in capital equipment compared to $14.6 million in 2007. These 2008 expenditures allowed Phoenix to expand its MWD fleet by 18 systems or by 20 percent from 2007 and it also assisted the Fund in minimizing expensive third-party equipment rentals, thereby improving profitability. The capital expenditure program undertaken in the year was financed from cash flow from operations, an equity financing and a portion of working capital. For the year ended December 31, 2008 the Fund realized proceeds from the involuntary disposal of drilling equipment in well bores of $6.1 million in 2008, compared to $2.2 million in 2007.

Financing

During the three-month period ended December 31, 2008, the Fund through its unit option program received cash proceeds of $52,000 from exercised options to acquire 12,765 Fund units. Cash proceeds of $4.0 million were received from the Fund's unit option program in the year ended December 31, 2008 from exercised options to acquire 653,480 Fund units.

The Fund repaid its bank overdraft facility of $2.8 million and its long-term debt of $1.8 million during the third quarter of 2008. In the fourth quarter of 2008 the Fund received proceeds from the issue of long-term debt of $5.0 million.

On May 27, 2008, the Fund closed its bought deal trust unit financing through a short form prospectus whereby 1,250,000 units were issued for net proceeds of $16.8 million. The proceeds from this financing were used to fund Phoenix's 2008 capital expenditure program.

Capital Resources

The Fund has access to a bank overdraft revolving facility of up to $5.0 million. This facility bears interest at the Fund's option at the bank's prime rate plus 0.375 percent or the bank's bankers' acceptance rate plus a stamping fee of 1.25 percent. As at December 31, 2008, the Fund had no amounts drawn on this facility.

On December 15, 2008, the Fund renewed its $20 million, 364-day extendible revolving facility with its bank. This bears interest at the Fund's option at the bank's prime rate plus 0.375 percent or the bank's bankers' acceptance rate plus a stamping fee of 1.25 percent. The facility is renewable at the option of the lender. Should this facility not be extended, outstanding amounts will be transferred to a four-year term facility repayable at 1/25 of the amount outstanding for fifteen quarters with the remaining balance paid on the sixteenth quarter. At December 31, 2008, $5.0 million was drawn on this facility.

Cash Requirements for Capital Expenditures

Historically, the Fund has financed its capital expenditures and acquisitions through cash flows from operating activities, debt and equity. The 2009 capital budget has been set at $10.2 million, of which $5.1 million represented 2008 orders that were carried over into 2009. These planned expenditures will be financed from cash flow from operations and by the Fund's unused credit facilities or equity, if necessary. However, if a sustained period of market uncertainty and financial market volatility persists in 2009, the Fund's activity levels, cash flows and access to credit maybe negatively impacted, and the expenditure level would be reduced accordingly. Conversely, if future growth opportunities present themselves, the Fund would look at expanding this planned capital expenditure amount.

Outlook

Phoenix enjoyed an extremely successful financial year in 2008 with all financial and operating measures at record levels. More importantly, even after spending a record $33.9 million in capital expenditures and paying out a record $21.8 million in cash distributions, the Fund exited 2008 with a very strong balance sheet and a net cash position of $7.6 million. The Fund's operations to date for the first quarter of 2009 have been robust, albeit not at record levels.

The implications of a sustained period of global recession and general economic uncertainty during times of tight credit markets are clear. Demand for oil and natural gas commodities will remain depressed and as a result commodity prices will remain low. It is very likely that the 2009 drilling programs for the majority of the Fund's customers will be substantially lower than 2008, due to their realization of lower cash flows from operations and the lack of their availability to secure credit or equity financing. In this recessive market competitive forces will place strong downward pressure on Phoenix's pricing to its customers.

Phoenix is fortunate that many of its management and key employees are very well experienced and therefore have witnessed past negative cycles in the oil and natural gas industry. A significant percentage of the Funds cost structure is variable in nature and Phoenix believes that it has the resources to weather this upcoming period, the duration of which is currently unknown. Phoenix believes that it will emerge from these uncertain times even stronger with enhanced technology and increased market share.

In 2009, the Fund will focus on:

- implementing and maintaining cost reduction strategies that can also be carried forward into more buoyant times; currently Phoenix is already actively involved in this process of reviewing its cost structure and creating cost efficiencies.

- increasing its research and development expenditures on key projects so that Phoenix is in a position to continue to offer leading edge technology to its clients;

- heavily scrutinizing and rationalizing capital expenditures requirements;

- continuing to diversify and grow organically, has been a key objective for Phoenix in the past; and,

- working to maintain and maximize distributions levels to unitholders.

Phoenix would like to thank all the people who have contributed to its successes; employees, consultants and directors. In particular, Phoenix would like to send sincere thanks to Jeffery Lawson, who resigned from the board of directors, for his dedication and commitment over the past nine years.

Non-GAAP Measures

1) EBITDA

EBITDA, defined as earnings before interest, taxes, depreciation and amortization, is not a financial measure that is recognized under GAAP. However, management believes that EBITDA provides supplemental information to net earnings that is useful in evaluating the Fund's operations before considering how it was financed or taxed in various countries. Investors should be cautioned, however, that EBITDA should not be construed as an alternative measure to net earnings determined in accordance with GAAP. Phoenix's method of calculating EBITDA may differ from that of other organizations and, accordingly, its EBITDA may not be comparable to that of other companies.



The following is a reconciliation of net earnings to EBITDA:

(Stated in thousands of dollars) Three-month periods Years ended
ended December 31, December 31,
2008 2007 2008 2007
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Net earnings $ 6,414 $ 5,281 $ 25,531 $ 18,214
Add:
Depreciation and amortization 2,739 1,876 9,160 7,165
Provision for income taxes (132) 82 2,934 1,041
Interest on long-term debt 23 31 63 110
Other interest (income) (5) 9 (48) 3
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EBITDA as reported $ 9,039 $ 7,279 $ 37,640 $ 26,533
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EBITDA per unit - diluted is calculated using the treasury stock method whereby deemed proceeds on the exercise of the unit options are used to reacquire fund units at an average unit price. The calculation of EBITDA on a dilutive basis does not include anti-dilutive options.

2) Distributable Cash

Distributable cash is defined as cash flows generated from operating activities before net changes in non-cash working capital, excluding bad debt provisions, and is not a measure recognized under GAAP. However, management believes that distributable cash provides supplemental information to cash flows from operating activities that is useful in evaluating the Fund's operating cash flow before considering changes in working capital balances. Management uses this measure to calculate its cash payout ratio to show what percentage of its distributable cash is paid out to its unitholders. Investors should be cautioned, however, that distributable cash should not be construed as an alternative measure to cash flows from operating activities determined in accordance with GAAP. Phoenix's method of calculating distributable cash may differ from that of other organizations and, accordingly, its distributable cash may not be comparable to that of other companies.

The Fund considers its maintenance capital expenditures to be minimal. Maintenance capital would only be relevant to the Fund's retirement of tubular equipment that is subsequently replaced. Typically, lost-in-hole equipment is replaced but these losses are funded by the proceeds from insurance or customers. In addition, due to the nature of the industry, the Fund's drilling equipment is frequently re-conditioned to an "as new" state with the associated costs expensed and included in the Fund's direct costs. Consequently, the Fund will not make an adjustment to distributable cash for capital maintenance expenditures. The Fund's assumptions used with respect to maintenance capital are believed to be reasonable at the time of preparation; however, no assurance can be given that these assumptions will prove to be correct and, consequently, the Fund's distributable cash could differ materially in the future.



The following is a reconciliation of net earnings to distributable cash:

(Stated in thousands of dollars) Three-month periods Years ended
ended December 31, December 31,
2008 2007 2008 2007
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Net earnings $ 6,414 $ 5,281 $ 25,531 $ 18,214
Add (deduct) items not affecting
cash:
Depreciation and amortization 2,739 1,876 9,160 7,165
Future income taxes 2,240 65 2,251 771
Unrealized foreign exchange loss
(gain) (241) 175 (25) 728
Gain on disposition of drilling
equipment (829) (547) (2,391) (624)
Stock-based compensation 342 392 1,407 1,419
Provision for bad debts 388 662 396 1,748
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Distributable cash $ 11,053 $ 7,904 $ 36,329 $ 29,421
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Distributable cash per unit - diluted is calculated using the treasury stock method whereby deemed proceeds on the exercise of the unit options are used to reacquire fund units at an average unit price. The calculation of distributable cash per unit on a dilutive basis does not include anti-dilutive options.

3) Cash Payout Ratio

The cash payout ratio is defined as cash distributions made by the Fund in the period divided by its distributable cash for the same period. The cash payout ratio is not a measure recognized under GAAP. However, management believes the cash payout ratio provides supplemental information that is useful in evaluating the level of cash distributions in relation to the Fund's distributable cash. Investors should be cautioned, however, that the cash payout ratio should not be construed as an alternative measure to other GAAP measures. Phoenix's method of calculating its cash payout ratio may differ from other organizations and, accordingly, the cash payout ratio may not be comparable to other companies.

Forward-Looking Statements

Certain statements and information contained in this press release and other continuous disclosure documents of the Fund referenced herein, including statements related to the Fund's capital expenditures, projected growth, view and outlook toward future oil and natural gas commodity prices and activity levels, cash distributions, customer pricing, future market opportunities and statements and information that contain the words such as "could", "should", "can", "anticipate", "expect", "believe", "will", "may" and similar expressions relating to matters that are not historical facts constitute "forward-looking information" within the meaning of applicable Canadian securities legislation. These statements and information involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements and information. The Fund believes the expectations reflected in such forward-looking statements and information are reasonable, but no assurance can be given that these expectations will prove to be correct. Such forward-looking statements and information included in this press release should not be unduly relied upon. These forward looking statements and information speak only as of the date of this press release.

In particular, forward-looking information and statements include:

- estimates that $10.2 million of total capital expenditures will be incurred in 2009, this includes $5.1 million in expenditures carried over from 2008;

- there are no planned additions in job capacity in the 2009 year other than the six MWD systems that were carried forward from 2008;

- these planned expenditures will be financed from cash flow from operations and by the Fund's unused credit facilities or equity, if necessary;

- it is very likely that the 2009 drilling programs for the majority of the Fund's customers will be substantially lower than 2008, due to their realization of lower cash flows from operations and the lack of their availability to secure credit or equity financing. In this recessive market competitive forces will place strong downward pressure on Phoenix's pricing to its customers; and

- a significant percentage of the Funds cost structure is variable in nature and Phoenix believes that it has the resources to weather this upcoming period, the duration of which is currently unknown.

In addition to other factors and assumptions which may be identified in this press release and other continuous disclosure documents of the Fund referenced herein, assumptions have been made in respect of such forward-looking statements and information regarding, among other things: anticipated financial performance, business prospects, impact of competition, strategies, the general stability of the economic and political environment in which the Fund operates, the sufficiency of budgeted capital expenditures in carrying out planned activities, the cost of labour and services and the ability to obtain financing on acceptable terms, which are subject to change based on commodity prices, market conditions, and future oil and natural gas prices, and potential timing delays. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.

Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other factors that could affect the Fund's operations and financial results are included in reports on file with the Canadian Securities Regulatory Authorities and may be accessed through the SEDAR website (www.sedar.com) or at the Fund's website. The forward-looking statements and information contained in this MD&A are expressly qualified by this cautionary statement. The Fund does not undertake any obligation to publicly update or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

Overview of Business

Phoenix is in the business of providing horizontal and directional technology and drilling services in Canada and the United States. In addition to this core business, the Fund also rents downhole performance drilling motors, drilling jars, and other ancillary equipment in Canada. CLT technology, which was developed in Phoenix's research and development center, is used to manufacture CLT-EM MWD guidance systems for use in the Fund's internal operations. The Fund maintains its corporate head office, research & development, Canadian sales, service and operational centers in Calgary, Alberta. The Fund's US operations, conducted through the Fund's wholly owned subsidiary, Nevis, is headquartered in Houston, Texas. Nevis has sales and service facilities in Houston, Texas; Traverse City, Michigan; and Casper, Wyoming. In addition, sales offices are located in Denver, Colorado and Fort Worth, Texas.



Consolidated Balance Sheets

December 31, 2008 2007
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ASSETS

Current assets:
Cash and cash equivalents $ 12,621,811 $ 3,008,797
Accounts receivable 40,773,509 29,943,706
Inventory 6,680,448 3,254,756
Prepaid expenses 1,088,468 574,853
Income tax receivable 322,958 -
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61,487,194 36,782,112

Drilling and other equipment 63,570,964 39,694,148
Goodwill 8,876,351 8,876,351
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$ 133,934,509 $ 85,352,611
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LIABILITIES AND UNITHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities $ 32,818,149 $ 16,631,330
Distributions payable 2,068,690 1,458,187
Income taxes payable - 65,000
Bank indebtedness - 2,827,355
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34,886,839 20,981,872

Long-term debt 5,000,000 1,775,000
Future income taxes 3,849,398 2,736,000
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43,736,237 25,492,872

Unitholders' equity:
Unitholders' capital 67,236,158 44,812,574
Contributed surplus 2,908,568 3,103,536

Retained earnings 18,901,636 15,741,760
Accumulated other comprehensive income (loss) 1,151,910 (3,798,131)
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20,053,546 11,943,629
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90,198,272 59,859,739

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$ 133,934,509 $ 85,352,611
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Consolidated Statements of Earnings

Three-month periods ended
December 31, Years ended December 31,
2008 2007 2008 2007
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(unaudited) (unaudited) (audited) (audited)

Revenue $ 48,064,987 $ 31,018,490 $164,344,928 $115,547,848
Direct costs 33,495,816 19,830,209 $108,614,714 $ 73,213,428
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Gross profit 14,569,171 11,188,281 55,730,214 42,334,420
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Expenses:
Selling, general
and administrative 5,634,218 3,299,042 18,344,156 12,681,482
Depreciation and
amortization 2,738,566 1,875,874 9,160,340 7,165,115
Provision for bad
debts 387,756 661,882 396,250 1,748,169
Stock-based
compensation 342,193 391,955 1,407,485 1,419,466
Foreign exchange
(gain)/loss (5,429) 102,747 332,610 576,203
Interest on
long-term debt 23,292 31,430 62,541 110,547
Other interest (5,176) 8,692 (47,074) 2,824
Gain on disposition
of drilling equipment (828,683) (546,743) (2,390,566) (623,980)
----------------------------------------------------------------------------
8,286,737 5,824,879 27,265,742 23,079,826

----------------------------------------------------------------------------
Earnings before
income taxes 6,282,434 5,363,402 28,464,472 19,254,594
----------------------------------------------------------------------------

Provision for /
(recovery of) income
taxes
Current (2,372,246) 17,000 683,002 270,000
Future 2,240,547 65,000 2,250,941 771,000
----------------------------------------------------------------------------
(131,699) 82,000 2,933,943 1,041,000
----------------------------------------------------------------------------

Net earnings $ 6,414,133 $ 5,281,402 $ 25,530,529 $ 18,213,594
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Earnings per unit
- basic $ 0.26 $ 0.24 $ 1.08 $ 0.81
Earnings per unit
- diluted $ 0.26 $ 0.23 $ 1.07 $ 0.81
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Consolidated Statements of Comprehensive Income
Three-month periods & years ended December 31, 2008 and 2007

2008 2007 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)

Net earnings 6,414,133 5,281,402 $ 25,530,529 $ 18,213,594
Foreign currency
adjustment 3,485,935 (74,446) 4,950,041 (2,182,238)

----------------------------------------------------------------------------
Comprehensive income $ 9,900,068 $ 5,206,956 $ 30,480,570 $ 16,031,356
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Consolidated Statements of Cash Flows

Three-month periods ended
December 31, Years ended December 31,
2008 2007 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from
operating
activities:
Net earnings $ 6,414,133 $ 5,281,402 $ 25,530,529 $ 18,213,594
Add (deduct) items
not affecting cash:
Depreciation and
amortization 2,738,566 1,875,874 9,160,340 7,165,115
Future income
taxes 2,240,547 65,000 2,250,941 771,000
Unrealized foreign
exchange (gain)/
loss (241,264) 174,738 (25,825) 727,938
Gain on
disposition of
drilling equipment (828,683) (546,743) (2,390,566) (623,980)
Stock-based
compensation 342,193 391,955 1,407,485 1,419,466
Provision for bad
debts 387,756 661,882 396,250 1,748,169
Change in non-cash
working capital 4,134,866 1,704,372 (3,407,298) (3,318,132)
----------------------------------------------------------------------------
15,188,114 - 9,608,480 32,921,856 26,103,170
----------------------------------------------------------------------------

Cash flows from
investing
activities:
Proceeds on
disposition of
drilling equipment 2,125,745 936,308 6,079,081 2,237,982
Acquisition of
drilling and other
equipment (10,680,443) (3,449,078) (33,908,041) (14,610,124)
Change in non-cash
working capital 2,428,513 (300,565) 5,060,620 1,176,007
----------------------------------------------------------------------------
(6,126,185) - (2,813,335) (22,768,340) (11,196,135)
----------------------------------------------------------------------------

Cash flows from
financing
activities:
Issuance of units
from unit option
plan 51,778 127,910 4,028,487 944,789
Issuance of units
from equity
financing - - 16,792,644 -
Distributions to
unitholders' (6,202,367) (4,371,753) (21,759,278) (17,433,573)
Repayment of
long-term debt - - (1,775,000) -
Repayment of bank
overdraft facility - - (2,827,355)
Proceeds of long
term debt 5,000,000 - 5,000,000
Proceeds from bank
overdraft facility - 2,827,355 - 2,827,355
----------------------------------------------------------------------------
(1,150,589) - (1,416,488) (540,502) (13,661,429)
----------------------------------------------------------------------------

Increase in cash
and cash
equivalents 7,911,340 - 5,378,657 9,613,014 1,245,606
Cash and cash
equivalents (bank
indebtedness),
beginning of period 4,710,471 (2,369,860) 3,008,797 1,763,191
----------------------------------------------------------------------------
Cash and cash
equivalents, end of
period $ 12,621,811 - $ 3,008,797 $ 12,621,811 $ 3,008,797
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Contact Information

  • Phoenix Technology Services Inc.
    John Hooks
    President and CEO
    (403) 543-4466
    (403) 543-6025 (FAX)
    or
    Phoenix Technology Services Inc.
    Cameron Ritchie
    Senior Vice President Finance and CFO
    (403) 543-4466
    (403) 543-6025 (FAX)
    or
    Phoenix Technology Services Inc.
    Suite 630, 435 4th Avenue SW
    Calgary, Alberta T2P 3A8
    Website: www.phoenixcan.com