Pure Energy Services Ltd.
TSX : PSV

Pure Energy Services Ltd.

August 13, 2007 17:11 ET

Pure Energy-2007 Second Quarter Financial Statements and M D & A

CALGARY, ALBERTA--(Marketwire - Aug. 13, 2007) - Pure Energy Services Ltd. (TSX:PSV) -

PURE ENERGY SERVICES LTD.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2007



PURE ENERGY SERVICES LTD.
Consolidated Balance Sheets
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(Unaudited, stated in thousands of dollars)

June 30, December 31,
2007 2006
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Assets

Current assets
Accounts receivable $ 13,182 $ 31,153
Inventory 2,345 1,339
Income taxes recoverable - 736
Deposits and prepaid expenses 2,572 1,175
Current portion of note receivable
(Notes 3(b) and 4) 533 2,331
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18,632 36,734
Note receivable (Notes 3(b) and 4) 533 4,662
Property, plant and equipment 159,018 144,467
Intangible assets 2,730 3,156
Goodwill 1,230 1,230
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$ 182,143 $ 190,249
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Liabilities and Shareholders' Equity

Current liabilities
Operating loan (Note 5) $ 3,719 $ 13,853
Accounts payable and accrued liabilities 8,809 13,055
Income taxes payable 1,664 -
Current portion of long-term debt 333 521
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14,525 27,429
Long term debt (Note 6) 30,667 13,146
Future income taxes 7,447 12,531

Shareholders' equity

Share capital (Note 7) 106,002 106,002
Contributed surplus 2,290 1,585
Accumulated other comprehensive loss (2,188) -
Retained earnings 23,400 29,556
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129,504 137,143
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Contingency (Note 11)
Subsequent event (Note 4)
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$ 182,143 $ 190,249
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See accompanying notes to the interim consolidated financial statements.


PURE ENERGY SERVICES LTD.
Consolidated Statements of Earnings(Loss) and Retained Earnings

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(Unaudited, stated in thousands of dollars, except per share amounts)

Three months ended Six months ended
June 30, June 30,
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2007 2006 2007 2006
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Revenue $ 16,510 $ 22,943 $ 62,616 $ 65,030

Expenses
Operating 17,790 17,983 49,421 42,724
Selling, general and
administrative 5,182 4,127 10,480 8,148
Depreciation and amortization 2,864 1,876 6,026 3,814
Interest on long-term debt 478 83 771 295
Other interest 99 - 295 -
Foreign exchange loss 38 341 30 310
Other expense (income) 3,892 (171) 3,776 (150)
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30,343 24,239 70,799 55,141

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Income (loss) before
income taxes (13,833) (1,296) (8,183) 9,889

Income taxes
Current tax expense (recovery) (1,775) (1,134) 2,338 2,168
Future tax expense (reduction) (2,789) 77 (5,082) 781
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(4,564) (1,057) (2,744) 2,949

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Net income (loss) (9,269) (239) (5,439) 6,940

Retained earnings, beginning
of period, as previously
reported 32,669 23,689 29,556 16,510

Adjustment relating to fair value
accounting of financial
instrument (Note3(b)) - - (717) -
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Retained earnings, beginning of
period, as re-stated 32,669 23,689 28,839 16,510
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Retained earnings, end of
period $ 23,400 $ 23,450 $ 23,400 $ 23,450
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Earnings (loss) per share (Note 8)
Basic $ (0.58) $ (0.02) $ (0.34) $ 0.46
Diluted $ (0.58) $ (0.02) $ (0.34) $ 0.44
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See accompanying notes to the interim consolidated financial statements.


PURE ENERGY SERVICES LTD.
Consolidated Statements of Comprehensive Income (Loss) and Accumulated Other
Comprehensive Loss

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(Unaudited, stated in thousands of dollars)

Three months ended Six months ended
June 30, June 30,
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2007 2006 2007 2006
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Net income (loss) $ (9,269) $ (239) $ (5,439) $ 6,940

Other comprehensive loss, net
of tax:

Unrealized loss on translating
financial statements of
self-sustaining foreign
operations (2,196) - (2,429) -

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Other comprehensive loss for
the period (2,196) - (2,429) -

Comprehensive income (loss)
for the period $(11,465) $ (239) $ (7,868) $ 6,940
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Three months ended Six months ended
June 30, June 30,
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2007 2006 2007 2006
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Accumulated other comprehensive
loss on translation of foreign
operations

Balance, beginning of period $ 8 $ - $ - $ -
Impact of translating financial
statements of self-sustaining
foreign operations on
January 1, 2007 - - 241 -
Unrealized loss on translation
of foreign operations during
the period (2,196) - (2,429) -
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Balance, end of period $ (2,188) $ - $ (2,188) $ -
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See accompanying notes to the interim consolidated financial statements.


PURE ENERGY SERVICES LTD.
Consolidated Statements of Cash Flows

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(Unaudited, stated in thousands of dollars)

Three months ended Six months ended
June 30, June 30,
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2007 2006 2007 2006
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Cash provided by (used in)
Operating activities
Net income (loss) $ (9,269) $ (239) $ (5,439) $ 6,940
Items not involving cash:
Depreciation and amortization 2,864 1,876 6,026 3,814
Future income tax expense
(reduction) (2,789) 77 (5,082) 781
Impairment of note receivable
(Note 4) 4,247 - 4,247 -
Stock-based compensation 338 307 705 508
Loss (gain) on sale of equipment (355) 34 (359) 55
Unrealized foreign exchange loss - 103 8 92
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(4,964) 2,158 106 12,190
Changes in non-cash working
capital balances (Note 10) 17,020 7,279 17,768 5,008
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12,056 9,437 17,874 17,198

Investing activities
Purchases of property, plant
and equipment (5,400) (21,120) (21,909) (40,069)
Note receivable - - 473 -
Intangible asset expenditures - (627) - (1,062)
Proceeds from the sale of
equipment 900 89 1,061 171
Changes in non-cash working
capital balances (Note 10) (3,967) 4,167 (4,347) 4,084
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(8,467) (17,491) (24,722) (36,876)

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Financing activities
Operating loan (8,506) - (10,485) -
Issuance of long-term debt 5,000 - 17,500 -
Repayment of long-term debt (83) (83) (167) (21,464)
Issue of share capital, net of
issue costs - 137 - 46,442
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(3,589) 54 6,848 24,978
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Increase (decrease) in cash - (8,000) - 5,300

Cash, beginning of period - 14,999 - 1,699
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Cash, end of period $ - $ 6,999 $ - $ 6,999
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Supplemental information (Note 10)

See accompanying notes to the interim consolidated financial statements.


PURE ENERGY SERVICES LTD.

Notes to the Consolidated Financial Statements

For the three and six months ended June 30, 2007 and 2006

(Unaudited, stated in thousands, except per share amounts)


1. Nature of operations

Pure Energy Services Ltd. (the "Corporation") is incorporated under the Business Corporations Act (Alberta) and provides completion and drilling related oilfield services to oil and gas exploration and development entities in the Western Canadian Sedimentary Basin and the US Rocky Mountain region.

The ability to move heavy equipment in oil and gas fields in Canada is dependent on weather conditions, whereby thawing in the spring renders many secondary roads incapable of supporting heavy equipment until the ground is dry. In addition, locations in more northern regions of Canada are accessible only in winter months where the ground is frozen enough to support the equipment. As a result of this seasonality, the Corporation's activity is traditionally higher in the first and fourth quarters of the year and lower in the second and third quarters.

2. Principles of presentation

The unaudited consolidated financial statements of the Corporation have been prepared by management in accordance with accounting principles generally accepted in Canada. These unaudited interim consolidated financial statements have been prepared following the same accounting policies and methods of application as the consolidated financial statements of the Corporation for the year ended December 31, 2006, except as disclosed in Note 3 below. The disclosures provided below are incremental to those included with the Corporation's annual consolidated financial statements. The unaudited interim consolidated financial statements and the related notes should be read in conjunction with the consolidated financial statements and the related notes for the year ended December 31, 2006.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end and the results of operations for the interim periods shown in these statements are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the accompanying unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary to present fairly the consolidated results of the Corporation's operations and cash flows for the three and six months ended June 30, 2007 and 2006.

3. Changes in accounting policies

(a) Since the Corporation's foreign operations in the United States have matured to the extent that they no longer require day to day financial assistance, they have been reclassified from integrated to self-sustaining operations. As a result, the Corporation has prospectively changed to the current rate method of foreign currency translation from the temporal method for consolidating its US operations. The exchange gain or loss attributable to current rate translation of non- monetary and monetary items as of the date of the change has been included as part of accumulated other comprehensive income (loss), a separate component of shareholders' equity.

(b) On January 1, 2007, the Corporation adopted Canadian accounting standards for financial instruments and other comprehensive income. Prior periods have not been restated.

Financial instruments

The new standards require that the note receivable be measured at fair value using the effective interest method with any adjustment of the previous carrying amount recognized as an adjustment of the opening balance of retained earnings at the beginning of the fiscal year in which the standard is initially adopted. Future gains or losses are recognized when the asset is derecognized. On January 1, 2007, the note receivable was accounted for at its fair value and the carrying value was reduced by $717. The resulting loss of $717 was charged to opening retained earnings. During the three and six months ended June 30, 2007, the Corporation recorded interest income of $nil (2006 - $nil) and $112 (2006 - $nil), respectively, which is included in other expense (income) on the Consolidated Statement of Earnings (Loss).

Other comprehensive income (loss)

The new standards require that the Corporation present a new Consolidated Statement of Comprehensive Income (Loss), which is comprised of net income (loss) and the unrealized foreign exchange gain or loss for the period related to the net investment in foreign operations. This statement has been included below the Consolidated Statements of Earnings (Loss) and Retained Earnings.

(c) Two new accounting standards have been issued which will come into effect on January 1, 2008. These standards require additional disclosure in the Corporation's financial statements in connection with financial instruments and capital. In addition, there is a new standard related to the measurement and disclosure of inventory which will be applied retrospectively, effective January 1, 2008. Management is currently assessing the impact of these changes.

4. Note receivable

The Corporation measures the note receivable for impairment based on the future expectations of cash receipts and the value of the outstanding principal by assessing the cash flow generating capability of the investment. Consideration is given as to whether a decline in recent or future cash flows is regarded as continuing for an extended period of time or is temporary.

The Supplier has defaulted on two provisions of the Agreement including failure to satisfy the quarterly repayment terms. These defaults and other factors indicate deterioration in the credit quality of the Supplier to the extent that the Corporation no longer has reasonable assurance of timely collection of the full amount of the note receivable. Management believes that some realistic prospect of recovery remains; however, the realizable amount of the loan is judged to be uncertain at this point in time.

As a result of the deterioration in the credit quality of the Supplier, the Corporation has recorded an allowance for loan impairment of $4.2 million reducing the carrying amount of the note receivable to $1.1 million, representing the estimated fair value of expected future cash flows and the underlying security. This value assumes that the assets securing the Corporation's position are liquidated. The resulting impairment charge of $4.2 million has been included in other expense (income) on the Consolidated Statement of Earnings (Loss) for the three and six months ending June 30, 2007.

Subsequent to June 30, 2007, the Corporation has commenced legal action against the borrower for breach of contract and other causes of action.

5. Operating loan

The Corporation has access to a $20,000 revolving demand operating loan. Canadian dollar advances are available at either the bank's prime rate plus 0.5% or subject to availability at the bank's Bankers' Acceptance rate plus 1.75%, or in combination. US dollar advances are available with interest at the bank's US base rate plus 0.5% per annum. The loan is secured by a general security agreement.

6. Long term debt

The Corporation has a $60,000 extendible revolving term loan facility and a $5,000 non-revolving term loan facility. Advances under the extendible revolving term loan facility are available at one of the bank's prime rate plus 0.5%, or subject to availability, either at the bank's Bankers' Acceptance rate plus 1.75% or the bank's fixed rate, or in combination. The extendible revolving facility is extendible annually at the bank's option. The current extension date of this facility is June 30, 2008. Should this facility not be extended, outstanding amounts will be repayable monthly over a four-year term. The loan is secured by a general security agreement.

The non-revolving term loan facility has been advanced at the bank's prime rate plus 0.75% and is repayable monthly over fifteen years. The loan is secured by mortgages covering all of the Corporation's property.



7. Share capital

(a) Common shares issued:

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Number of
Shares Amount
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(000's)

Balance, December 31, 2006 and June 30, 2007 15,847 $ 106,002
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(b) Escrow shares:

As at June 30, 2007, the Corporation has one million three hundred and thirty-eight thousand shares (2006 - two million eight hundred and thirty-one thousand) held in escrow that will be released over a period of time ranging from 180 days to three years from the date of closing of the initial public offering, which occurred on February 6, 2006.

(c) Stock options:

The average fair value of options issued during the three and six months ended June 30, 2007 was $4.00 (2006 - $7.85) and $4.13 (2006 - $7.49), respectively per option using the Black- Scholes option pricing model. The compensation cost to the Corporation for the three and six months ending June 30, 2007 was $338 (2006 - $307) and $705 (2006 - $508), respectively.



8. Earnings per share

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Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
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Net income (loss)
available to common
shareholders $ (9,269) $ (239) $ (5,439) $ 6,940
Weighted average
number of common
shares 15,847,031 15,830,160 15,847,031 15,174,513

Basic earnings
(loss) per share $ (0.58) $ (0.02) $ (0.34) $ 0.46
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Net income (loss)
available to common
shareholders $ (9,269) $ (239) $ (5,439) $ 6,940
Weighted average
number of common
shares 15,847,031 15,830,160 15,847,031 15,174,513
Dilutive effect of
stock options - - - 739,642
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Diluted weighted
average number of
common shares 15,847,031 15,830,160 15,847,031 15,914,155

Diluted earnings
(loss) per share $ (0.58) $ (0.02) $ (0.34) $ 0.44
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9. Segmented information

The Corporation operates in two main industry segments which operate in two geographic areas. These segments are Completion Services and Drilling Services and provide the following services to oil and gas exploration and production companies:

- Completion Services provides logging and perforating, production testing, multiline and pressure transient analysis services which are performed on new and producing oil and gas wells; and

- Drilling Services provides contract drilling services and equipment rentals.



The segmented amounts are as follows:
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Three months ended Completion Drilling
June 30, 2007 Services Services Corporate Total
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Revenue $ 15,099 $ 1,411 $ - $ 16,510
Loss before income
taxes (6,089) (1,320) (6,424) (13,833)
Depreciation and
amortization 2,633 231 - 2,864
Capital expenditures 4,464 936 - 5,400
Total assets 127,373 52,203 2,567 182,143
Goodwill 745 485 - 1,230
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Three months ended Completion Drilling
June 30, 2006 Services Services Corporate Total
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Revenue $ 17,957 $ 4,986 $ - $ 22,943
Income (loss) before
income taxes (542) 831 (1,585) (1,296)
Depreciation and
amortization 1,645 231 - 1,876
Capital expenditures 14,987 6,133 - 21,120
Total assets 109,966 39,523 8,224 157,713
Goodwill 745 485 - 1,230
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Six months ended Completion Drilling
June 30, 2007 Services Services Corporate Total
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Revenue $ 47,797 $ 14,819 $ - $ 62,616
Income (loss) before
income taxes (2,435) 2,920 (8,668) (8,183)
Depreciation and
amortization 5,248 778 - 6,026
Capital expenditures 17,931 3,978 - 21,909
Total assets 127,373 52,203 2,567 182,143
Goodwill 745 485 - 1,230
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Six months ended Completion Drilling
June 30, 2006 Services Services Corporate Total
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Revenue $ 49,197 $ 15,833 $ - $ 65,030
Income (loss) before
income taxes 7,770 5,128 (3,009) 9,889
Depreciation and
amortization 3,164 650 - 3,814
Capital expenditures 29,102 10,972 - 40,074
Total assets 109,966 39,523 8,224 157,713
Goodwill 745 485 - 1,230
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The Corporation operates in the following geographic locations:

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Three months ended June 30, 2007 Canada United States Total
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Revenue $ 7,967 $ 8,543 $ 16,510
Loss before income taxes (8,904) (4,929) (13,833)
Property, plant and equipment 97,253 61,765 159,018
Goodwill 1,230 - 1,230
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Three months ended June 30, 2006 Canada United States Total
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Revenue $ 18,439 $ 4,504 $ 22,943
Loss before income taxes (709) (587) (1,296)
Property, plant and equipment 104,139 18,573 122,712
Goodwill 1,230 - 1,230
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Six months ended June 30, 2007 Canada United States Total
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Revenue $ 45,296 $ 17,320 $ 62,616
Loss before income taxes (2,969) (5,214) (8,183)
Property, plant and equipment 97,253 61,765 159,018
Goodwill 1,230 - 1,230
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Six months ended June 30, 2006 Canada United States Total
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Revenue $ 55,582 $ 9,448 $ 65,030
Income before income taxes 9,859 30 9,889
Property, plant and equipment 104,139 18,573 122,712
Goodwill 1,230 - 1,230
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10. Supplemental cash flow information

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Three months ended Six months ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
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Interest paid $ 732 $ 83 $ 1,150 $ 295
Income taxes paid - 201 - 939

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Components of change
in non-cash working
capital balances:
Accounts receivable $ 21,785 $ 13,986 $ 17,663 $ 8,788
Inventory (695) (216) (1,072) (292)
Prepaid expenses and
deposits (1,547) (1,623) (1,442) (1,401)
Accounts payable and
accrued liabilities (4,716) 676 (4,066) 812
Income taxes payable (1,774) (1,377) 2,338 1,185
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13,053 11,446 13,421 9,092
Change in non-cash
working capital on
investing activities (3,967) 4,167 (4,347) 4,084
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Change in non-cash
working capital on
operating activities $ 17,020 $ 7,279 $ 17,768 $ 5,008
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11. Contingency

The Corporation's wholly-owned subsidiary, Pure Energy Services (USA), Inc. ("Pure USA") has been named in a lawsuit commenced by former employees claiming damages. Pure USA has made an offer to settle for $0.1 million which has been recorded as a liability in the financial statements. The former employees have rejected the settlement and the occurrence of further liability is not determinable at this time.

12. Comparative figures

Certain comparative figures have been reclassified to conform with the current period's financial statement presentation.


PURE ENERGY SERVICES LTD.

MANAGEMENT'S DISCUSSION AND ANALYSIS FORM 51-102F1

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007

AUGUST 13, 2007

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following management's discussion and analysis ("MD&A") of the consolidated financial condition and results of operations of Pure Energy Services Ltd. (the "Corporation") is dated, and has been prepared taking into consideration information available to August 13, 2007 and should be read in conjunction with the consolidated unaudited financial statements of the Corporation as at and for the six months ended June 30, 2007 and 2006 and should also be read in conjunction with the audited consolidated financial statements and MD&A for the years ended December 31, 2006 and 2005. Additional information relating to the Corporation, including the Corporation's Annual Information Form, is available on SEDAR at www.sedar.com. Unless otherwise indicated, references in this MD&A to "$" or "Dollars" are to Canadian dollars.

Overview

The Corporation is an oilfield services company which currently conducts operations in the Western Canadian Sedimentary Basin ("Canadian Operations") and in the Rocky Mountain region of the United States ("US Operations") through its wholly-owned subsidiaries, Pure Energy Services (USA), Inc., Ross Wireline Services (2005) Ltd. and Motorworks Drilling Solutions Inc. and its partnership, Pure Energy Services Partnership (the "Partnership"). References to the "Corporation" in this MD&A refers to the Corporation and its subsidiaries and the Partnership. The Corporation currently has two operating segments, the Completion Services segment and the Drilling Services segment, which carry on business through various operating divisions. The Completion Services segment carries on business in both Canada and the United States. The Canadian Completion Services segment conducts operations in the Western Canadian Sedimentary Basin ("WCSB") and is comprised of the Production Testing division, the Logging and Perforating division, the Multiline division and the Pressure Transient Analysis division (the "Canadian Completion Services"). The US Completion Services segment conducts operations in the Rocky Mountain region of the United States and is comprised of the Production Testing division, the Logging and Perforating division and the Fracturing division (the "US Completion Services"). The Drilling Services segment ("Drilling Services") conducts operations in the WCSB and is comprised of the Quintera Drilling division and the Motorworks Rentals division.

Readers are cautioned that this MD&A contains certain forward-looking information. Please see "Forward-Looking Information" for a discussion concerning the use of such information in this MD&A.



Selected Consolidated Financial Information

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($ millions, except Three Months ended June 30, Six Months ended June 30,
per share amounts) 2007 2006 2007 2006
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(unaudited) (unaudited) (unaudited) (unaudited)

Revenue $ 16.5 $ 22.9 $ 62.6 $ 65.0

EBITDA (1) (10.4) 0.7 (1.1) 14.0

Net income (Loss) (9.3) (0.2) (5.4) 6.9

Earnings per share
Basic $ (0.58) $ (0.02) $ (0.34) $ 0.46
Diluted $ (0.58) $ (0.02) $ (0.34) $ 0.44
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(1) EBITDA does not have a standardized meaning prescribed by GAAP.
Management believes that, in addition to net income, EBITDA is a useful
supplemental measure. EBITDA is provided as a measure of operating
performance without reference to financing decisions and income tax
impacts, which are not controlled at the operating management level.
Investors should be cautioned that EBITDA should not be construed as
an alternative to net income determined in accordance with GAAP as an
indicator of the Corporation's performance. The Corporation's method of
calculating EBITDA may differ from that of other corporations and
accordingly may not be comparable to measures used by other
corporations. Please refer to the "Non-GAAP Disclosure" for the
reconciliation to net income.


Second Quarter Highlights

The Corporation's 2007 second quarter revenue decreased 28% compared to the 2006 second quarter. A net loss of $9.3 million and a loss per share of $0.58 were recorded during the 2007 second quarter.

WCSB activity levels experienced during the 2007 second quarter compared to the 2006 second quarter decreased significantly as indicated by a 42% decline in the Petroleum Services Association of Canada's ("PSAC") well count(1) and a 55% decline in the number of active rigs according to the Canadian Association of Oilwell Drilling Contractor's ("CAODC") rig count(2). Industry activity levels decreased significantly as a result of weak customer demand combined with significant amounts of wet weather experienced during the quarter. The Canadian Completion Services segment results reflected this decline in activity with a 57% decline in overall job count and significant reductions in revenue and income before income taxes for this segment.

(1) Source - 2007 PSAC Canadian Drilling Activity Forecast July Update

(2) Source - CAODC Average Monthly Drilling Rig Count - Western Canada

Reduced industry activity levels also affected the Drilling Services segment as the Quintera Drilling division experienced a decline in rig utilization from 29% recorded during Q2 2006 to 6% recorded during Q2 2007. The Quintera Drilling division's 2007 second quarter revenue decreased 72% relative to the 2006 second quarter. The Motorworks Rentals division's 2007 second quarter revenue decreased 48% compared to the 2006 second quarter. These significant declines were primarily a result of the significant reduction in industry activity levels.

The US Rocky Mountain region has not experienced an extensive activity decline with the Q2 2007 rig count(3) decreasing 2% compared to the Q2 2006 rig count. The US Production Testing division experienced 49% growth in revenue and income before income taxes increased from basically break even levels experienced during Q2 2006 to strong levels experienced during Q2 2007 as a result of the revenue growth coupled with operational leverage on this division's fixed cost structure.

(3) Source - Baker Hughes Weekly Rotary Rig Count

The US Fracturing division's financial results continued to be hampered by a lack of fracturing sand supply from its main fracturing sand supplier. Modest quantities of fracturing sand were delivered during June 2007, but the quantities were not sufficient enough to meaningfully impact the utilization of the fracturing equipment during the quarter. To date, the division's fracturing sand supplier has continued to provide some quantities of sand to the division. This increase in the sand supply has provided more of an opportunity for the division to sell its services; however, it is not sufficient to fully utilize the division's two fracturing spreads.

Year-to-Date Highlights

The Corporation's 2007 year-to-date second quarter revenue decreased 4% compared to the 2006 year-to-date second quarter revenue. Year-to-date EBITDA decreased 107% and a net loss of $5.4 million was recorded during the six months ended June 30, 2007 as compared to net income of $14.0 million recorded during the six months ended June 30, 2006.

Year-to-date WCSB activity levels have declined significantly which has negatively impacted the Canadian Operations' results. Additional equipment added to the WCSB combined with weak customer demand has reduced the Canadian Operations' utilization levels and put downward pressure on pricing. As a result, the 2007 year-to-date operating results for these segments are significantly lower than the 2006 year-to-date results.

The US Rocky Mountain region has not experienced a similar decline in activity. The US Production Testing division operated at near full capacity during the first six months of 2007 and its financial results reflect these strong activity levels. The US Production Testing division's consistent financial results over the past year are reflective of the solid activity levels experienced in the US Rocky Mountain region combined with the fact that this division has firmly established itself in this market.

The US Fracturing division commenced operations in December 2006 after experiencing significant equipment manufacturing delays. This division's year-to-date financial results have been significantly reduced by its fracturing sand supplier's failure to supply adequate quantities of fracturing sand.

Results of Operations

Three Months Ended June 30, 2007 Compared to the Three Months Ended June 30, 2006



Canadian Completion Services

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Canadian Completion Services
Financial Results Year-Over-Year
Three months ended, June 30, % of June 30, % of Change
($ thousands, unaudited) 2007 Revenue 2006 Revenue $ Percentage
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Revenue $ 6,556 100% $13,453 100% $(6,897) (51)%

Expenses
Operating 8,646 131.9% 10,308 76.6% (1,662) (16)%

Selling, general
and
administrative 2,030 31.0% 1,828 13.6% 202 11%

Depreciation and
amortization 1,602 24.4% 1,240 9.2% 362 29%

Other expense /
(income) (314) (4.8)% 32 0.2% (346)


Income (Loss)
before income
taxes $ (5,408) (82.5)% $ 45 0.3% $(5,453)
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Canadian Completion Services Revenue

Revenue for Canadian Completion Services decreased 51% in the 2007 second quarter compared to the 2006 second quarter and was largely attributable to a 57% decline in the job count, which was partially offset by a 14% increase in average revenue per job. The job count decline was most prominent in the Production Testing and Multiline divisions. The job count decline is comparable to the decline in industry activity as evidenced by the PSAC well count decline of 42% and the CAODC rig count decline of 55%. An increase in average revenue per job was experienced in all three divisions.

The Production Testing division's revenue and job count decreased 69% and 71% respectively, which was partially offset by a 6% increase in average revenue per job. The job count decrease was the result of the slowdown in industry activity and poor weather experienced during the quarter. The increase in average revenue per job was the result of more work being performed in the northern regions of the WCSB during the 2007 second quarter, where the average revenue per job is higher, as compared to the 2006 second quarter.

The Multiline division's revenue and job count decreased 50% and 52% respectively, which was partially offset by a 3% increase in average revenue per job. The job count decrease was the result of the slowdown in industry activity and poor weather experienced during the quarter. The slight increase in average revenue per job was the result of additional charges relating to new regulatory requirements which was partially offset by the lower average revenue per job typically earned from optimization services.

The Logging and Perforating division's revenue and job count decreased 36% and 39% respectively, which was partially offset by a 5% increase in average revenue per job. The job count decrease is less than the decline in industry activity levels primarily due to the division's ability to shift its focus towards deeper gas and oil directed drilling activity. Average revenue per job increased as a result of the pricing impact from the shift towards deeper gas and oil directed drilling activity which typically experiences higher revenue per job and lower number of jobs relative to shallow gas directed drilling activity.



----------------------------------------------------------------------------
Canadian
Completion
Services 2007 Second Quarter 2006 Second Quarter As at December 31,
Unit Complement Average Ending Average Ending 2007(A) 2006
----------------------------------------------------------------------------

Production
Testing
Division 45.9 45 37.3 38 45 46
Logging and
Perforating
Division 21.0 21 18.0 18 22 20
Multiline
Division 16.0 16 16.0 16 16 16
----------------------------------------------------------------------------

Canadian
Completion
Services
Total 82.9 82 71.3 72 83 82
----------------------------------------------------------------------------
(A) - Expected equipment capacity as at December 31, 2007 based on approved
budgets.


Canadian Completion Services Income before Income Taxes

Canadian Completion Services income before income taxes decreased significantly in the 2007 second quarter compared to the 2006 second quarter as a result of the significant decrease in revenue combined with negative leverage on all of the operating divisions' fixed expenses. Depreciation expense increased as a result of the additional capital added during the second half of 2006 and the first quarter of 2007 and also contributed to the decrease in income before income taxes.

The Production Testing division's income before income taxes decreased significantly in the 2007 second quarter compared to the 2006 second quarter primarily due to the decrease in revenue combined with negative leverage on the division's fixed expenses. The division's operating and general and administrative expenses decreased significantly on a dollar basis; however, the percentage decrease in expenses was not as large as the percentage decrease in revenue. Depreciation expense increased as a result of adding nine production testing units subsequent to the 2006 second quarter.

The Logging and Perforating division's income before income taxes decreased significantly in the 2007 second quarter compared to the 2006 second quarter primarily due to the decrease in revenue coupled with increases to wages and benefits and depreciation expense. Wages and benefits have increased as a result of wage increases required to retain quality staff. Depreciation expense has increased as a result of the addition of three units and other sustaining capital since the 2006 second quarter.

The Multiline division's income before income taxes decreased significantly in the 2007 second quarter compared to the 2006 second quarter primarily due to the decrease in revenue combined with negative leverage on the division's fixed expenses. The division's operating and general and administrative expenses in the 2007 second quarter remained at levels comparable to the 2006 second quarter on a dollar basis; however, the significant decrease in revenue negatively impacted the division's income before income taxes.



US Completion Services

----------------------------------------------------------------------------
US Completion Services
Financial Results Year-Over-Year
Three months ended, June 30, % of June 30, % of Change
($ thousands, unaudited) 2007 Revenue 2006 Revenue $ Percentage
----------------------------------------------------------------------------
Revenue $8,543 100% $4,504 100% $4,039 90%

Expenses
Operating 7,307 85.5% 4,213 93.5% 3,094 74%

Selling, general and
administrative 886 10.4% 471 10.5% 415 88%

Depreciation and
amortization 1,031 12.1% 405 9.0% 626 155%

Other expense / (income) - 2 0.0% (2) (100)%

Income (Loss) before
income taxes $ (681) (8.0)% $ (587) (13.0)% $ (94) (16)%

----------------------------------------------------------------------------


US Completion Services Revenue

US Completion Services revenue increased 90% in the 2007 second quarter compared to the 2006 second quarter as a result of the significant increase in the Production Testing division's revenue and revenue generated by the Fracturing and Logging and Perforating divisions. The significant increase in revenue occurred despite the average rig count in the Rocky Mountain region decreasing by 2%, indicating a marginal decrease in industry activity levels during the 2007 second quarter relative to the 2006 second quarter.

The Production Testing division produced another quarterly revenue record with revenue and job count increasing 49% and 41%, respectively, in the 2007 second quarter compared to the 2006 second quarter. The job count increase for the production testing equipment is significantly higher than the slight decrease in rig count and was largely the result of higher utilization and the addition of 6 units, representing a 32% increase in unit capacity, since the 2006 second quarter. Average revenue per job for the production testing equipment increased by 6% as a result of price increases implemented in the 2006 fourth quarter.

The Fracturing division's revenue for the 2007 second quarter increased 6% over the 2007 first quarter. The Fracturing division's revenue for the 2007 second quarter continued to increase, albeit at levels lower than management's expectations. Equipment utilization continued to be hampered by delays in the start up of the Corporation's fracturing sand supplier's operations. The Fracturing division did receive some fracturing sand from its sand supplier in June 2007; however, the quantities of sand received have not been sufficient to significantly increase utilization of the fracturing spreads. The Fracturing division received delivery of the second fracturing spread near the end of the 2007 first quarter. The fracturing spread was commissioned in April 2007 and is now fully operational.

The US Logging and Perforating division's revenue for the 2007 second quarter increased 22% over to the 2007 first quarter. Management believes that the revenue growth in this division will continue to increase as customer acceptance continues to strengthen and synergies are developed with the Fracturing division.



----------------------------------------------------------------------------
2007 2006 As at
US Completion Services Second Quarter Second Quarter December 31,
Unit Complement Average Ending Average Ending 2007(A) 2006
----------------------------------------------------------------------------

Production Testing Division 22.1 23 16.7 17 23 21

Logging and Perforating
Division 2.0 2 0.7 2 2 2

Fracturing Division(B) 2.0 2 - - 3 1

----------------------------------------------------------------------------

US Completion Services
Total 26.1 27 17.4 19 28 24

----------------------------------------------------------------------------

(A)-Expected equipment capacity as at December 31, 2007 based on approved
budgets.
(B)-A fracturing spread is made up of several pieces of specialized
equipment.


US Completion Services Income before Income Taxes

The US Completion Services 2007 second quarter income before income taxes is consistent with the 2006 second quarter as a result of the significant increase in the income before income taxes of the production testing division, which was almost entirely offset by the operating loss incurred by the Fracturing division, an increase in administrative expenses associated with the growth of the US corporate office in Denver, an increase in depreciation and amortization expenses, and a small operating loss incurred by the Logging and Perforating division. Depreciation and amortization expense have increased as a result of the additional equipment deployed in the US Completion Services segment coupled with amortization of the Fracturing and Logging and Perforating divisions' deferred pre-operating costs.

The US Production Testing division's income before income taxes also set another quarterly record and increased significantly relative to the 2006 second quarter as a result of the increase in revenue combined with positive leverage on the division's cost structure. Strong margins were generated by the Production Testing division as a result of high equipment utilization. The Production Testing division experienced decreases in salaries and wages, repairs and maintenance and travel and accommodation as a percentage of revenue. These decreases were partially offset by increases in subsistence, vehicle and fuel expenses.

A significant operating loss was recorded by the Fracturing division due to lower than expected revenue levels coupled with the significant amount of fixed expenses relating to the infrastructure required to operate this division.

Administrative expenses have increased as a result of the growth in the infrastructure required to support the current and future growth of the US Operations.



Drilling Services

----------------------------------------------------------------------------
Drilling Services
Financial Results Year-Over-Year
Three months ended, June 30, % of June 30, % of Change
($ thousands, unaudited) 2007 Revenue 2006 Revenue $ Percentage
----------------------------------------------------------------------------
Revenue $ 1,411 100% $4,986 100% $(3,575) (72)%

Expenses
Operating 1,837 130.2% 3,462 69.4% (1,625) (47)%

Selling, general and
administrative 704 49.9% 462 9.3% 242 52%

Depreciation and
amortization 231 16.4% 231 4.6% -

Other income (41) (2.9)% - (41)

Income (Loss) before
income taxes $(1,320) (93.6)% $ 831 16.7% $(2,151) (259)%

----------------------------------------------------------------------------


Drilling Services Revenue

Drilling Services revenue decreased 72% in the 2007 second quarter compared to the 2006 second quarter largely as a result of the decrease in rig and mud motor utilization coupled with a decrease in average revenue per day for the Quintera Drilling division.

The Quintera Drilling division's revenue decreased 78% in the 2007 second quarter compared to the 2006 second quarter. The decrease in revenue was largely a result of a decrease in utilization resulting from poor weather experienced during the quarter coupled with lower industry activity levels as evidenced by the CAODC active rig count decrease of 55%. An average of 10.0 drilling rigs operated during the 2007 second quarter at an average utilization rate of 6% compared to an average of 6.7 drilling rigs operating during the 2006 second quarter at an average utilization rate of 29%. The slowdown led to downward pressure on drilling rig day rates which resulted in the average revenue per day decreasing by 27%.

The Motorworks Rentals division's revenue decreased 48% in the 2007 second quarter compared to the 2006 second quarter as a result of decreased utilization levels arising from the industry slowdown and poor weather conditions.



----------------------------------------------------------------------------
2007 2006 As at
Drilling Services Second Quarter Second Quarter December 31,
Unit Complement Average Ending Average Ending 2007(A) 2006
----------------------------------------------------------------------------
Drilling rigs 10.0 10 6.7 7 10 9

Mud motors 60.0 60 33.0 33 60 56
----------------------------------------------------------------------------
(A) - Expected equipment capacity as at December 31, 2007 based on approved
budgets.


Drilling Services income before income taxes decreased by $2.2 million in the 2007 second quarter compared to the 2006 second quarter. The decrease is primarily the result of the negative leverage on the Drilling segment's fixed cost structure.

The Quintera Drilling division's income before income taxes decreased significantly as a result of the decrease in industry activity. On a dollar basis, total operating expenses decreased by over 50%, however the reduced revenue levels achieved by this division resulted in negative leverage on the division's fixed cost structure.

The Motorworks Rentals division's income before income taxes decreased by approximately $0.4 million as a result of the decrease in revenue coupled with increases in SG&A and depreciation expense. The increase in SG&A expenses is the result of additional employees required to support the growth of the business since the 2006 second quarter. Depreciation expense has increased as a result of the capital added since the 2006 second quarter.



Corporate

----------------------------------------------------------------------------
Corporate Services
Financial Results % of
Three months ended, June 30, Consolidated June 30,
($ thousands, unaudited) 2007 Revenue 2006
----------------------------------------------------------------------------
Expenses
Selling, general and
administrative $ 1,562 9.5% $ 1,366
Interest on long-term debt 478 2.9% -

Other interest 99 0.6% 83

Foreign exchange (gain) / 38 0.2% 341
loss
Other expense / (income) 4,247 25.7% (205)

Loss before income taxes $ 6,424 38.9% $ 1,585
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Corporate Services
Financial Results % of Year-Over-Year Change
Three months ended, Consolidated
($ thousands, unaudited) Revenue $ Percentage
----------------------------------------------------------------------------

Expenses
Selling, general and 6.0% $ 196 14%
administrative
Interest on long-term debt 478

Other interest 0.4% 16 18%

Foreign exchange (gain) / 1.5% (303) (89)%
loss
Other expense / (income) (0.9)% 4,452

Loss before income taxes 6.9% $ 4,839 305%
----------------------------------------------------------------------------


Corporate expenses for the 2007 second quarter increased 305% compared to the 2006 second quarter relative to a 28% decrease in consolidated revenue for the same comparative periods. Other expenses increased significantly as a result of the impairment of the note receivable of $4.2 million. Please refer to the Critical Accounting Estimates section in this MD&A for further discussion of the note receivable impairment. SG&A expenses increased $0.2 million or 14% as a result of higher salaries and wages expenses coupled with an increase in professional fees related to compliance with Multilaterial Instrument 52-109. Interest expense increased $0.5 million as a result of higher debt levels maintained carried during the 2007 second quarter compared to the 2006 second quarter.

Income Tax Expense

The 2007 second quarter income tax provision decreased relative to the 2006 second quarter income tax provision largely due to the increase in the loss before income taxes. The current income tax recovery and the future income tax reduction recorded during the quarter was largely a result of the loss incurred during the quarter.



Results of Operations

Six Months Ended June 30, 2007 Compared to the Six Months Ended June 30,
2006

Canadian Completion Services

----------------------------------------------------------------------------
Canadian Completion Services
Financial Results Year-Over-Year
Six months ended, June 30, % of June 30, % of Change
($ thousands, unaudited) 2007 Revenue 2006 Revenue $ Percentage
----------------------------------------------------------------------------
Revenue $ 30,477 100% $39,749 100% $(9,272) (23)%

Expenses
Operating 24,953 81.9% 25,729 64.7% (776) (3)%

Selling,
general and
administrative 4,120 13.5% 3,784 9.5% 336 9%

Depreciation
and amortization 3,173 10.4% 2,443 6.1% 730 30%

Other expense /
(income) (300) (1.0)% 53 0.1% (353)

Income (Loss) before
income taxes $ (1,469) (4.8)% $7,740 19.5% $(9,209) (119)%
----------------------------------------------------------------------------


Canadian Completion Services Revenue

Revenue for Canadian Completion Services decreased 23% in the first six months of 2007 compared to the first six months of 2006. The decrease was largely attributable to a 29% decline in the job count, which was partially offset by an 8% increase in average revenue per job. Similar job count declines were experienced in all three divisions. The job count decline is comparable to the decline in industry activity as evidenced by the PSAC well count decline of 27%(1) and the CAODC active rig count decline of 35%(2). An increase in average revenue per job was experienced in all three divisions, with the most significant increases occurring in the Multiline and Logging and Perforating divisions.

(1) Source - 2007 PSAC Canadian Drilling Activity Forecast July Update

(2) Source - CAODC Average Monthly Drilling Rig Count - Western Canada

The Production Testing division's revenue decreased 23% as a result of a 26% job count decrease which was partially offset by a 4% increase in average revenue per job. The division's job count decreased less than industry activity due to the division's broad customer base. The increase in average revenue per job related to more work being performed in the northern regions of the WCSB during the first six months of 2007, where the average revenue per job is higher, as compared to the first six months of 2006.

The Multiline division's revenue and job count decreased 26% and 36% respectively, which was partially offset by a 16% increase in average revenue per job. The decrease in job count was comparable to the decline in industry activity. The higher average revenue per job was largely the result of additional charges relating to new regulatory requirements.

The Logging and Perforating division's revenue and job count decreased 22% and 31% respectively, which was partially offset by a 12% increase in average revenue per job. The decrease in job count was comparable to the decline in industry activity. Average revenue per job increased as a result of the pricing impact from the shift towards deeper gas and oil directed drilling activity, which typically experiences higher revenue per job and lower number of jobs, relative to shallow gas directed drilling activity.

Canadian Completion Services Income before Income Taxes

Canadian Completion Services income before income taxes decreased significantly in the first six months of 2007 compared to the first six months of 2006 as a result of the decrease in revenue combined with negative leverage on all of the operating divisions' fixed expenses. Increases in depreciation, repairs and maintenance, vehicle expenses, rent, and insurance also contributed to the decrease in income before income taxes. Repairs and maintenance, vehicle expenses, and depreciation have increased as a result of adding equipment to the Canadian Completion Services segment.

The Production Testing division's income before income taxes as a percentage of revenue decreased by approximately eighteen percentage points due to a decline in revenue coupled with increases in depreciation, repairs and maintenance, and vehicle expenses as a result of equipment additions to the division. The division's operating and general and administrative expenses decreased significantly on a dollar basis; however, the decrease was not as great in percentage terms as the decrease in revenue.

The Logging and Perforating division's income before income taxes as a percentage of revenue decreased by approximately twenty two percentage points primarily as a result of the decrease in revenue coupled with increases in wages and benefits, depreciation, rent, insurance, and repairs and maintenance expenses.

The Multiline division's income before income taxes as a percentage of revenue decreased by approximately thirty percentage points primarily as a result of the decrease in revenue coupled with increases in salary and wages, repairs and maintenance and depreciation expense.



US Completion Services

----------------------------------------------------------------------------
US Completion Services
Financial Results Year-Over-Year
Six months ended, June 30, % of June 30, % of Change
($ thousands, unaudited) 2007 Revenue 2006 Revenue $ Percentage
----------------------------------------------------------------------------
Revenue $ 17,320 100% $ 9,448 100% $ 7,872 83%

Expenses
Operating 14,577 84.2% 7,894 83.5% 6,683 85%

Selling, general
and administrative 1,634 9.4% 801 8.5% 833 104%
Depreciation and
amortization 2,075 12.0% 721 7.6% 1,354 188%

Other expense /
(income) - 2 0.0% (2) (100)%

Income (Loss) before
income taxes $ (966) (5.6)% $ 30 0.3% $ (996)
----------------------------------------------------------------------------


US Completion Services Revenue

US Completion Services revenue increased 83% in the first six months of 2007 compared to the first six months of 2006 primarily as a result of a significant increase in the Production Testing division's revenue and revenue generated by the Fracturing and Logging and Perforating divisions. The average rig count in the Rocky Mountain Region marginally increased 1%(3) during the first six months of 2007 relative to the first six months of 2006.

(3) Source - Baker Hughes Weekly Rotary Rig Count

The Production Testing division's revenue and job count increased 46% and 43%, respectively, in the first six months of 2007 compared to the first six months of 2006. The significant job count increase is significantly higher than the 1% increase in rig count and was largely the result of high utilization and the addition of six units, representing a 55% increase in unit capacity since the 2006 second quarter. Average revenue per job of the Production Testing division increased by 2% as a result of price increases implemented in the 2006 fourth quarter.

The Fracturing division's revenue for the first six months of 2007 was negatively impacted by its main fracturing sand supplier's inability to provide sufficient quantities of sand. The Fracturing division has received some fracturing sand in June from its main supplier and deliveries have continued in July 2007. In the near term, management expects to continue to receive some fracturing sand from its main supplier; however, not in quantities anticipated under the contract with the main supplier.

The US Logging and Perforating division's revenue for the first six months of 2007 continued to increase, although at a slower rate than management's expectations. Management believes that the revenue growth in this division will continue to increase as customer acceptance strengthens.

US Completion Services Income before Income Taxes

US Completion Services' income before income taxes decreased by $1.0 million in the first six months of 2007 compared to the first six months of 2006. The Production Testing division's income before income taxes increased significantly as a result of the increase in revenue and strong utilization of the production testing equipment. The increase in the Production Testing division's income before income taxes was offset by the operating loss incurred by the Fracturing division, an increase in depreciation and amortization expense, an increase in administrative expenses associated with the growth of the US corporate office in Denver, and a small operating loss incurred by the Logging and Perforating division. Depreciation and amortization expense has increased as a result of the additional equipment deployed in US Completion Services coupled with amortization of the Fracturing and Logging and Perforating divisions' deferred pre-operating costs.

The US Production Testing division's income before income taxes increased by $1.5 million as a result of the increase in revenue combined with positive leverage on the division's cost structure as a result of high equipment utilization. The Production Testing division experienced decreases in salaries and wages, repairs and maintenance and travel and accommodation as a percentage of revenue. These decreases were partially offset by increases in subsistence, fuel and vehicle expenses.

A significant operating loss was recorded by the Fracturing division due to lower than expected revenue levels coupled with the significant amount of fixed expenses relating to the infrastructure required to operate this division.

Administrative expenses have increased as a result of growth in the administrative infrastructure required to support the current and future growth of the US Operations.



Drilling Services

----------------------------------------------------------------------------
Drilling Services
Financial Results Year-Over-Year
Six months ended, June 30, % of June 30, % of Change
($ thousands, unaudited) 2007 Revenue 2006 Revenue $ Percentage
----------------------------------------------------------------------------
Revenue $ 14,819 100% $15,833 100% $(1,014) (6)%

Expenses
Operating 9,891 66.7% 9,101 57.5% 790 9%

Selling, general and
administrative 1,290 8.7% 954 6.0% 336 35%

Depreciation and
amortization 778 5.3% 650 4.1% 128 20%

Other expense /
(income) (60) (0.4)% - (60)

Income before income
taxes $ 2,920 19.7% $ 5,128 32.4% $(2,208) (43)%
----------------------------------------------------------------------------


Drilling Services Revenue

Drilling Services' revenue decreased by 6% in the first six months of 2007 compared to the first six months of 2006 despite the significant decline in industry activity levels as evidenced by the decrease in the CAODC rig count of 35%. Poor weather conditions experienced in the 2007 second quarter combined with lower industry activity levels in the first six months of 2007 as compared to the first six months of 2006 resulted in a decrease in revenue for the Quintera Drilling division which was partially offset by the increase in revenue from the Motorworks Rentals division.

The Quintera Drilling division's revenue decreased by $2.3 million in the first six months of 2007 compared to the first six months of 2006 as a result of the decrease in industry activity. An average of 9.8 drilling rigs operated during the first six months of 2007 at an average utilization rate of 27% compared to an average of 6.3 drilling rigs operating during the first six months of 2006 at an average utilization rate of 53%. Average revenue per day increased by 4% during the first six months of 2007 compared to the first six months of 2006 due to an increase in ancillary revenue, which was partially offset by a decrease in drilling rig day rates.

The Motorworks Rentals division's revenue increased by $1.7 million or 75% in the first six months of 2007 compared to the first six months of 2006 largely as a result of the significant increase in equipment capacity coupled with the expansion of the division's customer base.

Drilling Services Income before Income Taxes

Drilling Services' income before income taxes decreased by $2.2 million in the first six months of 2007 compared to the first six months of 2006. The decrease is primarily the result of the negative leverage on the Drilling Services' fixed cost structure coupled with an increase in SG&A expenses. SG&A expenses primarily increased as a result of additional administrative support to the segment.

The Quintera Drilling division's income before income taxes decreased by fourteen percentage points primarily due to the decrease in revenue combined with negative leverage on the division's fixed cost structure. The decrease is the result of increased repairs and maintenance, SG&A, and fuel expense. Repairs and maintenance expense has increased due to the 30% increase in the number of rigs. SG&A expenses have increased as the result of adding more infrastructure to support the growth of the division. Fuel expense has increased as fewer customers directly provide fuel required to drill a well.

The Motorworks Rentals division's income before income taxes increased slightly due to the additional equipment added in the second half of 2006 coupled with positive leverage on the division's fixed cost structure. The fully operational service facility reduced operating expenses and turnaround time of mud motor servicing.



Corporate

----------------------------------------------------------------------------
Corporate Services
Financial Results % of
Six months ended, June 30, Consolidated June 30,
($ thousands, unaudited) 2007 Revenue 2006
----------------------------------------------------------------------------
Expenses
Selling, general and administrative $ 3,436 5.5% $ 2,609
Interest on long-term debt 771 1.2% 295
Other interest 295 0.5% -
Foreign exchange (gain) / loss 30 0.0% 310
Other expense / (income) 4,136 6.6% (205)

Loss before income taxes $ 8,668 13.8% $ 3,009

----------------------------------------------------------------------------


----------------------------------------------------------------------------
Corporate Services
Financial Results % of Year-Over-Year Change
Six months ended, Consolidated
($ thousands, unaudited) Revenue $ Percentage
----------------------------------------------------------------------------
Expenses
Selling, general and administrative 4.0% $ 827 32%
Interest on long-term debt 0.5% 476 161%
Other interest 295
Foreign exchange (gain) / loss 0.5% (280) (90)%
Other expense / (income) (0.3)% 4,341

Loss before income taxes 4.6% $ 5,659 188%

----------------------------------------------------------------------------


Corporate expenses for the six months ended June 30, 2007 increased 188% compared to the six months ended June 30, 2006 relative to a 4% decrease in consolidated revenue for the same comparative periods. Other expenses increased significantly as a result of the impairment of the note receivable of $4.2 million. Please refer to the Critical Accounting Estimates section in this MD&A for further discussion of the note receivable impairment. SG&A expenses increased $0.8 million or 32%, primarily as a result of higher salaries and wages, an increase in professional fees related to compliance with Multilaterial Instrument 52-109 and an increase in insurance premiums. In addition, stock based compensation expense increased $0.2 million. Interest expense increased by $0.8 million as a result of higher debt levels carried during the first six months of 2007 compared to the first six months of 2006.

Income Tax Expense

The income tax provision for the first six months of 2007 decreased relative to the first six months of 2006 as a result of the decrease in income before income taxes. Current income tax expense in the first six months of 2007 is greater than the first six months of 2006 due to the deferral of 2006 partnership income into 2007. The future income tax provision has declined in 2007 as compared to 2006 due to the decrease in income before income taxes.



Capital Expenditures

----------------------------------------------------------------------------
Three months ended Six months ended
('000's) June 30, June 30,
----------------------------------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------------------------------
Canadian Completion Services $ 1,065 $ 1,436 $ 2,859 $ 5,950
----------------------------------------------------------------------------
US Completion Services 3,127 13,307 14,351 22,653
----------------------------------------------------------------------------
Drilling Services 936 6,132 3,978 10,971
----------------------------------------------------------------------------
Corporate 272 245 721 495
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Total Capital Expenditures $ 5,400 $ 21,120 $ 21,909 $ 40,069
----------------------------------------------------------------------------


The Canadian Completion Services capital expenditures for the first six months of 2007 represent sustaining capital, the purchase of real property, and payments relating to two mini-loggers.

The US Completion Services capital expenditures for the first six months of 2007 represent progress payments on the third fracturing spread, final payments on the second fracturing spread, and sustaining capital.

The Drilling Services capital expenditures for the first six months of 2007 represent payments relating to Quintera Drilling division's ninth and tenth drilling rigs, additional support equipment for the Motorworks Rentals division, and sustaining capital.

Liquidity and Capital Resources

Cash Provided by Operating Activities for the Three Months Ended June 30, 2007

Cash received for services performed exceeded cash payments relating to operating and interest expenses during the quarter ended June 30, 2007 by $12.0 million.

Cash Provided by Operating Activities for the Six Months Ended June 30, 2007

Cash received for services performed exceeded cash payments relating to operating and interest expenses during the six months ended June 30, 2007 by $17.9 million.



Working Capital

----------------------------------------------------------------------------
As at As at
($ thousands) June 30, 2007 December 31, 2006
----------------------------------------------------------------------------
Current assets $ 18,632 $ 36,734
Current liabilities 14,525 27,429
----------------------------------------------------------------------------
Working capital $ 4,107 $ 9,305
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The decrease in working capital was largely a result of a $18.0 million decrease in accounts receivable and an increase in income taxes payable of $2.4 million, which were partially offset by the reduction of the operating loan balance of $10.1 million, a $4.2 million decrease in accounts payable and accrued liabilities, an increase in prepaid expenses and deposits of $1.4 million, and an increase in inventory of $1.0 million.

Financing

The Corporation's primary sources of financing are bank debt and equity issuances. In March 2007, the Corporation amended its loan agreement to increase the extendible revolving term loan facility from $50 million to $60 million and to extend the renewal date under the facility to June 30, 2008, maintaining all other terms and conditions of the existing facility.

As at August 13, 2007, the Corporation had 15,847,031 common shares and 1,545,692 stock options outstanding.

The Corporation, through the conduct of its operations, has undertaken certain contractual obligations. As at June 30, 2007, the Corporation's contractual obligations were as follows:



----------------------------------------------------------------------------
Payments Due by Period
----------------------------------------------------------------------------
Contractual Less than 1 1 - 3 4 - 5 After
Obligations ('000's) Total Year Years Years 5 Years
----------------------------------------------------------------------------
Long-term debt $ $ $ $ $
obligations (1) 31,000 333 13,917 13,917 2,833
----------------------------------------------------------------------------
Purchase obligations 13,321 13,321
----------------------------------------------------------------------------
Operating leases 9,078 3,705 3,877 1,079 417
----------------------------------------------------------------------------
Total Contractual $ $ $ $ $
Obligations 53,399 17,359 17,794 14,996 3,250
----------------------------------------------------------------------------

(1) Long-term debt obligations represent balances outstanding under the
extendible revolving loan facility and the non-revolving loan facility
and the obligations in the table above assumes the revolving facility
is not renewed in 2008.



Cash Requirements

----------------------------------------------------------------------------
As at June 30, 2007
----------------------------------------------------------------------------
Committed capital expenditures $ 16,655
----------------------------------------------------------------------------
Uncommitted capital expenditures 7,293
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Remaining capital budget $ 23,948
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Corporation has committed to spend $16.7 million which represents the capital expenditures necessary to complete capital projects currently underway and provided for under the Corporation's capital budget. The remaining $7.3 million is uncommitted and represents projects not yet started under the Corporation's capital budget.

The Corporation has historically financed its capital expenditures with funds from operations, equity issuances and debt. As at June 30, 2007, the Corporation has available debt capacity of $33.5 million on its extendible revolving term loan facility.

Fracturing Sand Supply

On July 6, 2007, the Corporation's wholly-owned subsidiary, Pure Energy Services (USA), Inc. ("Pure USA") issued notices of default to its main fracturing sand supplier (the "Supplier") in respect of the failure by the Supplier to:

a. pay to Pure USA the quarterly installment of $500,000 (USD) which was due on June 30, 2007; and

b. make available for purchase by Pure USA sufficient quantities of fracturing sand necessary to satisfy the purchase commitments provided for under the sand purchase agreement entered into between Pure USA and the Supplier.

Under the terms of the agreement between Pure USA and the Supplier, the Supplier had 30 days from the date of receipt of the notices of default to cure these defaults. The Supplier failed to cure these defaults during the 30 day period and Pure USA has commenced legal action against the Supplier for breach of contract and other causes of action.

Pure USA has received some quantities of fracturing sand from the Supplier and expects to continue to receive at least similar quantities in the near future. The quantity of sand received has allowed Pure USA to perform a number of fracturing treatments for customers and is providing the Corporation with the opportunity to establish its reputation in the Rocky Mountain region. Management is hopeful that it will continue to receive fracturing sand in the future as the Supplier addresses its financial and operational issues and ramps its operations up to full capacity. Pure USA will continue to actively pursue all options available to protect its interest and to assist the Supplier in resolving its financial and operational issues.

Critical Accounting Estimates

Note Receivable

The Corporation measures the note receivable for impairment based on the future expectations of cash receipts and the value of the outstanding principal by assessing the cash flow generating capability of the investment. Consideration is given as to whether a decline in recent or future cash flows is regarded as continuing for an extended period of time or is temporary.

The Supplier has defaulted on two provisions of the Agreement including failure to satisfy the quarterly repayment terms. These defaults and other factors indicate deterioration in the credit quality of the Supplier to the extent that the Corporation no longer has reasonable assurance of timely collection of the full amount of the note receivable. Management believes that some realistic prospect of recovery remains; however, the realizable amount of the loan is judged to be uncertain at this point in time.

As a result of the deterioration in the credit quality of the Supplier, the Corporation has recorded an allowance for loan impairment of $4.2 million reducing the carrying amount of the note receivable to $1.1 million representing the estimated fair value of expected future cash flows and the underlying security. This value assumes that the assets securing the Corporation's position are liquidated. The resulting impairment charge of $4.2 million has been included in other expense (income) on the Consolidated Statement of Earnings (Loss) for the three and six months ending June 30, 2007.

Contingency

The Corporation's wholly-owned subsidiary, Pure Energy Services (USA) Inc. ("Pure USA"), has been named in a lawsuit commenced by former employees claiming damages. Pure USA has made an offer to settle for US$0.1 million which has been recorded as a liability in the financial statements. The former employees have rejected the settlement and the occurrence of further liability is not determinable at this time.

Accounting Policies

The Corporation prepares its financial statements in accordance with GAAP. Except as discussed below, accounting policies have been applied consistently during all periods included in the financial statements. Certain information of the previous period has been reclassified to conform to the presentation adopted in the current year.

Change in Accounting Policy

Significant changes in economic facts and circumstances have indicated that the Corporation's foreign operations in the United States require reclassification from integrated to self-sustaining operations. The Corporation's foreign operations in the US grew significantly and will no longer require day-to-day financial assistance from the Corporation. As a result, the Corporation has prospectively changed to the current rate method of foreign currency translation from the temporal method for consolidating the US Operations. The exchange gain or loss attributable to the current rate translation of non-monetary and monetary items as of the date of the change has been included as part of accumulated other comprehensive income, a separate component of shareholders' equity.

Accounting Pronouncements

Three new Canadian accounting standards have been issued which will require additional disclosure in the Corporation's financial statements commencing January 1, 2008 about the Corporation's inventories and financial instruments as well as its capital and how it is managed.

On January 1, 2007, the Corporation adopted the CICA's new accounting requirements for financial instruments and other comprehensive income. Under these new rules, the Corporation is required to measure financial assets and liabilities at fair value and include a new section in Shareholders' Equity, called Other Comprehensive Income, to report unrealized foreign exchange gains or losses on the net investment in foreign operations.

The new rules require the note receivable to be measured at fair value using the effective interest method with any adjustment of the previous carrying amount recognized as an adjustment to opening retained earnings. Future gains or losses will be recognized as the note receivable is collected. On January 1, 2007, the note receivable was remeasured at fair value and the resulting loss of $717 was charged to opening retained earnings. During the three and six months ended June 30, 2007, the Corporation recorded interest income of $nil and $110 respectively, on the note receivable which is included in other expense (income) on the Consolidated Statement of Earnings (Loss).

Internal Controls over Financial Reporting

There have been no changes in the design of the Corporation's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Corporation's internal controls over financial reporting during the three and six months ending June 30, 2007.

Business Risks

A complete discussion on business risks faced by the Corporation may be found under "Risk Factors" in the Corporation's Annual Information Form dated March 8, 2007 which is available under the Corporation's profile at www.sedar.com.

Seasonality

Equipment utilization in the Canadian Operations is affected by weather conditions to varying degrees, with geographic location and type of service being a factor. The Canadian Operations tend to be more active during the winter months from November to March as the movement of heavy equipment is easier over frozen ground since many wellsite locations are only accessible during the winter months. The Canadian Operations typically experience the lowest levels of equipment utilization during April and May; however, field operations located in northern British Columbia and northern Alberta typically experience reduced activity levels throughout the summer months. All services provided by the Canadian Operations are affected by wet weather and road bans; however, the impact on the Drilling Services segment is typically more pronounced due to increased challenges encountered when moving drilling rigs.

The weather does not have as significant an impact on equipment utilization in the US Operations. Access to wellsite locations is not typically dependent on ground conditions in the US Rocky Mountain region. As a result, oilfield services industry activity in the US Rocky Mountain region does not tend to be seasonal in nature.

Outlook

A significant decline in industry activity has been experienced in the WCSB during the first half of 2007. High natural gas inventory levels have resulted in low natural gas prices realized by the Corporation's customers and negatively impacted their exploration and development programs. Activity levels in the WCSB are expected to increase from the current seasonally low levels, but are expected to continue to be significantly lower than the activity levels experienced during recent years. Canadian Completion Services and Drilling Services segments are expected to continue to be negatively impacted by weak demand until natural gas inventory levels decline and prices strengthen.

Fracturing sand supply delays have materially reduced the year-to-date financial results of the US Fracturing division. Small quantities of fracturing sand from the sand supplier commenced in June 2007 and have continued to date. These deliveries are a positive step in the establishment of the US Fracturing division in the Piceance basin market; however, material increases in the quantities made available to the US Fracturing division need to be received to achieve the high level of equipment utilization expected of this division. This division's financial results are expected to continue to be weak-to-mixed at best for the remainder of 2007 as a result of the fracturing sand supply issue. Management believes that the Corporation has the right people and equipment in place and that the division has a good customer presence despite the nominal amount of fracturing jobs completed to date. Management is guardedly optimistic that the fracturing sand supply issue will be resolved in the near term and the US Fracturing division will gain positive momentum going into 2008.



Summary of Quarterly Results

----------------------------------------------------------------------------

($ millions, except
per share 2007 2006 2005
amounts, unaudited) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
----------------------------------------------------------------------------
Revenue $ 16.5 $ 46.1 $ 34.9 $ 35.4 $ 22.9 $42.1 $ 35.3 $26.7

Net income / (loss) (9.3) 3.8 2.8 3.3 (0.2) 7.2 5.7 2.9

Earnings / (loss)
per share
Basic $(0.58) $ 0.24 $ 0.17 $ 0.21 $(0.02) $0.49 $ 0.47 $0.26
Diluted $(0.58) $ 0.24 $ 0.17 $ 0.20 $(0.02) $0.47 $ 0.45 $0.25
----------------------------------------------------------------------------


Q2 2007

- Weak industry activity levels continued in the WCSB resulting in a significant reduction in revenue and operating results for Canadian Completion Services and Drilling Services.

- US Completion Services' Production Testing division produced another record quarterly revenue and income before income taxes during the quarter.

- US Completion Services' Fracturing division's financial results continue to be hampered by fracturing sand supply.

- The Corporate segment recorded an allowance for loan impairment increasing the net loss by $4.2 million as a result of the deterioration in the credit quality of the Corporation's fracturing sand supplier.

Q1 2007

- Weaker industry activity levels continued in the WCSB resulting in a reduction in revenue and operating results for Canadian Completion Services and Drilling Services.

- Drilling Services' Motorworks Rentals division substantially increased revenue due to strong equipment utilization during the quarter combined with significant growth in rental equipment capacity and its fully operational service facility.

- Drilling Services' Quintera Drilling division added rig 10, a deeper double rig, to its rig fleet.

- US Completions Services' Production Testing division produced record quarterly revenue and income before income taxes during the quarter.

- US Completion Services' Fracturing division completed 23 jobs during the quarter and received delivery of its second fracturing spread. Fracturing sand delivery delays resulted in an operating loss during the quarter.

Q4 2006

- Weaker industry activity levels continued in the WCSB resulting in a reduction in revenue and operating results for Canadian Completion Services and Drilling Services.

- US Completion Services' Fracturing division commenced operations in December 2006 with one fracturing spread.

- Drilling Services' Motorworks Rentals division substantially increased revenue due to the significant growth in rental equipment and the opening of its service facility.

- Canadian Completion Services added one mini-logger to its Logging and Perforating division and five production testing units to its Production Testing division.

- US Completion Services added one production testing unit to its Production Testing division.

- Drilling Services added rig 9, a deeper double rig, to its rig fleet and 21 mud motors to its drilling rental fleet.

Q3 2006

- Weaker industry activity levels, particularly in the shallow gas directed regions, were experienced in the WCSB during the quarter as a result of lower natural gas prices, reducing revenue and operating results for Canadian Completion Services and Drilling Services.

- Weak operating results were experienced in US Completion Services as the Production Testing division's operating results improved relative to the second quarter levels, but remained below management's expectations and the Logging and Perforating division recorded an operating loss.

- Canadian Completion Services added one mini-logger to its Logging and Perforating division and three production testing units to its Production Testing division.

- US Completion Services added three production testing units to its Production Testing division.

- Drilling Services adds rig 8, a single rig, to its rig fleet and two mud motors to its drilling rental fleet.

Q2 2006

- The results for the quarter reflected the impact of spring break-up, which historically hampers activity in Canadian Completion Services and Drilling Services.

- Weak operating results were experienced in the US Completion Services as the Production Testing division's operating results were reduced due to additional costs related to the recruitment and training of staff and an operating loss recorded by the Logging and Perforating division.

- Canadian Completion Services added one production testing unit to its Production Testing division.

- US Completion Services' Logging and Perforating division commenced operations with two electric line wireline units.

- Drilling Services added 12 mud motors to its drilling rental fleet.

Q1 2006

- New corporate quarterly highs for revenue, EBITDA, net income and earnings per share were established, exceeding the previous record set during Q4 2005.

- Strong industry activity levels in the WCSB resulted in strong equipment utilization for an expanded equipment fleet and combined with a favourable pricing environment resulting in record financial results for Canadian Completion Services and Drilling Services.

- Good utilization for an expanded US Completion Services' Production Testing equipment fleet resulted in improved US Completion Services financial results.

- US Completion Services added two production testing units to its Production Testing division.

- Drilling Services added rig 7, a single rig, to its rig fleet and 13 mud motors to its drilling rental fleet.

Q4 2005

- New corporate quarterly highs for revenue, EBITDA, net income and earnings per share were established, exceeding the previous record set during Q3 2005.

- Strong industry activity levels in the WCSB resulted in strong equipment utilization for an expanded equipment fleet and combined with a favourable pricing environment resulting in record financial results for Canadian Completion Services and Drilling Services.

- Canadian Completion Services' Multiline division experienced stronger operating results as it began to make meaningful inroads into the deep critical sour market. Stronger operating results continued in fiscal 2006.

- US Completion Services revenue and income before income taxes increased significantly as equipment capacity additions and strong industry activity levels combined to produce increased results.

- Motorworks Drilling Solutions Inc. was acquired during the quarter, introducing the Corporation to the drilling rentals business.

- Canadian Completion Services added three production testing units to its Production Testing division.

- US Completion Services added three production testing units to its Production Testing division.

- Drilling Services added rigs 5 and 6, a single and a double rig, respectively to its rig fleet.

Q3 2005

- New corporate quarterly highs for revenue, EBITDA, net income and earnings per share were established.

- Strong industry activity levels in the WCSB resulted in strong equipment utilization for an expanded equipment fleet and combined with a favourable pricing environment resulting in record financial results for Canadian Completion Services and Drilling Services.

- US Completion Services' revenue and income before income taxes increased significantly as equipment capacity additions and strong industry activity levels combine to produce increased results.

- Canadian Completion Services added one electric line wireline unit to its Logging and Perforating division and three combination wireline units to its Multiline division.

- US Completion Services added four production testing units to its Production Testing division.

Non-GAAP Disclosure

EBITDA does not have a standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other issuers. Management believes that, in addition to net income, EBITDA is a useful supplemental measure. EBITDA is provided as a measure of operating performance without reference to financing decisions and income tax impacts, which are not controlled at the operating management level. The following is a reconciliation of EBITDA, as used in this MD&A, to net income, being the most directly comparable measure calculated in accordance with GAAP.



----------------------------------------------------------------------------
Three Months ended Six Months ended
($ millions, except June 30, June 30,
per share amounts) 2007 2006 2007 2006
----------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
EBITDA $ (10.4) $ 0.7 $ (1.1) $ 14.0


Deduct:
Depreciation and
amortization 2.9 1.9 6.0 3.8
Interest expense 0.6 0.1 1.0 0.3
Income taxes (1) (4.6) (1.1) (2.7) 3.0

Net income (GAAP
financial measure) (9.3) (0.2) (5.4) 6.9

----------------------------------------------------------------------------
(1) Income taxes consist of current income taxes and future income taxes.


Forward-Looking Statements

Certain statements in this MD&A may constitute "forward-looking information" which involves known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Corporation, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information. When used in this MD&A, such information uses such words as "may", "would", "could", "will", "intend", "expect", "believe", "plan", "anticipate", "estimate" and other similar terminology. This information reflects the Corporation's current expectations regarding future events and operating performance and speaks only as of the date of this MD&A. Forward-looking information involves significant risks and uncertainties, should not be read as a guarantee of future performance or results, and will not necessarily be an accurate indication of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking information, including, but not limited to, the factors discussed below. Although the forward-looking information contained in this MD&A is based upon what management of the Corporation believes are reasonable assumptions, the Corporation cannot assure investors that actual results will be consistent with this forward-looking information. This forward-looking information is provided as of the date of this MD&A, and, subject to applicable securities laws, the Corporation assumes no obligation to update or revise such information to reflect new events or circumstances.

In particular, this MD&A contains forward-looking information pertaining to the following: capital expenditure programs; financing of the Corporation's activities including capital expenditures, supply and demand for oilfield services and industry activity levels, commodity prices, dependence on suppliers, dependence on personnel, collection of accounts receivable, expectations regarding market prices and costs, expansion of services in Canada and the United States and competitive conditions.

The Corporation's actual results could differ materially from those anticipated in the forward-looking information as a result of the following factors: general economic conditions in Canada and the United States; demand for oilfield services during drilling and completion of oil and natural gas wells; volatility in market prices for oil and natural gas and the effect of this volatility on the demand for oilfield services generally; competition; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; sourcing, pricing and availability of raw materials, consumables, component parts, equipment, suppliers, facilities, and skilled management, technical and field personnel; ability to integrate technological advances and match advances of competition; availability of capital; uncertainties in weather and temperature affecting the duration of the oilfield service periods and the activities that can be completed; changes in legislation and the regulatory environment, including uncertainties with respect to implementing the Kyoto Protocol; and the other factors considered under "Risk Factors" in the Corporation's Annual Information Form dated March 8, 2007 which is available under the Corporation's profile at www.sedar.com.

Contact Information

  • Kevin Delaney
    President and CEO
    Pure Energy Services Ltd.
    (403) 262-4000
    (403) 262-4005 (FAX)
    Email: kdelaney@pure-energy.ca
    or
    Michael Baldwin
    Chief Financial Officer
    Pure Energy Services Ltd.
    Email: mbaldwin@pure-energy.ca
    or
    Pure Energy Services Ltd.
    #300, 1010 - 1st Street S.W.
    Calgary, Alberta T2R 1K4
    Website: www.pure-energy.ca