Pure Energy Services Ltd.
TSX : PSV

Pure Energy Services Ltd.

May 12, 2009 20:55 ET

Pure Energy Services Ltd. Announces Results for the Quarter Ended March 31, 2009

CALGARY, ALBERTA--(Marketwire - May 12, 2009) - Pure Energy Services Ltd. (TSX:PSV)



Selected Consolidated Financial Information

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Three months ended March 31,
($ thousands, except per share amounts)
(unaudited) 2009 2008
(restated)
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Revenue $ 45,651 $ 46,695
Gross margin $ 9,051 $ 12,606
Gross margin % 20% 27%
General and administrative expenses $ 4,404 $ 5,297
EBITDA (1) $ 5,016 $ 7,296
EBITDAS (1) $ 5,108 $ 7,976
Net (loss) income $ (41) $ 2,058
Income per share:
Basic $ - $ 0.13
Diluted $ - $ 0.13
Funds flow from operations (2) $ 3,839 $ 6,604
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March 31, December 31,
2009 2008
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Total assets $ 217,197 $ 227,810
Total long-term debt $ 57,775 $ 65,314
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(1) EBITDA and EBITDAS do not have standardized meanings prescribed by
Canadian generally accepted accounting principles ("GAAP"). Management
believes that, in addition to net income, EBITDA and EBITDAS are useful
supplemental measures. EBITDA and EBITDAS are provided as measures of
operating performance without reference to financing decisions,
amortization or income tax impacts, which are not controlled at the
operating management level. EBITDAS also excludes stock-based
compensation expense as it is also not controlled at the operating
management level. Investors should be cautioned that EBITDA and EBITDAS
should not be construed as alternatives to net income determined in
accordance with GAAP as an indicator of the Corporation's performance.
The Corporation's method of calculating EBITDA and EBITDAS may differ
from that of other corporations and accordingly may not be comparable to
measures used by other corporations.

(2) Funds flow from operations is defined as cash from operating activities
before changes in non-cash working capital, as presented on the
Corporation's statement of cash flows. Funds flow from operations is a
measure that provides investors with additional information regarding
the Corporation's liquidity and its ability to generate funds to finance
its operations. Funds from operations does not have a standardized
meaning prescribed by GAAP and may not be comparable to similar measures
provided by other corporations.


First Quarter Highlights

As anticipated, activity in the industry during the quarter was depressed due to the impact of low commodity prices and the challenges of a global recession. US drilling activity declined 50% from the peak levels experienced in 2008 and first quarter drilling activity in Canada fell to levels not seen since 1999. While this industry environment certainly created some challenges for Pure in its Canadian and US operations, the diversity of Pure's operations allowed the Corporation to help mitigate the impact of the lower industry activity.

The following is a brief overview of a number of key highlights for the Corporation during the first quarter of 2009:

- Earned revenue of $45.7 million, within $1.0 million of the prior year's record revenue for the quarter;

- Continued to grow the contribution of the Corporation's US operations through the generation of 53% of the Corporation's consolidated revenue from its US operations versus 29% in the first quarter of 2008;

- Continued to expand the Corporation's operations in unconventional natural gas development areas in north eastern British Columbia;

- Proactively reduced operating costs in response to lower activity levels, allowing the Corporation to achieve a 20% gross margin as a percentage of revenue in a difficult operating environment; and

- Subsequent to quarter end, entered into a definitive agreement to combine its business with Canadian Sub-Surface Energy Services Corp. ("Canadian Sub-Surface") through a share exchange transaction whereby Pure's shareholders will own 67% and Canadian Sub-Surface's shareholders will own 33% of the combined company.

The increased contribution from the Corporation's USCS segment largely offset revenue declines experienced in the Corporation's CCS and Drilling segments resulting in revenue of $45.7 million during the quarter versus $46.7 million generated in the first quarter of 2008. Revenue and operating results also benefited from a 24% increase in the average US dollar exchange rate relative to the Canadian dollar in the quarter versus the first quarter of 2008.

This increase in contribution from Pure's US operations materially offset the significant decline in revenue experienced in the CCS and Drilling segments in the quarter versus the first quarter of 2008. The lower revenue in the Corporation's Canadian operating divisions was due to continued softening in industry activity levels in the WCSB. While the contribution from the Corporation's USCS segment increased in the quarter relative to the first quarter of 2008, revenue was 32% lower than the revenue generated in the USCS segment in the fourth quarter of 2008. The sharp decline in revenue during the quarter relative to the fourth quarter of 2008 is due to the significant decline in US industry activity levels.

As a result of the lower activity levels, combined with competitive pricing pressures, consolidated gross margin as a percentage of revenue declined to 20% during the quarter versus 27% in the first quarter of 2008, resulting in gross margin of $9.1 million versus $12.6 million in the first quarter of 2008.

In response to the low activity levels, the Corporation has undertaken a number of cost reduction initiatives. Included in these initiatives are staffing reductions, wage rollbacks, reduction of discretionary spending and the temporary parking of excess equipment until such time that industry activity levels increase.

As a result of the decrease in gross margin, EBITDA decreased to $5.0 million versus $7.3 million in the first quarter of 2008. Partially offsetting the impact of lower gross margin contribution on EBITDA was a $0.9 million reduction in general and administrative costs during the quarter. This reduction in general and administrative costs was due to the cost reduction initiatives as well as lower stock-based compensation expense during the quarter.

The decrease in EBITDA, combined with increased depreciation expense associated with the investment in capital assets subsequent to the first quarter of 2008, caused net income to decrease to nil in the quarter from $2.1 million during the first quarter of 2008. However, net income did benefit from $0.3 million in foreign exchange gains recognized during the quarter from the repatriation of cash from the Corporation's US subsidiary.

Subsequent Event

On May 6, 2009, the Corporation entered into a definitive agreement to combine its businesses through a share exchange transaction with Canadian Sub-Surface Energy Services Corp. ("Canadian Sub-Surface") under which Canadian Sub-Surface will exchange all of its outstanding Class A common shares for common shares of Pure (the "Combination").

The Combination will be effected by way of a plan of arrangement ("Arrangement") under the Business Corporations Act (Alberta) whereby Canadian Sub-Surface shareholders will receive 0.3017 of a Pure common share for each Canadian Sub-Surface Class A common share. On completion of the Combination, the current shareholders of Pure will own approximately 67% of Pure's outstanding common shares, and the shareholders of Canadian Sub-Surface will own approximately 33% of Pure's outstanding common shares.

The proposed Arrangement is subject to customary stock exchange, court and regulatory approvals as well as approval by 66 2/3% of the shareholders of Canadian Sub-Surface voting in person or by proxy at a meeting of Canadian Sub-Surface shareholders to be scheduled for late June, 2009. The Combination is expected to close shortly thereafter.

Following the transaction, the combined entity, Pure, will have a total fleet of 94 wireline units, 123 production testing units, 10 swabbing units, 10 drilling rigs and three well fracturing spreads operating in the WCSB, US Rocky Mountain region and North Dakota.

As a result of this Combination, Pure will be one of the largest wireline and production testing companies in Canada, with a combined fleet of 87 wireline units and 87 production testing units, further supported with 10 swab rigs. Pure's combined US completions equipment fleet, consisting of 7 wireline units, 36 production testing units and 3 fracturing spreads will offer further expansion opportunities which the Corporation will be able to support with its increased size. The Corporation's Drilling Services segment will remain unchanged and continue to add diversification to Pure's revenue stream.

Combined, Pure and Canadian Sub-Surface are a stronger company which will provide a number of benefits including:

- Increased customer base;

- Increased exposure to unconventional oil and gas plays such as the Horn River and Montney gas plays in north eastern British Columbia, and the Bakken oil play in Saskatchewan and North Dakota;

- The increased fleet size and diversity of equipment which will allow the Corporation to reallocate equipment to support the growth of new markets in the US, such as the Marcellus shale gas play, as well as to better support the Corporation's existing operations;

- Improve cost efficiencies through consolidation of the existing operating and support infrastructures as well as cost benefits resulting from economies of scale; and

- Further diversification of customers, geographic coverage and services.

In conjunction with the proposed Combination, the Corporation has received a commitment from its existing lender to provide a secured $18 million demand revolving operating credit facility ("Operating Facility") and a secured $80 million one year extendible revolving credit facility ("Revolving Facility"). The Revolving Facility is subject to renewal on March 31, 2010, and if not extended would term out with 25% of the outstanding balance being repaid over one year and the remaining balance due upon expiry of the one year amortization period. Borrowings under the Operating Facility will bear interest at either: (i) the lender's prime rate plus 1.50%, or (ii) bankers acceptance rates plus 2.75%. Borrowings under the Revolving Facility will bear interest at either: (i) the lender's prime rate plus 2.50%, or (ii) bankers acceptance rates plus 4.00%. The other terms of the new facilities, including financial covenants and borrowing limits, are similar to those contained in Pure's current credit facilities.



Results of Operations

US Completion Services

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Three months ended March 31
($ thousands) (unaudited) 2009 2008 Variance % Change
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Revenue $ 24,267 $ 13,662 $ 10,605 78%
Operating expenses 19,036 11,639 7,397 64%
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Gross margin $ 5,231 $ 2,023 $ 3,208 159%
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Gross margin % 22% 15% 7% 47%

Average units available during the
period:
Production testing 34.0 26.7 7.3 27%
Wireline 6.0 3.0 3.0 100%
Fracturing spreads 3.0 3.0 - 0%
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Number of jobs completed:
Production testing 1,575 1,912 (337) (18%)
Wireline 399 172 227 132%
Fracturing 192 151 41 27%
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As a result of the significant growth for Pure's USCS segment undertaken in 2008, revenue generated in the USCS segment during the quarter increased 78% to $24.3 million from the $13.7 million generated in the first quarter of 2008. The key factors contributing to this revenue growth during the quarter were:

- The segment's well fracturing division began full operation subsequent to the first quarter of 2008 which resulted in the number of jobs increasing by 27% in the first quarter of 2009 versus the comparative period in 2008. The increase in activity levels combined with higher average job pricing resulted in revenue in the well fracturing division increasing to $11.7 million during the quarter versus $4.0 million in the first quarter of 2008. A change in customer well fracturing job designs and the commencement of contract operations allowed for the increase in average job pricing during the quarter versus the first quarter of 2008;

- Wireline activity increased 132% due to the doubling of the segment's wireline units subsequent to the first quarter of 2008. The higher activity for the segment's wireline division is due to the establishment of wireline operations in Wyoming during the second quarter of 2008 as well as the success of the segment's marketing strategy to combine wireline operations with well fracturing operations for its customers; and

- A 24% increase in the average exchange rate of the US dollar relative to the Canadian dollar also positively benefited revenue by approximately $4.7 million in the quarter relative to the exchange rate in the first quarter of 2008.

While all of the above factors contributed to the increase in revenue and activity for the USCS segment during the quarter relative for the first quarter of 2008, a sharp decline in industry activity subsequent to the fourth quarter of 2008 curtailed overall activity for all divisions in the USCS segment. Compounding the overall decline in industry activity due to low commodity prices, activity for the production testing division was negatively impacted by adverse weather conditions during the quarter which created operating challenges for the division's customers in North Dakota. As a result, a number of projects were delayed during the quarter.

The increase in revenue during the quarter resulted in an 159% increase in gross margin for the USCS segment to $5.2 million from the $2.0 million generated in the first quarter of 2008. The increase in gross margin is predominantly related to improved operating efficiencies associated with the increased field activity for the segment's well fracturing division subsequent to the first quarter of 2008. Well fracturing operations were hindered during the first quarter of 2008 due to delays in receiving sand from the Corporation's primary sand supplier. As a result, the division was required to incur unusually high costs to procure sand from alternative suppliers and the delay in ramp up of the division's operations caused the division to carry proportionately high overhead costs in comparison to the abnormally low field activity levels during the quarter. These operating challenges were overcome in subsequent quarters.

As a result of the lower activity levels experienced in the first quarter of 2009 relative to the third and fourth quarters of 2008, management took steps during the quarter to reduce the size of the segment's operating infrastructure. These cost cutting initiatives included staff reductions, supplier pricing negotiations and the reduction of discretionary spending. Wage rollbacks were also implemented subsequent to the quarter, which will further help support the segment's gross margins in response to lower activity levels and increased competitive pricing.



Canadian Completion Services

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Three months ended March 31
($ thousands) (unaudited) 2009 2008 Variance % Change
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Revenue $ 12,326 $ 18,337 $ (6,011) (33%)
Operating expenses 10,728 12,897 (2,169) (17%)
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Gross margin $ 1,598 $ 5,440 $ (3,842) (71%)
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Gross margin % 13% 30% (17%) (57%)

Average units available during
the period:
Production testing 35.0 40.3 (5.3) (13%)
Wireline 34.2 37.0 (2.8) (8%)
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Number of jobs completed:
Production testing 1,379 2,443 (1,064) (44%)
Wireline 987 1,494 (507) (34%)
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Revenue for the CCS segment declined 33% to $12.3 million in the quarter from $18.3 million in the first quarter of 2008. The decline in revenue is due to a 40% decline in the number of jobs completed during the quarter due to lower industry activity. The decline in industry activity is a direct result of lower natural gas prices which have negatively impacted the industry. In addition, activity in the province of Alberta declined as a result of the uncertainty surrounding a number of changes in royalty rates introduced by the provincial government that came into effect January 1, 2009. Temporary royalty incentives were introduced during the quarter in an effort to promote drilling during 2009, however, low cash flows caused by low commodity prices, combined with uncertainty in the credit and equity markets have limited the ability of oil and natural gas exploration and production companies to increase their investment in the province at this time.

Partially mitigating the impact on revenue from the decline in activity were higher average job revenues generated from an increased proportion of technical work in non-conventional natural gas exploration areas such as the Montney resource play in north eastern British Columbia. On an individual division basis, pricing in the segment's wireline division was consistent in the quarter versus the first quarter of 2008. Competitive pricing pressures caused price declines in some services provided by the wireline division, however, an increase in more complex, higher priced work in northern British Columbia and Alberta helped to mitigate lower pricing in other service areas.

This increase in northern British Columbia and Alberta work also benefited the segment's production testing division which experienced a 23% increase in average pricing in the quarter versus the first quarter of 2008. The increase in higher pressure work benefits the division through higher priced and longer jobs. Average pricing in this division was also skewed higher due to the impact of pass-through items such as equipment rentals, transportation and certain equipment maintenance associated with these northern projects. While these pass-through items increase average revenue rates, they have a nominal impact on the division's gross margin as these items are generally passed through to customers at cost.

As a result of the lower overall activity levels for the segment and increased costs associated with northern work, the segment's gross margin as a percentage of revenue declined to 13% during the quarter from the 30% generated in the first quarter of 2008. The wireline division was particularly negatively impacted by the decrease in activity due to the high fixed cost structure associated with this division's operations. In contrast, the higher proportion of variable costs in the production testing division allowed this division to reduce costs during the lower activity levels experienced during the quarter.

As a result of the lower revenue and gross margin as a percentage of revenue, gross margin declined to $1.6 million during the quarter from $5.4 million in the first quarter of 2008. In response to the lower activity levels and reduced margins, the CCS segment undertook a number of cost reduction measures in the quarter, including staffing reductions, wage rollbacks, reduction in support costs, and the elimination of discretionary spending. The CCS segment has also chosen to temporarily park excess wireline and production testing units in response to the lower activity levels and to eliminate all variable costs related to these units. These units will be brought back into production once warranted by improved activity levels in the industry.



Drilling Services

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Three months ended March 31
($ thousands) (unaudited) 2009 2008 Variance % Change
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Revenue $ 9,058 $ 14,696 $ (5,638) (38%)
Operating expenses 6,836 9,553 (2,717) (28%)
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Gross margin $ 2,222 $ 5,143 $ (2,921) (57%)
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Gross margin % 25% 35% (10%) (29%)

Average units available during
the period:
Drilling rigs 10.0 10.0 - 0%
Mud motors 54.7 59.0 (4.3) (7%)
Utilization:
Drilling rigs 39% 71% (32%) (45%)
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Revenue for Pure's Drilling Services segment decreased to $9.1 million during the quarter from $14.7 million in the first quarter of 2008. This decrease in revenue is due to lower industry activity which caused activity for the segment's drilling rigs to decline by 45% to a utilization of 39%. Lower activity was also experienced in the segment's directional drilling operations which experienced a 30% decline in revenue during the quarter.

The 39% utilization attained by Pure's drilling rigs was slightly above the 36% utilization attained by the industry during the quarter (source: CAODC). Industry drilling activity in the first quarter of 2009 was the lowest first quarter activity level seen since 1999 (source: Daily Oil Bulletin). Pure's drilling rigs enjoyed utilization of 69% during January, however, due to customers cancelling or reducing their drilling programs in light of low natural gas prices, activity levels fell during February, with all of the rigs being shut down by early March in response to the commencement of spring breakup.

Partially mitigating the impact on revenue from lower activity was an 8% increase in average day pricing for the segment's drilling rigs to $18,900 per day versus $17,500 per day in the first quarter of 2008. The higher result achieved during the quarter was due to higher third party pass-through items such as fuel, equipment rentals and trucking. These items are passed through to the customer at cost or a small mark-up which, while increasing revenue, has little impact on gross margin for the division. In addition, the drilling division was able to pass on a pricing increase associated with a 10% field salary increase implemented across the industry in October 2008.

As a result of the decreased revenue for the Drilling Services segment, gross margin decreased by 57% to $2.2 million from $5.1 million in the comparative quarter. Combined gross margin as a percentage of revenue for the segment was 25% during the quarter versus 35% in the first quarter of 2008. The decline in gross margin as a percentage of revenue was due to average base pricing declines in the segment's drilling rig division and the incurrence of higher field operating costs associated with the segment's directional drilling and mud motor division. In addition, lower activity resulted in a lower contribution towards fixed operating costs during the quarter.

In response to the lower activity currently being experienced, similar to the other segments, management has taken steps to reduce operating costs through the reduction of staffing levels. In addition, the CAODC has voted to reduce field wages by approximately 10% effective May 1, 2009. This wage reduction largely reverses the previous wage increase implemented by the CAODC in October 2008. While the field staff wage reductions will help reduce operating costs, management expects these cost savings will largely be offset by reduced revenue rates in response to continued competitive pricing in the industry.

General and Administrative Expenses

General and administrative expenses decreased during the quarter to $4.4 million from $5.3 million in the first quarter of 2008 and from $5.6 million incurred in the fourth quarter of 2008. The primary factor contributing to the lower general and administrative costs during the quarter was the receipt of $0.7 million from the Corporation's former legal counsel in settlement of a malpractice claim initiated by the Corporation related to legal advice previously provided by the Corporation's former legal counsel. General and administrative costs also benefited from lower stock-based compensation expense during the quarter which reduced to $0.1 million during the quarter versus $0.7 million in the first quarter of 2008. The first quarter of 2008 incurred $0.5 million in additional stock-based compensation expense related to the cancellation of various outstanding options.

Partially offsetting the cost reductions discussed above were severance costs of $0.2 million associated with staff reductions implemented during the quarter. Similar to the initiatives implemented in the operating divisions, management is reviewing its overhead cost structure in response to the lower activity levels currently being experienced. In addition to staffing reductions implemented during the quarter, management has also implemented various wage rollbacks in April 2009.

Depreciation and Amortization Expense

Depreciation and amortization expense increased to $4.1 million during the quarter versus the $3.7 million incurred in the first quarter of 2008. The increase is due to depreciation associated with $28.0 million in capital asset additions made subsequent to the first quarter of 2008.

Interest Expense

While average debt increased $16.7 million in the quarter versus the first quarter of 2008, a 49% decline in prime interest rates, plus the use of lower rate bankers acceptances during the quarter, allowed interest expense to decrease to $0.5 million in the quarter versus $0.7 million in the first quarter of 2008.

Other (Income) Expenses

Other income is primarily comprised of a $0.3 million foreign exchange gain related to the repatriation of cash from the Corporation's US subsidiary. In addition the Corporation recognized a $0.1 million gain on sale of assets associated with equipment lost in hole during the quarter and billed to customers. Similar foreign exchange gains or asset disposals did not occur during the first quarter of 2008.

Income Tax Expense

Pure recorded an income tax expense of $0.5 million during the quarter. This tax expense is higher than the expected tax expense based on the Corporation's statutory rates for its Canadian and US operations of 29.2% and 37.6%, respectively, due to the impact of non-deductible expense items.

Liquidity and Capital Resources

Pure ended the quarter with $5.7 million in cash and $59.4 million outstanding on the Corporation's debt facilities compared to $4.2 million in cash and $65.3 million outstanding on these facilities as at December 31, 2008. On a net debt basis, long-term debt less positive working capital, the Corporation's net debt decreased to $33.3 million from $35.1 million as at December 31, 2008. This decrease in net debt arose from the Corporation generating $3.8 million in positive funds flow from operations during the quarter. In addition to paying down debt facilities, a portion of the Corporation's positive funds flow from operations was used to invest $2.9 million in property and equipment expenditures during the quarter.

The Corporation's board of directors has approved a nominal $2.0 million capital budget for 2009 which will be used as required to maintain and supplement the Corporation's existing operating capacity and capabilities. These capital expenditures are in addition to approximately $6.0 million in capital expenditures which were carried over from 2008.

In addition to the capital expenditures discussed above, the Corporation has the following operating and debt commitments over the next five years:



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Payments Due by Period
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Contractual
Obligations Less than 1 1 - 3 4 - 5 After 5
($ thousands) Total year years years years
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Long-term debt
obligations (1) $ 57,775 $ 10,080 $ 26,341 $ 17,011 $ 4,343
Purchase
obligations 50,854 11,530 20,380 18,944 -
Operating leases 15,758 5,489 7,116 2,928 225
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Total Contractual
Obligations $ 124,387 $ 27,099 $ 53,837 $ 38,883 $ 4,568
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(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 2009.


Included in the Corporation's purchase obligations is a take-or-pay sand supply contract to support Pure's US well fracturing operations. Subsequent to quarter end, management successfully negotiated a 20% reduction in its contracted sand supply commitment for 2009. Under the revised terms of the agreement for 2009, the Corporation has committed to purchase approximately 109,000 tons of sand for 2009, with any unused purchases being carried over to 2010. The remaining shortfall from the Corporation's original 135,000 ton commitment will be spread out equally during the contract period of 2011 to 2013. Further reductions to the 2009 commitment will be considered on a quarterly basis throughout the remainder of 2009. Management believes this revised agreement for 2009 provides the Corporation with the necessary flexibility to operate its well fracturing operations during the reduced activity expected for 2009.

Management believes the Corporation's existing debt facilities combined with Pure's ability to generate positive funds flow from operations will be sufficient to finance the Corporation's current business operations and announced capital expenditure plans.

As at May 12, 2009, the Corporation had 15,905,431 common shares issued and outstanding and 1,231,627 stock options issued and outstanding, of which 891,627 were vested.

Changes in Accounting Policies

On January 1, 2009, the Corporation adopted new accounting standards dealing with Intangible Assets issued by the Canadian Institute of Chartered Accountants ("CICA"). These new standards, which apply to fiscal years beginning on or after October 1, 2008 have been adopted retrospectively resulting in restatement of prior period financial statements. The revisions to the various accounting standards are intended to align the definition of an Intangible Assets under Canadian GAAP with that under IFRS. Section 1000, "Financial Statement Concepts" was revised to remove material that permitted the recognition of assets that might not otherwise meet the definition of an asset and to add guidance from the IASB's "Framework for the Preparation and Presentation of Financial Statements" that will help distinguish assets from expenses. Section 3064 "Goodwill and Intangible Assets", which replaces Section 3052 "Goodwill and Other Intangible Assets", gives guidance on the recognition of intangible assets as well as the recognition and measurement of internally developed intangible assets.

As a result of the adoption of the new Section 3064, the intangible assets related to pre-operating expenditures for start-up activities in the United States have been reversed and balances for prior periods restated to reflect the change. The resulting impact on the comparative December 31, 2008 balance sheet is as follows:



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Previously
Reported Restated
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Opening retained earnings, January 1, 2008 25,310 24,322
Ending retained earnings, December 31, 2008 26,322 25,614
Intangible assets 1,671 266
Future income taxes 4,886 4,366
Accumulated other comprehensive income 4,349 4,172
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For the comparative income statement, amortization for the three months ended March 31, 2008 decreased by $0.1 million and future income tax expense increased by $0.1 million.

In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed the changeover to International Financial Reporting Standards ("IFRS") from Canadian generally accepted accounting principles ("GAAP") will be required for publicly accountable enterprises effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. There are a number of differences between IFRS and GAAP which may result in a number of changes to the Corporation's accounting policies and disclosures as a result of the transition to IFRS.

The transition from current GAAP to IFRS is a significant undertaking. The Corporation is in the process of reviewing the potential impact of IFRS on the Corporation's financial accounting and reporting processes. The Corporation has established an IFRS conversion steering committee which will be reviewing the Corporation's existing accounting policies and disclosures during 2009 and assessing the impact to these policies and disclosures in reference to standards differences between IFRS and GAAP.

Based on an initial review of the differences between IFRS and GAAP, the Corporation's steering committee has identified a number of areas which may result in significant adjustments to the Corporation's accounting policies and disclosures. The Committee's primary focus for 2009 will be to focus on these areas where significant effort will be required to adjust the Corporation's current accounting policies to conform to IFRS. The Committee anticipates completing its assessment of high impact areas during 2009 and based on this assessment, the Committee will begin to undertake the process of quantifying the impact of these IFRS changes on the Corporation's financial statements at the end of 2009 and into 2010.

Risks and uncertainties

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 18, 2009 which is available under the Corporation's profile at www.sedar.com.

Outlook

Industry activity continues to be depressed in both Canada and the US and there is a great amount of uncertainty and speculation by analysts as to when higher activity will once again return to the industry. The impact of lower industry activity on individual companies is further complicated by the markets in which companies compete. The diversity in activity levels throughout the industry is evidenced in Pure's operations. For example, activity in Pure's North Dakota operations is expected to be high relative to other areas due to its focus on oil development, and activity in Pure's technical deep natural gas focused completions work is expected to benefit from the continued industry development of non-conventional natural gas resource plays. In contrast, activity in other areas such as shallow natural gas development is expected to remain low in the current low natural gas price environment. As discussed in previous reports, the diversity of Pure's operations will be key in Pure's short-term and long-term success.

In order to capitalize on areas of higher activity, Pure continues to reallocate equipment amongst its operating bases. Subsequent to quarter end, Pure relocated one fracturing spread to North Dakota to complete fracturing projects for its existing production testing customers in North Dakota. In addition, a wireline unit was relocated from Canada to Wyoming in January to expand Pure's presence in technical high pressure natural gas completions work in Wyoming. The success of Pure's operations in this area has allowed this unit to replace a pre-existing large competitor for this project.

In areas of lower activity such as the Piceance basin in Colorado, Pure has responded to lower activity levels by reallocating equipment where possible and continuing to focus on providing strong operational performance to maintain its share of the lower industry activity. In fact, Pure's strong relationships with its key customers in this basin have allowed the Corporation to grow its market share during this period of lower industry activity.

While there are some bright spots in Pure's US operations, Pure will not be able to escape the impact of a 50% decline in drilling activity from the highs of 2008. This lower activity has not only reduced activity for Pure's US divisions, but has also created an environment of intense competitive pricing pressure. Pure has responded to these challenges by reducing its cost structure to reflect the lower activity levels. Included in these cost reduction initiatives are staff reductions and wage rollbacks. In addition, one key area of cost management was the recent renegotiation of the Corporation's sand supply contract for 2009. Pure's purchase commitment has now been reduced to reflect the lower level of sand required and the supplier has provided reduced pricing for some of its sand supply which will allow Pure to continue to be competitive in this environment.

Activity in the Canadian market is expected to remain challenging during 2009, with a number of analysts now predicting approximately 10,000 to 12,000 wells to be drilled in the WCSB during 2009 versus approximately 17,000 wells drilled during 2008. Coming off the lowest first quarter drilling activity since 1999, the Canadian market is now in the midst of spring break-up which is expected to be longer than normal due to the lack of urgency by exploration and development companies to continue their projects in the current low natural gas price environment. In response to this expectation of lower activity, Pure has been aggressively reducing its cost structure which management believes will help mitigate the impact of reduced revenues from lower activity and pricing due to competitive pricing pressures.

While operating in this environment of low industry activity certainly has its challenges, management believes Pure is meeting these challenges head on by leveraging off of its areas of strengths and focusing on adjusting its operations and cost structure to reflect the lower price and activity environment that will likely be a reality for the remainder of 2009.

The announced business combination of Pure and Canadian Sub-Surface will provide Pure with greater opportunities to diversify its business operations and expand upon the strengths of both Pure and Canadian Sub-Surface. The combined entity will also provide the Corporation opportunities to reallocate equipment to enhance its operating efficiencies and benefit from economies of scale.

Management is optimistic that the fundamentals of oil and natural gas supply and demand will eventually create an environment of higher activity, however, the timing of this recovery cannot be predicted with certainty. As such, the primary focus of management during this period of low activity is to continue to focus on maximizing the opportunities the Corporation has during this time period and maintain the strength of Pure's balance sheet, which will allow the Corporation to be in a position to prosper once activity levels increase again in the future.

Forward-looking Statements

This press release contains certain forward-looking statements and other information that are based on the Corporation's current expectations, estimates, projections and assumptions made by management in light of its experience and perception of historical trends, current conditions, anticipated future developments and other factors believed by management to be relevant.

All statements and other information contained in this press release that address expectations or projections about the future are future-looking statements. Some of the forward-looking statements may be identified by words such as "may", "would", "could", "will", "intends", "expects", "believes", "plans", "anticipates", "estimates", "continues", "maintains", "projects", "indicates", "outlook", "proposed", "objective" and other similar expressions. These statements speak only as of the date of this press release. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications 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 statements, including, but not limited to, the factors discussed below and under "Risks and uncertainties" discussed in the Corporation's MD&A of the audited December 31, 2008 financial statements and the most recent Annual Information Form, Information Circular, quarterly reports, material change reports and news releases. The Corporation cannot assure investors that actual results will be consistent with the forward-looking statements and readers are cautioned not to place undue reliance on them. The forward-looking statements are provided as of the date of this press release and, except as required pursuant to applicable securities laws and regulations, the Corporation assumes no obligation to update or revise such statements to reflect new events or circumstances.

The forward-looking statements and information contained in this press release reflect several major factors, expectations and assumptions of the Corporation, including without limitation, that the Corporation will continue to conduct its operations in a manner substantially consistent with past operations; the general continuance of current or, if applicable, assumed industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) taxation, royalty and regulatory regimes; certain commodity prices and other cost assumptions; certain conditions regarding natural gas storage in North America; the continued availability of adequate debt and/or equity financing and cash flow from the Corporation's operations to fund its capital and operating requirements as needed; the extent of its liabilities; and in relation to the Combination, the time required to prepare meeting materials for mailing to the Canadian Sub-Surface shareholders; and the timing and receipt of necessary regulatory and court approvals and the satisfaction of conditions to closing of the Combination. Many of these factors, expectations and assumptions are based on management's knowledge and experience in the industry and on public disclosure of industry participants and analysts relating to anticipated exploration and development programs of oil and gas producers, the effect of changes to regulatory, taxation and royalty regimes, expected active rig counts and industry equipment utilization in the WCSB and the Rocky Mountain region and other matters. The Corporation believes that the material factors, expectations and assumptions reflected in the forward-looking statements and information are reasonable; however, no assurances can be given that these factors, expectations and assumptions will prove to be correct.

In particular, this press release contains forward-looking information pertaining to the following: ability to reduce costs in response to lower industry activity levels; success of marketing programs; capital expenditure programs; ability to move equipment within operating locations; availability of debt financing and ability to renew the Corporation's existing facilities, including the new Operating Facility and the Revolving Facility, at acceptable terms; supply and demand for oilfield services and industry activity levels; oil and natural gas prices; oil and natural gas drilling activity; treatment under governmental royalty, collection of accounts receivable; operating risk liability; expectations regarding market prices and costs; expansion of services and operations in Canada and the United States; further reductions to the Corporation's 2009 commitments under its sand supply contract; the completion of the Combination; the new credit facilities of the Corporation available after the completion of the Combination; the anticipated synergies, operating efficiencies and cost savings resulting from the Combination; and competitive conditions.

The Corporation's actual results and its ability to complete the Combination could differ materially from those anticipated in such forward-looking statements as a result of the risk factors set forth below and elsewhere in this press release: failure to realize anticipated benefits from the Combination; failure to satisfy closing conditions in relation to the Combination; general economic conditions in Canada and the United States; changes in the level of capital expenditures made by oil and natural gas producers and the resultant effect on 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; risks inherent in the Corporation's ability to generate sufficient cash flow from operations to meet its current and future obligations; increases in debt service charges; the Corporation's ability to access external sources of debt and equity capital; changes in legislation and the regulatory environment, including uncertainties with respect to implementing binding targets for reductions of emissions; uncertainties in weather and temperature affecting the duration of the oilfield service periods and the activities that can be completed; competition; sourcing, pricing and availability of raw materials, consumables, component parts, equipment, suppliers, facilities, and skilled management, technical and field personnel; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; ability to integrate technological advances and match advances of competition; credit risk to which the Corporation is exposed in the conduct of its business; and changes to the royalty regimes applicable to entities operating in the WCSB or the Rocky Mountain region.



PURE ENERGY SERVICES LTD.

Consolidated Balance Sheets

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(Unaudited, stated in thousands of dollars)

March 31, 2009 December 31,
2008
As restated
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Assets

Current assets
Cash and cash equivalents $ 5,747 $ 4,201
Accounts receivable 25,463 37,304
Inventory 5,238 5,041
Deposits and prepaid expenses 1,726 1,996
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38,174 48,542
Property and equipment 178,766 179,002
Intangible assets 257 266
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$ 217,197 $ 227,810
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Liabilities and Shareholders' Equity

Current liabilities
Operating loan $ 1,657 $ -
Accounts payable and accrued liabilities 10,248 16,598
Income taxes payable 1,557 1,455
Deferred government grant 267 270
Current portion of long-term debt 10,080 7,909
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23,809 26,232
Long-term debt 47,695 57,405
Future income taxes 4,283 4,366
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75,787 88,003
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Shareholders' equity
Share capital 106,510 106,510
Contributed surplus 3,603 3,511
Accumulated other comprehensive income 5,724 4,172
Retained earnings 25,573 25,614
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141,410 139,807
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$ 217,197 $ 227,810
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PURE ENERGY SERVICES LTD.

Consolidated Statements of Income (Loss) and Retained Earnings

For the three months ended March 31,

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

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2009 2008
As restated
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Revenue $ 45,651 $ 46,695
Operating expenses 36,600 34,089
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Gross margin 9,051 12,606

Expenses
Selling, general and administrative 4,404 5,297
Depreciation and amortization 4,065 3,706
Interest on long-term debt 489 664
Other interest - 79
Gain on sale of equipment (81) (3)
Foreign exchange (gain) loss (288) 16

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Income before income taxes 462 2,847
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Income taxes
Current expense 411 626
Future expense 92 163
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503 789

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Net (loss) income (41) 2,058

Retained earnings, beginning of period 25,614 24,322
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Retained earnings, end of period $ 25,573 $ 26,380
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Earnings per share
Basic $ - $ 0.13
Diluted $ - $ 0.13
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PURE ENERGY SERVICES LTD.
Consolidated Statements of Cash Flows
For the three months ended March 31,

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(Unaudited, stated in thousands of dollars)

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2009 2008
As restated
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Cash provided by (used in)
Operating activities
Net (loss) income $ (41) $ 2,058
Items not involving cash:
Depreciation and amortization 4,065 3,706
Stock-based compensation expense 92 680
Future income tax expense 92 163
Gain on sale of equipment (81) (3)
Realized foreign exchange gain (288) -
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3,839 6,604
Changes in non-cash working capital balances 8,159 (8,846)
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11,998 (2,242)

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Investing activities
Purchases of property and equipment (2,851) (2,256)
Proceeds from the sale of equipment 331 28
Changes in non-cash working capital balances (2,189) (1,224)
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(4,709) (3,452)

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Financing activities
Operating loan 1,657 -
Net (repayment) of / proceeds of / from revolving
term loans (7,489) 7,021
Repayment of fixed term loans (194) (83)
Deferred charge (14) -
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(6,040) 6,938

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Increase in cash 1,249 1,244
Effect of translation on foreign currency
cash and cash equivalents 297 100
Cash, beginning of period 4,201 1,855
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Cash, end of period $ 5,747 $ 3,199
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Contact Information

  • Pure Energy Services Ltd.
    Kevin Delaney
    President and CEO
    (403) 262-4000
    (403) 262-4005 (FAX)
    Email: kdelaney@pure-energy.ca
    or
    Pure Energy Services Ltd.
    Brian Peters
    Chief Financial Officer
    (403) 262-4000
    (403) 262-4005 (FAX)
    Email: bpeters@pure-energy.ca
    or
    Pure Energy Services Ltd.
    10th Floor, 333 - 11th Avenue S.W.
    Calgary, AB
    T2R 1L9