Stoneham Drilling Trust
TSX : SDG.UN

Stoneham Drilling Trust

August 11, 2005 08:00 ET

Stoneham Drilling Trust- Financial results for the second quarter ended June 30, 2005.

CALGARY, ALBERTA--(CCNMatthews - Aug. 11, 2005) - Stoneham Drilling Trust (TSX:SDG.UN) ("Stoneham" or the "Trust") experienced a decrease in operating days, causing a drop in revenue, net earnings and cash flow from operations in the three month period ending June 30, 2005, compared to the same period in 2004 due to an extended spring break-up and reduced pad rig activity. Stoneham continued to surpass industry utilization by 44% in the second quarter of 2005 and by 23% year to date.



HIGHLIGHTS Three months ended Six months ended
(000s except for per June 30, June 30,
unit amounts) 2005 2004 Change 2005 2004 Change
$ $ % $ $ %

Revenue 5,144 6,027 -15% 13,938 14,172 -2%
Net earnings 867 1,096 -21% 2,979 3,147 -5%
Per unit (diluted) 0.14 0.35 -60% 0.54 1.00 -46%
Cash flow from
operations (1) 1,332 1,808 -26% 4,263 4,692 -9%
Per unit (diluted) 0.22 0.57 -61% 0.77 1.49 -48%
EBITDA (2) 1,264 1,998 -37% 4,255 5,119 -17%
Units outstanding
(weighted average) 6,157 2,823 118% 5,556 2,823 97%
Units outstanding
(diluted) 6,157 3,156 95% 5,556 3,156 76%

Operating Highlights
Number of rigs 7 6 17% 7 6 13%
Operating days 297 342 -13% 786 807 -3%
Utilzation rate 46.6% 62.6% -26% 63.6% 73.9% -14%
Industry average 32.4% 30.0% 8% 51.6% 51.6% 0%

(1) Readers are cautioned that cash flow from operations does not have a
standardized meaning prescribed by GAAP and therefore may not be
comparable to other companies. However, Stoneham does compute cash
flow from operations on a consistent basis for each reporting
period.
(2) EBITDA means earnings before interest, taxes, depreciation and
amortization. Readers are cautioned that EBITDA does not have a
standardized meaning prescribed by GAAP and therefore may not be
comparable to other companies. However, Stoneham does compute EBITDA
on a consistent basis for each reporting period.


Revenue, net earnings, and cash flow from operations decreased for the three and six months ended June 30, 2005, compared to the same period in 2004. Revenues for the three months ended June 30, 2005, were $5.1 million, net earnings $0.9 million, and cash flow from operations was $1.4 million. EBITDA for the three month period was $1.3 million.

Poor weather conditions, including record levels of rainfall experienced in parts of western Canada in June, extended spring break-up and decreased Stoneham's number of operating days and rig utilization rates by impeding rig movement. In the second quarter of 2004, Stoneham had two pad rigs in operation. The quad pad and octi pad proprietary technology allows multiple wells to be drilled from one surface location without having to rig up and rig down between wells resulting in higher rig utilization. During the same period in 2005 there was only one pad rig in operation. Operating days are expected to increase with the deployment of Rig 8 in July.

As a result of Stoneham's growth strategy to build new drilling rigs, construction of Rig 9 continued during the quarter and is expected to begin operating in the field in the third quarter. Construction of Rigs 10 and 11, both 4,000 metre telescopic triple drilling rigs are expected to be completed in the fall of 2005. Construction costs of the three rigs are and will be financed with proceeds from the private placement financing which closed on March 22, 2005 and through additional credit facilities.

Stoneham Drilling Trust is an income trust that provides contract drilling services to oil and natural gas exploration and production companies operating in western Canada. With its modern, innovative fleet of eight telescopic drilling rigs and three additional rigs currently under construction, Stoneham is an industry leader in operational performance and rig utilization. Stoneham began trading on the TSX on January 6, 2005 under the symbol SDG.UN. The Trust pays monthly cash distributions to unitholders.

This news release may contain forward-looking statements concerning the anticipated performance of Stoneham. Forward-looking statements are based on the estimates and opinions of management at the date the statements are made, and Stoneham undertakes no obligation to update forward looking statements if conditions or opinions should change.



STONEHAM DRILLING TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2005


Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto of Stoneham Drilling Trust for the year ended December 31, 2004, Management's Discussion and Analysis for the year ended December 31, 2004, and the unaudited Consolidated Financial Statements for the three and six month periods ended June 30, 2005. The Consolidated Financial Statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). Throughout this report the term "Stoneham" has been used to refer to Stoneham Drilling Trust, its subsidiaries, Stoneham Drilling Limited Partnership, Stoneham Drilling Inc. and Stoneham Administration Inc., as the context requires.

This discussion provides Management's analysis of Stoneham's historical financial and operating results and provides estimates of Stoneham's future financial and operating performance based on information currently available. Certain statements in this report may constitute forward-looking statements. Such forward-looking statements involve risks, uncertainties and other factors that may cause actual results to vary significantly from the results implied by such forward-looking statements. Consequently, readers should not place undue reliance on any forward-looking statements. Readers should also be aware that historical results are not necessarily indicative of future performance.

The information in this report was prepared on August 10, 2005, and incorporates all relevant considerations to that date.

Overview

The Trust is an open-ended, investment trust governed by the laws of the Province of Alberta pursuant to the Declaration of Trust. The Trust was established for the purpose of investing in property including the securities of Stoneham Drilling Limited Partnership, Stoneham Drilling Inc. and Stoneham Administration Inc. Valiant Trust Company (the "Trustee") is the Trustee of the Trust. The beneficiaries of the Trust are the holders of the trust units. The business of Stoneham involves the provision of contract drilling services to oil and natural gas exploration and production companies operating in western Canada.



Selected Financial Information

$ 000s except for per trust Three months ended Six months ended
unit data and trust units June 30, June 30,
outstanding 2005 2004 2005 2004
------------------------------------------------------------------------

Revenue 5,144 6,027 13,938 14,172
Net earnings 867 1,096 2,979 3,147
Per trust unit (basic) 0.14 0.39 0.54 1.11
Per trust unit (diluted) 0.14 0.35 0.54 1.00
Cash flow from operations (1) 1,332 1,808 4,263 4,692
Per trust unit (diluted) 0.22 0.57 0.77 1.49
Total assets 62,470 29,060 62,470 29,060
Long term debt (2) 2,769 11,322 2,769 11,322
Weighted average trust
units outstanding
Basic 6,156,561 2,822,801 5,556,407 2,822,801
Diluted 6,156,561 3,156,134 5,556,407 3,156,134

EBITDA (3) 1,264 1,998 4,255 5,119

(1) Readers are cautioned that cash flow from operations does not have a
standardized meaning prescribed by GAAP and therefore may not be
comparable to other companies. However, Stoneham computes cash
flow from operations on a consistent basis for each reporting
period.
(2) Long term debt includes obligations under capital lease, callable
debt, long-term debt and amounts due to unitholders, including the
current portion of each.
(3) EBITDA means earnings before interest, taxes, depreciation and
amortization. Readers are cautioned that EBITDA does not have a
standardized meaning prescribed by GAAP and therefore may not be
comparable to other companies. However, Stoneham does compute EBITDA
on a consistent basis for each reporting period.


Highlights

- Stoneham continues to benefit from an improved balance sheet as a result of its initial public offering on January 6, 2005 and its bought deal financing which was completed on March 6, 2005. The equity offerings consisted of 1,666,667 and 1,182,796 trust units resulting in net proceeds of $18.4 million and $20.8 million respectively.

- Stoneham continues to perform at a utilization rate higher than industry average with a second quarter utilization rate of 46.6%, which is 44% higher than the industry's utilization rate of 32.4% for the three months ended June 30, 2005, as reported by the CAODC.

- Poor weather conditions in western Canada extended spring break-up decreasing Stoneham's operating days to 297 for the three months ended June 30, 2005, from 342 for the same period in 2004. As a result year to date operating days at 786 for the six month period ended June 30, 2005, are also modestly below the 807 operating days for the same period in 2004. Operating days are defined as the number of days a drilling rig is in operation. To obtain Stoneham's total operating days, the operating days of all rigs working during the period are added together.



Operational Highlights (1)

Three months ended Six months ended
June 30, June 30, % June 30, June 30, %
2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
Operating days 297 342 -13% 786 807 -3%
Utilization rate 46.6% 62.6% -26% 63.6% 73.9% -14%
CAODC industry average 32.4% 30.0% 8% 51.6% 51.6% 0%
Number of drilling
rigs in operation 7 6 17% 7 6 13%

(1) As reported by the Canadian Association of Oilwell Drilling
Contractors (CAODC).


The Canadian drilling industry is seasonal with activity building over the summer and fall and peaking during the winter months as northern transportation routes become accessible. The peak Canadian drilling season ends with spring break-up, at which time drilling operations are curtailed due to seasonal road bans (temporary prohibitions on road use). As warm weather returns in the spring many secondary roads are incapable of supporting the weight of heavy equipment until they have completely dried out. This spring break-up usually occurs in April and May and generally lasts from four to eight weeks.

Poor weather conditions, including record levels of rainfall experienced in parts of western Canada in May and June, extended spring break-up and decreased the industry's number of operating days by impeding rig movement. In the second quarter of 2004, Stoneham had two pad rigs in operation. The quad pad and octi pad proprietary technology allows multiple wells to be drilled from one surface location without having to rig up and rig down between wells resulting in higher rig utilization. During the same period in 2005 there was only one pad rig in operation. Stoneham continued to operate at a higher than industry average utilization rate and expects this trend to continue. Operating days are expected to increase with the deployment of Rig 8 in July.



Revenue and Operating Expenses

Three months ended Six months ended
June 30, June 30, % June 30, June 30, %
$ 000s 2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
Revenue 5,144 6,027 -15% 13,938 14,172 -2%
Operating expenses 3,187 3,618 -12% 8,376 8,270 1%


Revenue for the three months ended June 30, 2005, decreased 15% to $5.1 million. The decrease is attributable to a lower number of operating days in the quarter due to an extended spring break-up period and having only one quad pad rig in operation. Revenue per operating day decreased slightly to $17,320 from $17,624 in the three month period ended June 30, 2005. This is attributable to reduced usage of the pad rig proprietary technology and elimination of certain equipment rentals that more than offset continued real price increases.

For the six months ended June 30, 2005, revenue decreased slightly to $13.9 million. The slight decrease is attributable to a similar small decline in activity. Revenue per operating day for the six month period ended June 30, 2005, increased to $17,732 from $17,561 per operating day for the same period in 2004. The increase is attributable to real price increases offset in part by second quarter reductions resulting from reduced pad rig usage and equipment rentals.

Operating expenses decreased to $3.2 million or $10,729 per operating day in the second quarter from $3.6 million or $10,578 per operating day for the same period in 2004. Lower utilization rates, offset by rig recertification costs incurred and an increased fixed cost component, caused operating expenses to not decrease in proportion to revenue in the quarter.

For the six month period ended June 30, 2005, operating expenses increased slightly to $8.4 million. This reflects the recertification costs incurred in both quarters on three rigs and the increase in the fixed cost component of operating costs in 2005 over 2004 levels as a result of changes made during 2004 in anticipation of our growth.



General & Administrative Expenses

Three months ended Six months ended
June 30, June 30, % June 30, June 30, %
$ 000s 2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
General &
Administrative 694 412 68% 1,307 782 67%


General and administrative expenses increased 68% to $0.7 million for the three month period ended June 30, 2005. The increase is attributable to additional staff hired to manage our larger fleet and increased costs associated with the requirements of being a publicly traded entity.

For the six month period ending June 30, 2005, general and administrative costs increased 67% over the prior year to $1.3 million, consistent with the discussion above.



Amortization

Three months ended Six months ended
June 30, June 30, % June 30, June 30, %
$ 000s 2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
Amortization 465 712 -35% 1,284 1,545 -17%


Amortization of property, plant and equipment decreased for the three month period ended June 30, 2005, to $0.5 million. The majority of Stoneham's assets are amortized on a unit-of-production basis thus resulting in a decrease from 2004 due to lower utilization rates and reduced utilization of the quad pad/octi pad equipment during the quarter. These same factors were also responsible for the decrease in amortization for the six month period ended June 30, 2005 to $1.3 million.



Interest Expense

Three months ended Six months ended
June 30, June 30, % June 30, June 30, %
$ 000s 2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
Interest on term
and callable debt 43 180 -76% 150 391 -62%
Other interest
(income) (112) 9 - (158) 36 -


Interest on term and callable debt, including capital leases, decreased from $0.18 million for the three months ended June 30, 2004, to $0.04 million for the same period in 2005. The reduction reflects reduced levels of term debt from repayments during 2004 and the first six months of 2005 and using a portion of the proceeds from the initial public offering to repay the construction facility. Other interest in 2005 is comprised of interest income derived from investing cash from the equity financings that is not immediately required for Stoneham's capital expenditure program, in short-term low risk instruments. Other interest in 2004 represents interest expense from utilization of the operating line facility.

Interest Rate Risk Management

Stoneham is exposed to fluctuations in interest rates on our floating rate callable debt. Stoneham manages interest rate risk by utilizing a mixture of fixed and floating rate debt.

Income Taxes

The Trust distributes all of its taxable income to its unitholders, therefore the only income taxes recognized are those incurred by the General Partner. Taxable income of the General Partner was nil, therefore no income tax has been recognized for the three and six month periods ended June 30, 2005. The General Partner was acquired on December 15, 2004, therefore its income is not included in the results for the three and six month period ended June 30, 2004.

Liquidity and Capital Resources

At June 30, 2005, Stoneham had a working capital balance of $16.5 million compared with a deficiency of $10.5 million at December 31, 2004. The elimination of the working capital deficiency is attributable to debt retirement with the proceeds of the equity issues in the first quarter and cash balances on hand at June 30. The cash on hand will be applied to Stoneham's capital expenditure program during the remainder of the year. During the quarter, $0.6 million of debt was repaid, bringing the year to date total to $11.0 million.

Operating line facilities totaling $9.5 million were available to Stoneham, of which no amounts were drawn.

On January 6, 2005, Stoneham completed its initial public offering and began trading on the Toronto Stock Exchange. The offering consisted of 1,666,667 trust units at $12.00 per trust unit resulting in gross proceeds of $20.0 million. Net proceeds of the issue after underwriting fees and expenses amounted to $18.4 million. The proceeds of the offering were used to reduce callable debt relating to construction of Rigs 7 and 8. Prior to the offering, the stock options were exercised resulting in the issuance of 400,000 trust units for proceeds of $0.2 million. At the same time, an obligation due to unitholders of $1.0 million was settled with the issuance of 84,297 trust units based on the initial public offering price of $12.00 per trust unit.

On March 22, 2005, Stoneham closed a bought deal financing, issuing 1,182,796 trust units at $18.60 per trust unit for gross proceeds of $22.0 million. Net proceeds of the issue after underwriting fees and expenses amounted to $20.8 million. Proceeds from the financings are being and will be used to partially fund the construction of Rigs 9, 10 and 11.



Operating Activities

Three months ended Six months ended
June 30, June 30, % June 30, June 30, %
$ 000s 2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
Net earnings 867 1,096 -21% 2,979 3,147 -5%
Cash flow from
operations 1,332 1,808 -26% 4,263 4,692 -9%


Net earnings decreased 21% to $0.9 million for the three month period ended June 30, 2005, and cash flow from operations decreased 26% to $1.3 million. Lower utilization levels for the second quarter due to an extended spring break-up and reduced pad rig utilization, and higher fixed operating and general and administrative expenses, offset in part by lower interest and amortization expenses contributed to lower net earnings and cash flow from operations.

Slightly lower rig utilization and the costs associated with the recertification of three drilling rigs caused the net earnings and cash flow from operations to be slightly lower for the six months ended June 30, 2005 compared with the same period in 2004.



Investing Activities

Three months ended Six months ended
June 30, June 30, % June 30, June 30, %
$ 000s 2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
Capital expenditures 3,557 260 - 13,256 279 -


Capital expenditures for the three month period ended June 30, 2005, increased to $3.6 million as a result of the construction costs incurred during the quarter for Rig 9 and the purchase of certain tubular and ancillary equipment. The remainder of the construction costs on Rig 9 will be incurred in the third quarter, when construction is expected to be completed. Proceeds from the equity issue that closed on March 22, 2005 are and will be used to fund the cost of construction of Rig 9. Maintenance capital expenditures comprised the 2004 balance. Construction of Rig 10 and Rig 11 are expected to be completed in the fall of 2005, being partially funded by the equity issue that closed on March 22, 2005 with the remainder to be financed by additional credit facilities.

For the six month period ending June 30, 2005, capital expenditures were $13.3 million and included costs for the construction of Rig 7 and 8 and a portion of Rig 9. Capital expenditures for the same period in 2004 were comprised of maintenance capital items.



Financing Activities

Three months ended Six months ended
June 30, June 30, % June 30, June 30, %
$ 000s 2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
Net change in term
debt (1) (619) (1,643) -62% (11,006) (3,292) -
Changes in capital - - - 39,470 - -

(1) Includes long-term debt, callable debt, capital leases and amounts
due to unitholders.


Term debt repayments of $0.6 million for the three months ended June 30, 2005 were $1.0 million less than the same period in 2004. For the six month period ended June 30, 2005, term debt repayments were $11.0 million, $7.7 million more than was repaid in the same period of 2004. Proceeds from the initial public offering in January were used to repay certain debt facilities. Also the amounts due to unitholders were repaid by the issuance of 84,297 trust units. Proceeds from the private placement are and will be used to partially fund the construction of drilling Rigs 9, 10 and 11.



Distributions

$ 000s, except for Three months ended Six months ended
per trust unit June 30, June 30, % June 30, June 30, %
amounts 2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
Net earnings 867 1,096 -21% 2,979 3,147 -5%
Cash flow from
operations 1,332 1,808 -26% 4,263 4,692 -9%
Distributions paid
and payable 2,309 - - 4,322 - -
Distributions per
trust unit 0.375 - - 0.750 - -


Stoneham makes distributions from cash flow from operations to our unitholders on a monthly basis after withholding a portion of this cash flow to repay debt and fund capital expenditures. The level of cash flow retained will vary based on debt levels and anticipated capital expenditures. Management is prepared to adjust the payout levels in an effort to balance desired distributions with our requirement to maintain an appropriate capital structure. As a private entity, Stoneham did not make any cash distributions. In February 2005, Stoneham began monthly cash distributions of $0.125 per trust unit ($1.50 per trust unit per annum) and to date has distributed $4.3 million or $0.75 per trust unit.

At June 30, 2005 and at August 10, 2005, the Trust had 6,156,561 trust units outstanding compared to 2,822,801 trust units and 400,000 stock options outstanding at June 30, 2004. The Trust does not have an equity option plan for directors, officers or employees.



Selected Quarterly Financial Information

$ 000s except Three Months Three Months Three Months Three Months
per trust Ended Ended Ended Ended
unit data June 30 March 31 December 31 September 30
and utilization 2005 2004 2005 2004 2004 2003 2004 2003
------------------------------------------------------------------------

Revenue 5,144 6,027 8,794 8,144 7,758 7,307 5,225 6,476
Net earnings 867 1,096 2,112 2,051 1,938 1,654 523 1,118
Per trust unit
(basic) 0.14 0.39 0.43 0.73 0.69 0.59 0.19 0.40
Per trust unit
(diluted) 0.14 0.35 0.43 0.65 0.60 0.53 0.17 0.36
Cash flow from
operations 1,332 1,808 2,932 2,884 2,715 2,405 1,138 1,888
Per trust unit
(diluted) 0.22 0.57 0.59 0.91 0.84 0.76 0.36 0.61
Utilization:
Stoneham 47% 63% 80% 85% 82% 76% 61% 79%
Industry 32% 30% 71% 73% 62% 57% 47% 53%


Additional Information

Additional information relating to Stoneham, including the annual information form for the year ended December 31, 2004, may be found on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com.



Stoneham Drilling Trust
Consolidated Balance Sheets
------------------------------------------------------------------------

June 30, December 31,
2005 2004
(unaudited)
ASSETS

Current
Cash and cash equivalents $ 17,738,307 $ -
Accounts receivable 3,876,285 7,004,954
Prepaid expenses 270,435 743,502
------------------------------------------------------------------------
21,885,027 7,748,456

Property, plant and equipment 40,584,658 28,612,991
------------------------------------------------------------------------
$ 62,469,685 $ 36,361,447
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES

Current
Bank indebtedness (Note 3) $ - $ 1,919,015
Accounts payable and accrued liabilities 2,450,166 2,286,986
Distributions payable (Note 5) 769,570 -
Income taxes payable - 3,733
Current portion of obligations under
capital lease 380,332 3,205,919
Callable debt 1,812,010 9,612,020
Due to unitholders - 1,034,529
Current portion of long-term debt - 187,500
------------------------------------------------------------------------
5,412,078 18,249,702

Obligations under capital lease 577,020 769,877
------------------------------------------------------------------------
5,989,098 19,019,579
Contingencies (Note 7)
UNITHOLDERS' EQUITY

Unitholders' capital (Note 4) 49,443,452 8,962,071
Accumulated earnings 11,358,856 8,379,797
Accumulated distributions to unitholders
(Note 5) (4,321,721) -
------------------------------------------------------------------------
56,480,587 17,341,868

$ 62,469,685 $ 36,361,447
------------------------------------------------------------------------
------------------------------------------------------------------------


Stoneham Drilling Trust
Consolidated Statements of Earnings and Accumulated Earnings (unaudited)
------------------------------------------------------------------------

Three months ended June 30, Six months ended June 30,
2005 2004 2005 2004

REVENUE $ 5,144,010 $ 6,027,353 $ 13,937,695 $ 14,171,716
------------------------------------------------------------------------

EXPENSES

Operating 3,186,580 3,617,564 8,376,329 8,270,344
Amortization 465,176 711,741 1,284,426 1,544,900
General and
administrative 693,880 412,318 1,306,610 782,327
Interest on term and
callable debt 43,466 180,132 149,517 390,910
Other interest
(income) (111,900) 9,193 (158,246) 36,199
------------------------------------------------------------------------
4,277,202 4,930,948 10,958,636 11,024,680
------------------------------------------------------------------------

Net earnings 866,808 1,096,405 2,979,059 3,147,036
------------------------------------------------------------------------

Accumulated
earnings, beginning
of period 10,492,048 4,822,869 8,379,797 2,772,238
------------------------------------------------------------------------

Accumulated
earnings, end of
period $ 11,358,856 $ 5,919,274 $ 11,358,856 $ 5,919,274
------------------------------------------------------------------------
------------------------------------------------------------------------

Earnings per unit
Basic $ 0.14 $ 0.39 $ 0.54 $ 1.11
Diluted $ 0.14 $ 0.35 $ 0.54 $ 1.00


Stoneham Drilling Trust
Consolidated Statements of Cash Flows (unaudited)
------------------------------------------------------------------------

Three months ended June 30, Six months ended June 30,
2005 2004 2005 2004

OPERATING ACTIVITIES
Net earnings for
the period $ 866,808 $ 1,096,405 $ 2,979,059 $ 3,147,036
Adjustment for an
item not affecting
cash:
Amortization 465,176 711,741 1,284,426 1,544,900
------------------------------------------------------------------------
Cash flow from
operations 1,331,984 1,808,146 4,263,485 4,691,936
Change in non-cash
working capital
(Note 6) 3,518,030 569,175 2,519,649 653,522
------------------------------------------------------------------------
4,850,014 2,377,321 6,783,134 5,345,458
------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of
property, plant
and equipment (3,557,192) (259,914) (13,256,093) (279,347)
Changes in
non-cash investing
working capital (1,064,800) - 1,241,533 -
------------------------------------------------------------------------
(4,621,992) (259,914) (12,014,560) (279,347)
------------------------------------------------------------------------

FINANCING
ACTIVITIES
Term and callable
debt repayments (619,272) (1,653,878) (11,005,954) (3,291,709)
Trust unit issue - - 39,269,830 -
Proceeds on
exercise of Trust
unit options - - 200,000 -
Distributions paid
to Trust unitholders
(Note 5) (2,308,710) - (3,552,150) -
Due to Trust
unitholders - 10,406 (22,978) 2,375
------------------------------------------------------------------------
(2,927,982) (1,643,472) 24,888,748 (3,289,334)
------------------------------------------------------------------------

(Decrease) Increase
in cash (2,699,960) 473,935 19,657,322 1,776,777
Cash (Bank
indebtedness),
beginning of
period 20,438,267 (1,388,486) (1,919,015) (2,691,328)
------------------------------------------------------------------------

Cash (Bank
indebtedness),
end of period $ 17,738,307 $ (914,551) $ 17,738,307 $ (914,551)
------------------------------------------------------------------------
------------------------------------------------------------------------


Stoneham Drilling Trust
Notes to the Consolidated Financial Statements
June 30, 2005 and June 30, 2004
(unaudited)


1. Basis of Presentation

These interim financial statements were prepared using accounting policies and methods of their application consistent with those used in the preparation of the Stoneham Drilling Trust (the Trust) audited consolidated financial statements for the year ended December 31, 2004. These interim financial statements conform in all respects to the requirements of generally accepted accounting principles in Canada for annual financial statements with the exception of certain note disclosures. As a result, these interim financial statements should be read in conjunction with the Trust's audited financial statements for the year ended December 31, 2004, contained in the Trust's 2004 annual report.

2. Seasonality of Operations

All of the Trust's operations are carried out in Canada. The ability to move heavy equipment in the Canadian oil and natural gas fields is dependent on weather conditions. As warm weather returns in the spring, the winter frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until they have thoroughly dried out. The duration of this spring break-up has a direct impact on the Trust's activity levels. In addition, many exploration and production areas in northern Canada are accessible only in winter months when the ground is frozen sufficiently to support drilling equipment and services. The timing of freeze up and spring break-up affects the ability to move drilling equipment in and out of these areas. As a result, April through May is traditionally our slowest time.

3. Bank Indebtedness

Pursuant to an agreement dated January 17, 2005, the Trust increased its authorized operating loan to $7,500,000 at June 30, 2005, subject to margin requirements, at a rate of prime plus 0.75%. Pursuant to the same agreement, a secondary demand operating facility was granted to the Trust in an amount of $2,000,000 bearing interest at a rate of prime plus 1.00%. The bank indebtedness is secured by a general security agreement and the assignment to the bank of all risk insurance.

4. Unitholders' Capital

On January 6, 2005, the Trust completed its initial public offering resulting in the issuance of 1,666,667 trust units for gross proceeds of $20.0 million. Net proceeds of the issuance after the underwriting fees and expenses amounted to $18.4 million. Prior to the initial public offering, 400,000 stock options were exercised for proceeds of $0.2 million and the Trust settled an outstanding obligation to certain unitholders of $1.0 million by issuing 84,297 trust units based on the initial public offering price of $12.00 per trust unit. On March 22, 2005, the Trust issued 1,182,796 trust units for gross proceeds of $22.0 million. Net proceeds of the issuance after the underwriting fees and expenses amounted to $20.8 million.



Issued and Outstanding Trust Units
Number of units Amount
-------------------------------
Balance December 31, 2004 2,822,801 $ 8,962,068
Issued pursuant to initial public
offering, net of costs 1,666,667 18,435,475
Options exercised 400,000 200,000
Units issued on conversion of obligation 84,297 1,011,554
Issued pursuant to private placement,
net of costs 1,182,796 20,834,355
-------------------------------
Balance June 30, 2005 6,156,561 $ 49,443,452
-------------------------------
-------------------------------


5. Accumulated Distributions to Unitholders
The following table shows the cumulative distributions to unitholders.

$/unit Amount
----------------------

January, 2005 0.125 $ 621,720
February, 2005 0.125 621,720
March, 2005 0.125 769,570
April, 2005 0.125 769,570
May, 2005 0.125 769,570
June, 2005 (declared and payable in July, 2005) 0.125 769,570


6. Supplemental Cash Flow Information

Changes in non-cash working capital

Three months ended Six months ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------------------------------------------
Decrease in current
assets
Accounts receivable $ 4,409,493 $ 568,519 $ 3,128,669 $ 297,838
Prepaid expenses 59,453 95,841 473,067 159,176

(Decrease) increase in
current liabilities
Accounts payable and
accrued liabilities (947,183) (95,185) (1,078,354) 196,508
Income taxes payable (3,733) - (3,733) -
------------------------------------------------
$ 3,518,030 $ 569,175 $ 2,519,649 $ 653,522
------------------------------------------------
------------------------------------------------
Interest paid $ 42,158 $ 187,496 $ 151,696 $ 425,161
------------------------------------------------
------------------------------------------------
Income taxes paid $ 1,624 $ - $ 1,624 $ -
------------------------------------------------
------------------------------------------------


7. Contingencies

On the June 30, 2003 corporate income tax return of Seamans Drilling Inc. a reduction of income subject to income taxes was claimed relating to corporate reorganization costs. The corporate tax return was reviewed by Canada Revenue Agency and the Agency assessed on the basis that these costs are not fully deductible in the year they were incurred but are eligible capital property, of which 75% of the reorganization costs incurred are considered to be cumulative eligible capital and a reduction of 7% may be claimed on an annual basis. Based on this, the Partnership paid additional corporate income taxes totaling $147,260, but appealed the assessment and reflected the entire amount as being recoverable in the financial statements. The appeal has now been rejected by Canada Revenue Agency. Accordingly, while no final decision has been made on a possible further appeal, it is considered prudent to expense the portion of the income taxes paid that relate to the amount of the reorganization costs not deductible as eligible capital property, being 25% or $36,815. The remainder is considered to be fully recoverable. Under the terms of the purchase agreement between Stoneham Drilling Limited Partnership and Seamans Drilling Inc, the Stoneham Drilling Limited Partnership assumed all of the liabilities of Seamans Drilling Inc. Accordingly, the amount above has been included with general and administrative expenses on the statement of earnings.



TRUST INFORMATION

STONEHAM DRILLING INC. Head Office
DIRECTORS 620, 300 - 5th Avenue S.W.
Calgary, Alberta T2P 3C4
Martin G. Abbott (1)(2)(3) Telephone: (403) 264-7777
Calgary, Alberta Fax: (403) 264-7766
Website: www.stonehamdrilling.com
Donald D. Copeland(2)(4)
Calgary, Alberta Field Operations Office
2, 2104 - 7th Street
D. Grant Gunderson(4) Nisku, Alberta T9E 7Y2
Calgary, Alberta Telephone: (780) 955-4242
Fax: (780) 955-4757
Bruce W. Jones
DeWinton, Alberta Trustee Registrar and Transfer Agent
Valiant Trust Company
Kenneth D. Poffenroth(2)(3) 310, 606 - 4th Street S.W.
Spruce Grove, Alberta Calgary. Alberta T2P 1T1

STONEHAM ADMINISTRATION INC. Stock Exchange Listing
DIRECTORS Toronto Stock Exchange
Symbol: SDG.UN
Jeffrey J. McCaig (1)(2)(5)
The Woodlands, Texas Auditors
PricewaterhouseCoopers LLP
D. Grant Gunderson (5) 3100, 111 - 5th Avenue S.W.
Calgary, Alberta Calgary, Alberta T2P 5L3

Perry W. Jasson(2)(5) Bankers
Calgary, Alberta HSBC Bank Canada
9th Floor, 407 - 8th Avenue S.W.
Bruce W. Jones Calgary, Alberta T2P 1E5
DeWinton, Alberta
Legal Counsel
J. Wayne Thomas(2) Fraser Milner Casgrain LLP
Calgary, Alberta 30th Floor, 237 - 4th Avenue S.W.
Calgary, Alberta T2P 4X7
(1) Chairman of the Board
(2) Member of the Audit Blake Cassels & Graydon LLP
Committee 3500, 855 - 2nd Street S.W.
(3) Member of the Compensation Calgary, Alberta T2P 4J8
Committee
(4) Member of the Governance
Committee
(5) Member of the Governance
and Compensation Committee

OFFICERS
Bruce W. Jones
President and Chief Executive
Officer

Jack M. Smart, CA
Chief Financial Officer

J. Scott Bodie
Corporate Secretary


Contact Information