Stoneham Drilling Trust

Stoneham Drilling Trust

March 30, 2005 15:41 ET

Stoneham Drilling Trust: Financial Results for Fourth Quarter and Year Ended December 31, 2004


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: STONEHAM DRILLING TRUST

TSX SYMBOL: SDG.UN

MARCH 30, 2005 - 15:41 ET

Stoneham Drilling Trust: Financial Results for Fourth
Quarter and Year Ended December 31, 2004

CALGARY, ALBERTA--(CCNMatthews - March 30, 2005) - Stoneham Drilling
Trust (TSX:SDG.UN) ("Stoneham" or the "Trust") achieved record financial
results during both the three and twelve-month periods ended December
31, 2004.



HIGHLIGHTS
(000's except for Three Months Ended Years Ended
per unit amounts) December 31, December 31,
2004 2003 Change 2004 2003 (1) Change
$ $ % $ $ %
Revenue 7,758 7,307 6% 27,155 25,057 8%
Net earnings 1,938 1,654 17% 5,608 3,878 45%
Per unit (diluted) 0.60 0.53 13% 1.74 1.19 46%
Cash flow from
operations 2,715 2,405 13% 8,545 7,292 17%
Per Unit (diluted) 0.84 0.76 11% 2.65 2.23 19%
EBITDA (2) 2,908 2,675 9% 9,340 8,469 10%
Units Outstanding
(weighted average) 2,823 2,823 0% 2,823 2,933 -4%
Units Outstanding
(diluted) 3,223 3,156 2% 3,223 3,266 -1%

Operating Highlights
Number of rigs 6 6 0% 6 6 0%
Operating days 454 422 8% 1,599 1,560 3%
Utilzation Rate 82.2% 76.4% 8% 72.8% 71.2% 2%
Industry average 61.7% 57.2% 8% 52.9% 53.1% 0%

(1) The 2003 comparative results include the unaudited results for the
six months ended June 30, 2003 as reported by Seamans Drilling Inc.
plus the audited results for the six months ended December 31, 2003
as reported by Stoneham Drilling Trust.

(2) EBITDA means earnings before interest, taxes, depreciation and
amortization. Readers are cautioned that EBITDA does not have a
standardized meaning prescribed by GAAP; however Stoneham does
compute EBITDA on a consistent basis for each reporting period.


For the three and twelve months ended December 31, 2004, Stoneham
established record revenue, net earnings, cash flow from operations and
EBITDA. Revenue for the three months ended December 31, 2004 increased
6% to $7.8 million, net earnings grew 17% to $1.9 million, cash flow
from operations increased 12% to $2.7 million, while EBITDA grew 7% to
$2.9 million. Year-end revenue improved 8% to $27.1 million, net
earnings grew 45% to $5.6 million, cash flow from operations increased
17% to $8.5 million and EBITDA grew 10% to $9.3 million.

The year ended December 31, 2004 represented the industry's most active
year ever with Canadian Association of Oilwell Drilling Contractors'
statistics indicating a total of 21,593 wells drilled in the western
Canadian sedimentary basin, a 9% increase over the 2003 level of 19,851
wells drilled. Stoneham's results reflect this increased drilling
activity with total operating days increasing to 1,599 from 1,560 in
2003 and utilization increasing by 2% to 72.8% in 2004. Stoneham
continued to surpass industry utilization by 33% in the fourth quarter
and 38% in 2004.

Stoneham responded to the robust market conditions and high customer
demand by expanding its rig fleet through the construction of two 4,000
metre telescopic triple drilling rigs (Rigs 7 and 8), both of which are
under contract. On January 6, 2005, Stoneham closed its $20.0 million
initial public offering. Proceeds from the offering were used or will be
used to repay the demand construction loan, fund remaining construction
costs for drilling Rigs 7 and 8, fund lease buy outs as they expire and
for general working capital purposes.

Stoneham's growth strategy focuses on constructing new rigs in response
to customer and market demands. As a result of these demands, the Trust
announced a $22.0 million private placement financing with proceeds to
be used, in part, to construct a 3,500 metre telescopic double drilling
rig and two 4,000 metre telescopic triple drilling rigs. The financing
closed on March 22, 2005.

The Trust is an open-ended investment trust governed by the laws of the
Province of Alberta pursuant to the amended and restated Declaration of
Trust of the 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. The Trust units of Stoneham trade on the Toronto Stock Exchange
under the symbol SDG.UN. Stoneham provides contract drilling services to
oil and natural gas exploration and production companies operating in
western Canada, using its fleet of six modern 3,000 metre telescopic
double drilling rigs and two newly constructed 4,000 metre telescopic
triple drilling rigs.

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 YEAR ENDED DECEMBER 31, 2004

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. 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 and Seamans Drilling Inc.
(a company related by common control), 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 which 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 management's discussion and analysis was
prepared on March 29, 2005 and incorporates all relevant considerations
to that date.

Introduction

Prior to July 2003 the business of Stoneham was conducted by Seamans
Drilling Inc. ("Seamans Drilling"). On July 1, 2003, Seamans Drilling,
as part of a corporate reorganization contributed all of its oil and gas
drilling business to Stoneham Drilling Limited Partnership (the
"Partnership"), in consideration for the assumption by the Partnership
of the then existing liabilities of Seamans Drilling and the issuance by
the Partnership to Seamans Drilling of limited partnership units and
fixed notes. This gave Seamans Drilling a 99.99% interest in the
Partnership and it was the sole limited partner in the Partnership. On
July 29, 2003 Seamans Drilling sold the limited partnership units and
fixed notes to Stoneham Drilling Trust (the "Trust") in exchange for
units of the Trust, at which point the Trust became the sole limited
partner of the Partnership. On December 15, 2004 the Trust acquired
Stoneham Drilling Inc., the General Partner of the Partnership (the
"General Partner"). The General Partner holds the remaining 0.01%
interest in the Partnership.

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 the Partnership, the General Partner and Stoneham
Administration Inc., the manager of the Trust. 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
$ 000's except for per Trust
unit or per share amounts December 31, December 31,
and Trust units/shares 2004 2003
outstanding (unaudited) (1)
------------------------------------------------------------------------
Revenue 27,155 25,057
Net earnings 5,608 3,878
Per unit/share (basic) 1.99 1.32
Per unit/share (diluted) 1.74 1.19
Cash flow from operations 8,545 7,292
Per unit/share (diluted) 2.65 2.23
Total Assets 36,361 30,781
Long term debt (2) 14,810 14,611
Weighted average units/shares outstanding
Basic 2,822,801 2,932,798
Diluted 3,222,801 3,266,131

EBITDA (3) 9,340 8,469

(1) See 2003 Results on page 11.
(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. It does not include future income taxes or
non-controlling interest.
(3) EBITDA means earnings before interest, taxes, depreciation and
amortization. Readers are cautioned that EBITDA does not have a
standardized meaning prescribed by GAAP; however Stoneham does
compute EBITDA on a consistent basis for each reporting period.


Highlights

- Net earnings increased to $5.6 million or $1.74 per diluted trust unit
for the year ended December 31, 2004 from $3.9 million or $1.19 per
diluted trust unit for the year ended December 31, 2003. This increase
is a result of activity and margin improvements, lower interest costs
and elimination of corporate income taxes of Stoneham associated with
the July 2003 reorganization.

- Cash flow from operations increased to $8.5 million, $2.65 per diluted
trust unit for the year ended December 31, 2004 from $7.3 million, $2.23
per diluted trust unit for the year ended December 31, 2003. The
additional cash flow was utilized for debt repayments, maintenance
capital and strengthening working capital.

- Stoneham's rig utilization rate of 73% continued to be significantly
higher than the industry average of 53%.

- In the fourth quarter of 2004 Stoneham entered into an agreement to
construct two additional drilling rigs. Rig 7, a 4,000 metre telescopic
triple rig commenced work in the field in February 2005 and construction
of Rig 8, a 4,000 metre telescopic triple rig was completed in March
2005.

- Subsequent to Stoneham's year end, on January 6, 2005, Stoneham
completed its initial public offering and commenced trading on the
Toronto Stock Exchange under the symbol SDG.un. The initial offering
consisted of 1,666,667 trust units at $12.00 per trust unit for gross
proceeds of $20.0 million. Proceeds from the offering were used or will
be used to repay the demand construction facility, fund remaining
construction costs for drilling Rigs 7 and 8, fund lease buy outs as
they expire and for general working capital purposes.

- On March 3, 2005 the Trust announced that it had entered into a
'bought deal' financing agreement whereby the underwriters agreed to
purchase 1,129,033 trust units for $18.60 per trust unit for gross
proceeds of $21.0 million. The underwriters exercised their option to
purchase an additional 53,763 trust units at $18.60 per trust unit for
additional gross proceeds of $1.0 million. The offering closed on March
22, 2005. Proceeds from the offering will be used to partially fund the
construction of three additional drilling rigs. The new rigs are
expected to be completed in the fall of 2005.



Operational Highlights

December 31, December 31, %
2004 2003 Change
------------------------------------------------------------------------
Operating days 1,599 1,560 3%
Utilization rate 72.8% 71.2% 2%
CAODC industry average 52.9% 53.1% 0%


In 2004 demand for drilling services remained strong as our clients
continued to experience high commodity prices. Rig utilization improved
to 73% for the year ended December 31, 2004 from 71% for the year ended
December 31, 2003. Stoneham continues to operate at a significantly
higher utilization rate compared to the industry average. Overall
industry utilization remained constant at 53% in 2004. Excellent
activity over the first six months of 2004 for both Stoneham and the
industry were offset by significant third quarter reductions resulting
primarily from wet weather conditions and resultant difficulties in
location preparation and rig moves. Demand for Stoneham's proprietary
pad rig moving system resulted in additional second quarter drilling
days and was largely responsible for the increase in activity over 2003.
We expect continued strength in commodity prices will result in strong
rig utilization and anticipate that our utilization rate will continue
to be higher than the industry average in 2005.

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.



Outlined below are the quarterly results for 2004 and 2003.

Selected Quarterly Financial Information

($000's except Three Months Three Months Three Months Three Months
per Trust unit Ended Ended Ended Ended
data and December 31 September 30 June 30 March 31
utilization) 2004 2003 2004 2003 2004 2003 2004 2003
------------------------------------------------------------------------
Revenue 7,758 7,307 5,225 6,476 6,028 3,605 8,144 7,668
Net earnings 1,938 1,654 523 1,118 1,096 (103) 2,051 1,209
Per Trust unit
(basic) 0.69 0.59 0.19 .40 0.39 (0.04) 0.73 0.36
Per Trust unit
(diluted) 0.60 0.53 0.17 0.36 0.35 (0.04) 0.65 0.33
Cash flow from
operations 2,715 2,405 1,138 1,888 1,808 768 2,884 2,231
Per Trust unit
(diluted) 0.84 0.76 0.36 0.61 0.57 0.25 0.91 0.61
Utilization:
Stoneham 82% 76% 61% 79% 63% 40% 85% 89%
Industry 62% 57% 47% 53% 30% 30% 74% 72%


Fourth Quarter Overview

Revenue for the fourth quarter of 2004 was $7.8 million, an increase of
6% over the same period in 2003. Stoneham's operating days for the
period were 454 compared to 422 in the fourth quarter of 2003.
Stoneham's fourth quarter 2004 utilization rate of 82.2%, compared
favourably to an industry utilization rate during the same period of
61.8%. Net earnings for the period were $1.9 million, an increase of 16%
over the $1.7 million earned in 2003. Cash flow from operations was $2.7
million, an increase of 12% over the $2.4 million earned in the fourth
quarter of 2003. The earnings and cash flow increase resulted from the
improved activity and stronger margins combined with lower interest
costs. Stoneham's working capital position temporarily weakened during
the quarter with the addition of $6.7 million in callable debt
associated with capital expenditures of $5.6 million on partial
construction of Rigs 7 and 8. Deposits of $1.9 million associated with
these rigs were incurred earlier in 2004. This debt was repaid in
January 2005 following the initial public offering as described above.



Revenue and Operating Expenses

December 31, December 31, %
$ 000's 2004 2003 Change
------------------------------------------------------------------------
Revenue 27,155 25,057 8%
Operating expenses 16,045 14,770 9%


Revenue for the year ended December 31, 2004 increased 8% to $27.2
million from $25.1 million in 2003. The increase is attributable to the
increase in activity, some real price increases based on the strength of
rig demand and recoveries of specific cost increases and project costs.
Revenue per operating day increased from $16,062 per operating day in
2003 to $16,982 per operating day in 2004.

Operating expenses increased to $16.0 million or $10,035 per operating
day compared to $14.8 million or $9,468 per operating day in 2003.
Operating expenses are mainly variable in nature and increased in part
due to the increase in activity but also due to wage and burden
increases, fuel cost increases, and increased maintenance and rig
consumable expenses. The fixed cost component also increased with the
addition of an operations superintendent during 2004 in anticipation of
Rigs 7 and 8. We expect substantial increases in revenues and operating
costs in 2005 with the additional rigs available. Operating margins are
expected to remain strong along with the expected demand for our
services.



General & Administrative Expenses

Year ended Year ended
December 31, December 31, %
$ 000's 2004 2003 Change
------------------------------------------------------------------------
General & administrative expense 1,770 1,817 -3%


General and administrative expenses remained relatively constant for the
year ended December 31, 2004 compared to 2003 levels. One time only
charges in 2003 for the corporate reorganization caused 2003 costs to
exceed those incurred in 2004. This was offset in part in 2004 by
increased staffing levels and compensation increases. General and
administrative expenses incurred are expected to increase in 2005,
attributable to increased staffing levels to manage the growing business.



Amortization

Year ended Year ended
December 31, December 31, %
$ 000's 2004 2003 Change
------------------------------------------------------------------------
Amortization 2,937 2,795 5%


Amortization of property, plant and equipment increased for the year
ended December 31, 2004 to $2.9 million from $2.8 million for the year
ended December 31, 2003. This is in line with activity increases as the
majority of our assets are amortized on a unit-of-production basis. Also
contributing to the increase was the aggressive amortization of project
equipment acquired in both 2003 and 2004.



Interest Expense

Year ended Year ended
December 31, December 31, %
$ 000's 2004 2003 Change
------------------------------------------------------------------------
Interest expense 795 1,161 -32%


Interest on term and callable debt, including capital leases, decreased
from $1.1 million in 2003 to $0.7 million in 2004. The reduction
reflects the significant reduction in term debt levels during this
period. Variable rate debt was also impacted in 2004 by a lower prime
rate of interest. Other interest was largely unchanged.

Interest expense is expected to decrease in 2005 as a result of debt
repayment with the proceeds of the announced equity issues in 2005.

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

Year ended Year ended
December 31, December 31, %
$ 000's 2004 2003 Change
------------------------------------------------------------------------
Current - 17 -100%
Future - 619 -100%


Following the reorganization in July 2003, the only income taxes were
those incurred by the General Partner. The General Partner's results are
only included in these results from December 15, 2004 and as a result no
amounts for income taxes is recorded in 2004. The Trust does not
recognize income tax expense as it distributes its taxable income to its
unitholders.

Liquidity and Capital Resources

At December 31, 2004 Stoneham's working capital deficiency was $10.5
million, compared to a deficiency of $8.9 million at December 31, 2003.
The deficiencies in each year were the result of our highly leveraged
balance sheet and the resultant callable debt, long-term debt and
capital lease repayments required over the next year; $6.3 million in
2004; $7.7 million in 2003. The amounts were further impacted by the
CICA guidelines relating to callable debt obligations, which results in
amounts due on demand being treated as current liabilities even though
repayment may not be expected during the next twelve months. This
resulted in a further reduction to 2004 working capital of $7.7 million,
and $3.9 million in 2003.

Term debt facilities were fully drawn at December 31, 2004 with the
exception of a term line of $15.8 million for the construction of
drilling Rigs 7 and 8 (December 31, 2003 - $nil). At December 31, 2004,
$6.7 million (December 31, 2003 - $nil) had been drawn on the facility.
Deposits to suppliers and construction costs relating to Rigs 7 and 8
incurred prior to December 31, 2004 were $7.6 million.

At December 31, 2004, Stoneham had available to it an operating line
facility of $5.0 million of which $1.9 million was drawn. At December
31, 2003 $1.1 million was drawn on the facility. Subsequent to year end
the operating facility was increased to $7.5 million. At December 31,
2004, $9.1 million (December 31, 2003 - $nil) was available to be drawn
under the Rig 7 and 8 construction term facility.

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. The proceeds of the offering were and will be
used to reduce Stoneham's obligations, significantly improving the
balance sheet. On March 22, 2005 Stoneham closed a 'bought deal'
financing whereby we issued 1,182,796 trust units at $18.60 per trust
unit for gross proceeds of $22.0 million. Proceeds from the financing
will be used to partially fund the construction of three new drilling
rigs. The remainder of the construction costs are expected to be
financed through additional credit facilities.



Contractual
Obligations (6) Payments Due by Period (000's)
Less than 1 - 3 4 - 5
1 Year Years Years Thereafter Total
---------------------------------------------------
Obligations under
capital lease (1) 3,206 770 - - 3,976
Callable debt (2) 2,897 3,455 2,698 562 9,612
Long-term debt (3) 188 188
Due to unitholders (4) 1,034 - 1,034
Operating lease
commitments (5) 197 340 127 - 664
---------------------------------------------------
7,522 4,565 2,825 562 15,474
---------------------------------------------------
---------------------------------------------------

(1) Obligations under capital leases are described in Note 7 to the
audited consolidated financial statements.
(2) Callable debt obligations are described in Note 8 to the audited
consolidated financial statements. At December 31, 2004 only $6.7
million of the $15.8 million committed was drawn relating to the
construction of two 4,000 metre drilling rigs.
(3) Long-term debt obligations are described in Note 10 to the audited
consolidated financial statements.
(4) Due to unitholders are described in Note 9 to the audited
consolidated financial statements.
(5) Operating lease commitments are described in Note 16 to the audited
consolidated financial statements.
(6) In addition to the contractual obligations above, Stoneham is
committed to capital investments of approximately $25.0 million
relating to the construction of one 3,500 metre double drilling rig
and two 4,000 metre triple drilling rigs.


Distributions

As a private entity, Stoneham did not make any cash distributions in
2004 or 2003. In February 2005, Stoneham began monthly cash
distributions of $0.125 per trust unit ($1.50 per trust unit per annum).



Operating Activities

December 31, December 31, %
$ 000's 2004 2003 Change
------------------------------------------------------------------------
Net earnings 5,608 3,878 45%
Cash flow from operations 8,545 7,292 17%


Net earnings increased 45% year over year to $5.6 million in 2004 from
$3.9 million in 2003. Cash flow from operations increased 17%, to $8.5
million, $2.65 per diluted trust unit, for the year ended December 31,
2004 from $7.3 million, $2.23 per diluted trust unit for the year ended
December 31, 2003. Both increases are a result of increased utilization
rates, real price increases, and lower interest costs. Earnings in 2003
were also negatively impacted by future income tax expenses. Earnings
and cash flow from operations are sensitive to the demand for Stoneham's
services.



Investing Activities
Year ended Year ended
December 31, December 31, %
$ 000's 2004 2003 Change
------------------------------------------------------------------------
Capital expenditures 7,910 790 -901%


Capital expenditures in 2004 increased to $7.9 million from $0.8 million
for the same period in 2003. The increase is attributable to costs
incurred prior to year end for the construction of two drilling rigs.
Construction of Rig 7 was completed in February 2005 and construction of
Rig 8 was completed in March 2005. Capital expenditures in 2003 were
mainly project costs, including Stoneham's proprietary pad rig moving
system.

In conjunction with the bought deal financing announced March 3, 2005,
the Trust has entered into agreements to construct one 3,500 metre
telescopic double drilling rig and two 4,000 metre telescopic triple
drilling rigs for an estimated cost of $25.0 million.



Financing Activities
Year ended Year ended
December 31, December 31, %
$ 000's 2004 2003 Change
------------------------------------------------------------------------
Net change in term debt (1) 199 (4,755) 104%
Changes in capital - 790 -100%

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


Term debt repayments of $6.6 million for the year ended December 31,
2004 were offset by $6.7 million in additional financing drawn for the
construction of two drilling rigs. Excluding the new financing,
repayments were $0.4 million greater than those for the same period in
2003, reflecting repayments on amounts borrowed in 2003. Term financing
in 2003 included $0.9 million to finance a common share redemption in
Seamans Drilling and $0.5 million associated with 2003 project capital.
Changes in capital in 2003 included the issue of 62,800 common shares of
Seamans Drilling.

At December 31, 2004 and 2003 the Trust had 2,822,801 trust units
outstanding and 400,000 stock options. Subsequent to year end the Trust
completed its initial public offering and issued 1,666,667 trust units
at $12.00 per trust unit for gross proceeds of $20.0 million. Prior to
the offering the stock options were exercised resulting in the issuance
of 400,000 trust units. At the same time, the due to unitholders
obligation was settled with the issuance of 84,297 trust units. On March
22, 2005, the Trust closed a 'bought deal' financing arrangement where
it issued 1,182,796 trust units at $18.60 per trust unit for gross
proceeds of $22.0 million. Proceeds from the initial public offering
were used or will be used to repay the demand construction facility,
fund remaining construction costs for Rigs 7 and 8, fund lease buy outs
as they expire and for general working capital purposes. Proceeds from
the issue announced on March 3rd are anticipated to partially fund the
construction of three additional drilling rigs.

Risks and Uncertainties

The drilling industry is cyclical and the business of Stoneham is
directly affected by fluctuations in the level of oil and natural gas
exploration and development carried on by its customers. Drilling
activity is seasonal and, in turn, is directly affected by a variety of
factors including weather, oil and natural gas prices, access to capital
markets and government policies. Any prolonged or significant decrease
in energy prices, economic activity or adverse change in government
regulation could have a significant negative impact on exploration and
development drilling in Canada. Stoneham emphasizes the continuous
development of long-term relationships with a core of base customers who
maintain ongoing drilling programs during all phases of the economic
cycle.

The success of Stoneham also depends on other factors, including
competition and the management of operational and environmental risks.

Stoneham manages its risks in these areas by:

- Employing well trained, experienced and responsible employees;

- Ensuring that all employees comply with clearly defined safety
standards;

- Improving the skills of its employees through training programs;

- Reducing environmental risk through the implementation of
industry-leading standards, policies and procedures;

- Maintaining an efficient fleet of rigs through a rigorous, ongoing,
maintenance program constantly upgrading its rig fleet; and

- Maintaining comprehensive insurance policies with respect to its
operations.

Stoneham is subject to federal, provincial and local environmental
protection laws concerning emissions to the air, discharges to surface
and subsurface waters and the handling, use, emission and disposal of
materials and wastes from operating drilling rigs.

Stoneham maintains comprehensive insurance policies with respect to its
operations in amounts that it believes are adequate and in accordance
with industry standards, Stoneham's liability with respect to its
well-site activities is limited by provisions of its agreements with oil
and gas well operators that either limit Stoneham's liability or provide
for indemnification against certain risks. As a matter of policy,
Stoneham ensures blowout insurance has been obtained by its customers
and thereby reduces its related risks.

Critical Accounting Estimates

This Management's Discussion and Analysis is based on Stoneham's
consolidated financial statements that have been prepared in accordance
with Canadian generally accepted accounting principles. Significant
accounting policies are described in Note 2 to the consolidated
financial statements. The preparation of the consolidated financial
statements requires that certain estimates and judgments be made with
regard to the reported amount of revenues and expenses and the carrying
values of assets and liabilities. These estimates are based on
historical experience and management judgment. Anticipating future
events involves uncertainty and consequently the estimate used by
management in the preparation of the consolidated financial statements
may change as future events unfold, additional experience is acquired or
Stoneham's operating environment changes.

Amortization

The accounting estimate that has the most significant impact on
financial results of Stoneham is amortization. Amortization of
Stoneham's property plant and equipment incorporates estimates of useful
lives and residual values. These estimates may change as more experience
is obtained or as general market conditions change impacting the
operation of Stoneham's property and equipment.

Allowance for Doubtful Accounts Receivable

Stoneham performs credit evaluations of its customers and grants credit
based on past payment history, financial conditions and anticipated
industry conditions. Stoneham has consistently mitigated risk by working
mainly for large, financially sound oil and gas producers. Customer
payments are regularly monitored and a provision for doubtful accounts
is established based on specific situations and overall industry
conditions. Stoneham's history of bad debt losses has been minimal and
generally limited to specific customer circumstances, however given the
cyclical nature of the oil and gas industry, the credit risks can change
suddenly and without notice.

Recent Accounting Pronouncements

Consolidation of Variable Interest Entities

Stoneham early adopted the recommendations of AcG-15 resulting in the
consolidation of the Trust's financial statements with those of the
Partnership, the variable interest entity ("VIE"). Historically,
entities have been consolidated by an enterprise when it has a
controlling financial interest through the ownership of a majority
voting interest in the entity. AcG-15 is meant to apply to entities with
a structure that precludes voting control but over which control may
exist through other arrangements.

As the limited partner in the Partnership, the Trust does not have a
majority voting interest in the Partnership. The majority voting
interest is held by the General Partner, which was itself not controlled
by the Trust until December 15, 2004. The Partnership is considered to
be a VIE under AcG-15 and the Trust as the owner of all the partnership
units and subordinated debt, receives 99.99% of the VIE's expected
residual returns and would absorb 99.99% of its expected losses. As a
result, the Trust is considered to be the primary beneficiary and must
consolidate the VIE.

AcG-15 was applied as though it was effective when the Trust first met
the conditions to be the primary beneficiary of the Partnership, July
2003.

2003 Results

The year end of the Trust, the Partnership and the General Partner is
December 31. Previously Seamans Drilling had a year end of June 30. The
financial information follows the continuity of interest method as if
the business had always been in the Trust. This basis is intended to
provide unitholders with meaningful comparative information. Therefore
the 2003 comparative results include the unaudited results for the six
months ended June 30, 2003 as reported by Seamans Drilling plus the
audited results for the six months ended December 31, 2003 as reported
by the Trust. The table below provides a summary.



Stoneham Seamans Combined
Drilling Drilling
Trust Inc.
Six months Six months Year
ended ended ended
December 31, June 30, December 31,
2003 2003 2003
audited unaudited unaudited
----------------------------------------
Revenue $ 13,783,194 $ 11,273,352 $ 25,056,546
----------------------------------------

Expenses
Operating 8,220,365 6,549,910 14,770,275
Amortization 1,520,953 1,273,807 2,794,760
General and administrative 709,902 1,106,611 1,816,513
Interest on term and
callable debt 504,453 569,112 1,073,565
Other interest 55,005 32,007 87,012
----------------------------------------
11,010,678 9,531,447 20,542,125
Earnings before income tax and
non-controlling interest 2,772,516 1,741,905 4,514,421
Current income tax - 17,067 17,067
Future income tax - 619,247 619,247
----------------------------------------
Earnings before non-controlling
interest 2,772,516 1,105,591 3,878,107
Non-controlling interest 278 - 278
----------------------------------------
Net earnings $ 2,772,238 $ 1,105,591 $ 3,877,829
----------------------------------------
----------------------------------------
Cash flow from operations $ 4,293,469 $ 2,998,645 $ 7,292,114
----------------------------------------
----------------------------------------
Purchase of property, plant
and equipment $ 90,000 $ 700,013 $ 790,013
----------------------------------------
----------------------------------------
Term and callable debt
repayments $ 3,208,621 $ 2,957,677 $ 6,166,298
----------------------------------------
----------------------------------------
Term and callable debt financing $ 480,000 $ 900,000 $ 1,380,000
----------------------------------------
----------------------------------------
Changes in capital $ 109,900 $ (900,000) $ (790,100)
----------------------------------------
----------------------------------------


Future Outlook

Continued strong commodity pricing in early 2005 results in expectations
for 2005 of continued high demand for drilling services. The Canadian
Association of Oilwell Drilling Contractors estimates an increase of 12%
in the number of wells drilled in the western Canadian sedimentary basin
to 24,205 in 2005 from 21,593 wells drilled in 2004. With the addition
of two new drilling rigs and planned construction of three later in the
year, Stoneham is well positioned to participate in this growth. Overall
during 2004 the rig fleet operated by CAODC members grew by 8% from 660
to 715. Finding new reserves in the western Canadian sedimentary basin
is becoming increasingly challenging causing exploitation plans to be at
deeper depths than we have experienced in the past. Stoneham's fleet of
drilling rigs is designed to meet this challenge. The equity issues
announced will provide us with a stronger balance sheet to participate
in expected growth.

Provided that demand for our services remains strong, Stoneham expects
financial results in 2005 to be improved over 2004 due to the increase
in the size of our drilling fleet.

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
---------------------------------------------------------------------
December 31, December 31, June 30,
2004 2003 2003
ASSETS (Note 1)

Current
Accounts receivable $ 7,004,954 $ 6,817,388 $ 3,758,438
Prepaid expenses 743,502 322,832 145,193
---------------------------------------------------------------------
7,748,456 7,140,220 3,903,631
Property, plant and
equipment (Note 5) 28,612,991 23,640,413 25,063,517
---------------------------------------------------------------------
$ 36,361,447 $ 30,780,633 $ 28,967,148
---------------------------------------------------------------------
---------------------------------------------------------------------

LIABILITIES
Current
Bank indebtedness (Note 6) $ 1,919,015 $ 2,691,328 $ 1,230,103
Accounts payable and
accrued liabilities 2,286,986 1,742,889 1,636,398
Income taxes payable 3,733 - 66,065
Current portion of
obligations under
capital lease (Note 7) 3,205,919 4,850,188 3,660,311
Callable debt (Note 8) 9,612,020 4,977,040 5,532,050
Due to unitholders (Note 9) 1,034,529 1,010,137 985,411
Current portion of
long-term debt (Note 10) 187,500 750,000 750,000
---------------------------------------------------------------------
18,249,702 16,021,582 13,860,338
Obligations under capital
lease (Note 7) 769,877 2,836,202 5,824,689
Long-term debt (Note 10) - 187,500 562,500
Future income taxes (Note 12) - - 2,473,114
Non-controlling interest - 1,040 -
---------------------------------------------------------------------
19,019,579 19,046,324 22,720,641
Commitments (Note 16) and
Contingencies (Note 17)
UNITHOLDERS' EQUITY

Unitholders' capital (Note 11) 8,962,071 8,962,071 1,254,732
Accumulated earnings 8,379,797 2,772,238 4,991,775
---------------------------------------------------------------------
17,341,868 11,734,309 6,246,507

$ 36,361,447 $ 30,780,633 $ 28,967,148
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes to the consolidated financial statements

Approved by the Board


Bruce W. Jones Perry W. Jasson
Director Director



Stoneham Drilling Trust
Consolidated Statements of Earnings and Accumulated Earnings
---------------------------------------------------------------------
Six months Year ended
Year ended Ended June 30,
December 31, December 2003
2004 31, 2003 (Note 1)

REVENUE $ 27,155,003 $ 13,783,194 $ 20,553,853
---------------------------------------------------------------------

EXPENSES

Operating 16,045,232 8,220,365 11,629,351
Amortization 2,937,333 1,520,953 2,293,357
General and administrative 1,769,530 709,902 1,957,223
Interest on term and
callable debt 720,156 504,453 1,220,088
Other interest 74,668 55,005 36,664
---------------------------------------------------------------------
21,546,919 11,010,678 17,136,683
---------------------------------------------------------------------

Net earnings before income
taxes 5,608,084 2,772,516 3,417,170

INCOME TAXES (Note 12)
Current - - 62,627
Future - - 1,195,965
---------------------------------------------------------------------
- - 1,258,592
---------------------------------------------------------------------
Net earnings before
non-controlling interest 5,608,084 2,772,516 2,158,578

Non-controlling interest 525 278 -
---------------------------------------------------------------------
Net earnings 5,607,559 2,772,238 2,158,578

Accumulated earnings,
beginning of period 2,772,238 - 3,460,429
Premium on redemption of
capital stock - - (627,232)
---------------------------------------------------------------------

Accumulated earnings, end
of period $ 8,379,797 $ 2,772,238 $ 4,991,775
---------------------------------------------------------------------
---------------------------------------------------------------------

Earnings per unit (Note 13)
Basic $ 1.99 $ 0.99 $ 0.67
Diluted $ 1.74 $ 0.88 $ 0.62


See accompanying notes to the consolidated financial statements



Stoneham Drilling Trust
Consolidated Statements of Cash Flows
---------------------------------------------------------------------
Six months Year ended
Year ended Ended June 30,
December 31, December 2003
2004 31, 2003 (Note 1)

OPERATING ACTIVITIES
Net earnings for the period $ 5,607,559 $ 2,772,238 $ 2,158,578
Adjustments for items
not affecting cash:
Amortization 2,937,333 1,520,953 2,293,357
Future income taxes - - 1,195,965
Non-controlling interest 525 278 -
---------------------------------------------------------------------
Cash flow from operations 8,545,417 4,293,469 5,647,900
Change in non-cash working
capital (Note 14) (61,972) (3,070,699) (2,539,921)
---------------------------------------------------------------------
8,483,445 1,222,770 3,107,979
---------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of property, plant
and equipment (7,909,911) (90,000) (727,566)
---------------------------------------------------------------------

FINANCING ACTIVITIES
Term and callable debt
repayments (6,570,613) (3,208,621) (4,956,481)
Term and callable debt
financing 6,745,000 480,000 -
Redemption of capital stock - - (900,000)
Trust unit issue - 109,900 -
Accrued interest payable to
Trust unitholders 24,392 24,726 30,723
---------------------------------------------------------------------
198,779 (2,593,995) (5,825,758)
---------------------------------------------------------------------

Increase (Decrease) in cash 772,313 (1,461,225) (3,445,345)
Cash (Bank indebtedness),
beginning of period (2,691,328) (1,230,103) 2,215,242
---------------------------------------------------------------------

Bank indebtedness, end of
period $(1,919,015) $ (2,691,328) $ (1,230,103)
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes to the consolidated financial statements


Stoneham Drilling Trust
Notes to the Consolidated Financial Statements
December 31, 2004, December 31, 2003 and June 30, 2003


1. Structure of the Trust

Prior to July 2003 the business of the company was conducted by Seamans
Drilling Inc. ("Seamans Drilling"). On July 1, 2003, as part of a
corporate reorganization Seamans Drilling contributed all of its oil and
gas drilling business to Stoneham Drilling Limited Partnership (the
"Partnership") in consideration of the assumption by the Partnership of
the then existing liabilities of Seamans Drilling and the issuance by
the Partnership to Seamans Drilling of Limited Partnership units and
fixed notes. This gave Seamans Drilling a 99.99% interest in the
Partnership and it was the sole limited partner in the Partnership. On
July 29, 2003 Seamans Drilling sold the Limited Partnership units and
fixed notes to Stoneham Drilling Trust (the "Trust") in exchange for
units of the Trust. The Trust was then the sole limited partner of
Partnership. On December 15, 2004 the Trust acquired Stoneham Drilling
Inc., general partner of the Limited Partnership ("the General
Partner"). The General Partner holds the remaining 0.01% interest in the
Partnership. The Partnership provides contract drilling services to oil
and natural gas exploration and production companies in western Canada.

The year end of the Trust, the Partnership and the General Partner is
December 31. Previously Seamans Drilling had a year end of June 30.
Therefore for comparative purposes the audited consolidated financial
results of the Trust for the six months ended December 31, 2003 and the
audited financial results of Seamans Drilling for the year ended June
30, 2003 have been presented.

The Trust is an open-end, 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 the Partnership, the General Partner and Stoneham
Administration Inc., the manager of the Trust. Valiant Trust Company
(the "Trustee) is the Trustee of the Trust. The beneficiaries of the
Trust are the holders of the trust units.

2. Significant Accounting Policies

The consolidated financial statements have been prepared by management
following Canadian generally accepted accounting principles ("GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingencies at the date of the
financial statements, and revenues and expenses during the reporting
period. Actual results could differ from those estimated.

Principles of Consolidation

The consolidated financial statements include the accounts of the Trust
and all of its subsidiaries. The Trust has chosen early adoption of
Accounting Guideline 15, Consolidation of Variable Interest Entities;
see Note 3 Changes in Accounting Policies.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost.

Drilling rig equipment is amortized using the unit-of-production method
based on 3,200 drilling days, except for drill pipe and collars and rig
manager quarters, which are amortized over 1,500 drilling days. Rigs
under construction are not subject to amortization.

Spare pumps are amortized using the unit-of-production method based on
2,500 drilling days.

Equipment acquired for specific contracts is amortized over the term of
the contract to its estimated residual value.

Equipment and office furniture are amortized using the declining balance
method at an annual rate of 30%. In the year of acquisition one-half of
this rate is used.

Income Taxes

A provision for income taxes has note been made in the consolidated
financial statements, as the unitholders are responsible for income
taxes on their share of income from the Trust. Stoneham Drilling Inc.,
general partner, is subject to tax on its earnings.

Revenue Recognition

Services are generally sold based upon contracts with the customer that
includes fixed or determinable prices based upon daily or hourly rates.
Customer contract terms do not include provisions for significant
post-service delivery obligations. Revenue is recognized when service is
rendered and only when collectability is reasonably assured.

Leases

Leases are classified as either capital or operating leases. A lease
that transfers substantially all benefits and risks incidental to the
ownership of property is classified as property, plant and equipment.
All other leases are accounted for as operating leases where rental
payments are expensed as incurred. At the inception of a capital lease,
an asset and an obligation are recorded at an amount equal to the lesser
of the present value of the minimum lease payments and the property's
fair value at the beginning of the lease. Assets recorded as a capital
lease are amortized in accordance with the property plant and equipment
policy above.

Stock-Based Compensation

Effective January 1, 2004 the Trust was required to retroactively apply
the fair value method to all options granted in 2002 and subsequent
years. No compensation expense has been recognized as no new options
have been granted since January 1, 2002.

Per Unit Amounts

Basic per unit amounts are calculated using the weighted average number
of units outstanding during the year. Diluted earnings per unit are
calculated using the treasury stock method to determine the dilutive
effects of stock options. The treasury method assumes that proceeds from
the exercise of "in-the-money" unit options are used to re-purchase
units at the prevailing market rate.

Comparative Figures

Certain comparative figures have been reclassified to conform to the
current financial statement presentation.

3. Changes in Accounting Policies

Adoption of Accounting Guideline 15 - Consolidation of Variable Interest
Entities ("AcG-15")

During the fourth quarter, the Trust has early adopted the
recommendations of AcG-15 resulting in the consolidation of the Trust's
financial statements with those of the Partnership, the variable
interest entity ("VIE"). Historically, entities have been consolidated
by an enterprise when it has a controlling financial interest through
the ownership of a majority voting interest in the entity. AcG-15 is
meant to apply to entities with a structure that precludes voting
control but over which control may exist through other arrangements.

As the limited partner in the Partnership, the Trust does not have a
majority voting interest in the Partnership. The majority voting
interest is held by the General Partner, which was itself not controlled
by the Trust until December 15, 2004. The Partnership is considered to
be a VIE under AcG-15 and the Trust as the owner of all the partnership
units and subordinated debt, receives 99.99% of the VIE's expected
residual returns and would absorb 99.99% of its expected losses. As a
result, the Trust is considered to be the primary beneficiary and must
consolidate the VIE.

AcG-15 was applied as though it was effective when the Trust first met
the conditions to be the primary beneficiary of the Partnership, July
2003.

4. Business Acquisition

On July 1, 2003, Seamans Drilling a company related by common control,
transferred all of its oil and gas drilling business assets in a series
of transactions involving the Partnership to the Trust in exchange for
assumption of debt and 2,822,800 Trust units.

The acquisition was accounted for using the continuity of interest
method. The assets and liabilities of Seamans Drilling were recorded at
their carrying amount as at the transaction date and are treated as if
they were always held by the Partnership.



The allocation of the total purchase price is as follows:

Assets
Accounts receivable $ 3,825,682
Property, plant and equipment 25,063,517
Prepaids 145,193
--------------
29,034,392
--------------
Liabilities
Bank indebtedness 1,230,103
Accounts payable 1,636,398
Callable and term debt 17,314,961
--------------
20,181,462
--------------
Net assets $ 8,852,930
--------------
--------------



5. Property, Plant and Equipment
Accumulated Net Book
December 31, 2004 Cost Amortization Value
------------------------------------------------------------------------

Drilling rigs and ancillary
equipment $ 15,264,944 $ 5,298,658 $ 9,966,286
Drilling rigs under
construction 7,556,937 - 7,556,937
Drilling rigs and ancillary
equipment under capital
lease 14,338,424 3,364,228 10,974,196
Office furniture and
equipment 199,712 84,140 115,572
-------------------------------------------
$ 37,360,017 $ 8,747,026 $ 28,612,991
-------------------------------------------
-------------------------------------------

Accumulated Net Book
December 31, 2003 Cost Amortization Value
------------------------------------------------------------------------

Drilling rigs and ancillary
equipment $ 14,986,342 $ 3,595,087 $ 11,391,255
Drilling rigs under
construction - - -
Drilling rigs and ancillary
equipment under capital
lease 14,338,424 2,161,801 12,176,623
Office furniture and
equipment 123,460 50,925 72,535
-------------------------------------------
$ 29,448,226 $ 5,807,813 $ 23,640,413
-------------------------------------------
-------------------------------------------

Accumulated Net Book
June 30, 2003 Cost Amortization Value
------------------------------------------------------------------------

Drilling rigs and ancillary
equipment $ 14,917,342 $ 2,731,626 $ 12,185,716
Drilling rigs under
construction - - -
Drilling rigs and ancillary
equipment under capital
lease 14,338,424 1,521,782 12,816,642
Office furniture and
equipment 102,460 41,301 61,159
-------------------------------------------
$ 29,358,226 $ 4,294,709 $ 25,063,517
-------------------------------------------
-------------------------------------------


6. Bank Indebtedness

The Trust has an authorized operating loan of $5,000,000 at December 31,
2004 (December 31, 2003 - $3,750,000, June 20, 2003 - $3,750,000),
subject to margin requirements, at a rate of prime plus 0.75%. The bank
indebtedness is secured by a general security agreement and the
assignment to the bank of all risk insurance.

Subsequent to year end on January 15, 2005 the authorized limit was
increased to $7,500,000 and a second demand operating facility was
granted in the amount of $2,000,000 at a rate of prime plus 1.00%.



7. Obligations Under Capital Lease

The Trust has the following obligations under capital lease:

December 31, December 31, June 30,
2004 2003 2003
-------------------------------------------
HSBC Bank Canada agreement
bearing interest at 6.38%
repayable at $113,497 per
month principal and interest
and a buy out value of
$1,175,000 in December 2004 $ - $ 2,312,033 $ 2,908,080

HSBC Bank Canada agreement
bearing interest at 7.18%
repayable at $110,269 per
month principal and interest
and a buy out value of
$1,122,106 in March 2005 1,320,776 2,502,741 3,062,749

HSBC Bank Canada agreement
bearing interest at 7.18%
repayable at $115,467 per
month principal and interest
and a buyout value of
$1,175,000 in March 2005 1,383,030 2,620,711 3,207,117

HSBC Bank Canada agreement
bearing interest at 7.18%
repayable at $11,056 per
month principal and interest
and a buyout value of
$112,500 in March 2005 132,396 250,905 307,054

HSBC Bank Canada agreement
bearing interest at 5.68%
repayable at $35,406 per
month principal and interest
and a buyout value of $100
in December 2007 1,139,594 - -
-------------------------------------------
3,975,796 7,686,390 9,485,000
Less current portion 3,205,919 4,850,188 3,660,311
-------------------------------------------
$ 769,877 $ 2,836,202 $ 5,824,689
-------------------------------------------
-------------------------------------------

Total payments of obligations under capital leases are as follows:

Principal Interest Total
-------------------------------------------
2005 $ 3,205,919 $ 102,143 $ 3,308,062
2006 391,251 33,621 424,872
2007 378,626 10,940 389,566
-------------------------------------------
$ 3,975,796 $ 146,704 $ 4,122,500
-------------------------------------------
-------------------------------------------

8. Callable Debt

Callable Debt is comprised of the following:

December 31, December 31, June 30,
2004 2003 2003
-------------------------------------------
HSBC Bank Canada demand term
loan bearing interest at
prime plus 1% repayable at
$120,000 per month principal
only, maturing March 2006 $ 1,800,000 $ 3,240,000 $ 3,960,000

HSBC Bank Canada demand term
loan bearing interest at
prime plus 1% repayable at
$15,425 per month principal
only, maturing February 2006 215,900 401,000 493,550

HSBC Bank Canada demand term
loan bearing interest at
prime plus 1% repayable at
$5,410 per month principal
only, maturing March 2006 81,120 146,040 178,500

HSBC Bank Canada demand term
loan bearing interest at
prime plus 1% repayable at
$25,000 per month principal
only, maturing June 2006 450,000 750,000 900,000

HSBC Bank Canada demand term
loan bearing interest at
prime plus 1% repayable at
$10,000 per month principal
only, maturing August 2007 320,000 440,000 -

HSBC Bank Canada demand term
rig construction loan
bearing interest at prime
plus 1.25% repayable over 60
months commencing on the
first day of the month
following the 60 day period
after the final drawdown 6,745,000 - -
-------------------------------------------
$ 9,612,020 $ 4,977,040 $ 5,532,050
-------------------------------------------
-------------------------------------------

The HSBC Bank Canada Loans are secured by a general security agreement as
described in Note 6 Bank Indebtedness.

Principal repayments on the callable debt in each of the next five fiscal
years are as follows:

2005 $ 2,896,937
2006 2,026,004
2007 1,429,004
2008 1,349,004
2009 1,349,004
Thereafter 562,067
------------
$ 9,612,020
-------------
-------------


9. Due to Unitholders

At December 31, 2004 $1,034,529 (December 31, 2003 - $1,010,137, June
30, 2003 - $985,411) of secured subordinated promissory demand notes due
to certain unitholders of the Trust were outstanding. The promissory
notes are unsecured, due on demand, subordinate to obligations to the
HSBC Bank Canada and bear interest at prime plus 1%. During the year
ended December 31, 2004 the Trust recognized interest expense of $43,796
(six months ended December 31, 2003 - $24,726, year ended June 30, 2003
- $49,208).

Subsequent to year end and prior to the initial public offering
described in Note 18, the debt was settled with the issuance of 84,297
trust units.

10. Long-term Debt

The Trust holds a debenture, subordinate to HSBC Bank Canada. The
debenture bears interest at prime rate and is repayable at $187,500 per
quarter principal only, maturing February 2005.




December 31, December 31, June 30,
2004 2003 2003
--------------------------------------------
Balance outstanding $ 187,500 $ 937,500 $ 1,312,500
Less current portion 187,500 750,000 750,000
--------------------------------------------
$ - $ 187,500 $ 562,500
--------------------------------------------
--------------------------------------------


11. Unitholders' Capital

The Trust is authorized to issue an unlimited number of trust units. At
December 31, 2004, 2,822,801 (December 31, 2003 - 2,822,801) voting
participating units were issued and outstanding. At June 30, 2003,
2,760,000 common redeemable voting shares were issued and outstanding.



Issued and Outstanding Trust Units

December 31, December 31,
2004 2003
-------------------------------------------------
Number of Number of
Trust Units $ Trust Units $
-------------------------------------------------
Balance, end of period 2,822,801 8,962,071 2,822,801 8,962,071
-------------------------------------------------
-------------------------------------------------


June 30,
2003

Number of
Common Shares $
-----------------------------
Balance, end of period 2,760,000 1,254,732
-----------------------------
-----------------------------


At June 30, 2003 Seamans Drilling Inc had authorized an unlimited number
of Class A common redeemable voting shares of which 2,760,000 Class A
common shares were issued for $1,254,732. During the year ended June 30,
2003 Seamans Drilling redeemed 600,000 Class A common shares at $1.50
per share for $900,000 and cancelled the Class B common shares, and the
Class C,D,E and F preferred shares of which there were no issued or
outstanding shares.

During the 6 months ended December 31, 2003 Seamans Drilling issued
62,800 Class A common shares at $1.75 per share for consideration of
$109,900.

An executive officer of the Trust has 400,000 options at an exercise
price of $0.50 that expire August 14, 2008. These options were granted
pursuant to a long-term incentive plan established prior to January 2002
in Seamans Drilling and extended to the Trust upon reorganization.
Subsequent to year end and prior to the initial public offering
described in Note 18 the options were exercised.

12. Income Taxes

The income tax provision differs from that which would be computed using
the statutory rates. A reconciliation of the differences is as follows:



Six months
Year ended ended Year ended
December 31, December 31, June 30,
2004 2003 2003
------------------------------------------
Earnings before income taxes $ 5,608,084 $ 2,772,516 $ 3,417,170
Statutory tax rate 35.00% 35.50% 36.00%
Expected income tax at
statutory rate 1,962,829 984,243 1,230,181
Add (Deduct):
Permanent differences 14,167 8,147 43,130
Prior year recovery - - (3,438)
Distributions to unitholders (1,976,996) (992,390) -
Other - - (11,281)
------------------------------------------
Income tax provision $ - $ - $ 1,258,592
------------------------------------------
------------------------------------------

The net future tax liability is comprised of the tax effect of the
following temporary differences:


December 31, December 31, June 30,
2004 2003 2003
--------------------------------------------
Capital assets $ - $ - $ 7,306,564
Other - - (264,668)
--------------------------------------------
- - 7,041,896
Expected future tax rate 35.0% 35.5% 35.1%
--------------------------------------------
Future income taxes at
expected rate $ - $ - $ 2,473,114
--------------------------------------------
--------------------------------------------


13. Earnings per Unit

The earnings per trust unit amounts for 2004 were calculated based on
the weighted average number of units outstanding of 2,822,801 (December
31, 2003 - 2,812,562, June 30 2003 - 3,208,767 common shares). For the
year ended December 31, 2004, the calculated additional diluted units
are 400,000 (six months ended December 31, 2003 - 333,333, year ended
June 30, 2003 - 285,714) due to the dilutive impact of options
outstanding.



14. Supplemental Cash Flow Information

Changes in non-cash working capital

December 31, December 31, June 30,
2004 2003 2003
--------------------------------------------
(Increase) in current assets
Accounts receivable $ (187,566) $ (2,988,206) $ (3,185,200)
Prepaid expenses (420,670) (185,488) (28,385)

Increase in current
liabilities
Accounts payable and
accrued liabilities 542,531 102,995 1,234,200
Income taxes payable 3,733 - 560,536
--------------------------------------------
$ (61,972) $ (3,070,699) $ (2,539,921)
--------------------------------------------
--------------------------------------------

--------------------------------------------
Interest paid $ 752,822 $ 539,324 $ 1,231,603
--------------------------------------------
--------------------------------------------
Income taxes paid $ - $ - $ 625,386
--------------------------------------------
--------------------------------------------


15. Significant Customers

During 2004 three (six months ended December 31, 2003 - four, year ended
June 30, 2003 - three) customers each provided more than 10% of the
Trust's revenue. In management's assessment, the future viability of the
Trust is not dependent upon any one of these major customers.

16. Commitments

The Trust has several operating lease agreements on office space and
vehicles. The future lease obligations for the next five years are
summarized below:



2005 $ 196,690
2006 214,925
2007 125,216
2008 63,544
2009 62,567


The Trust is committed to the construction of two additional drilling
rigs. The estimated cost of the rigs is $15,770,000 of which $7,556,937
has been incurred to December 31, 2004. The Trust has entered into an
agreement with HSBC Bank Canada to finance 100% of the cost of these
rigs. At December 31, 2004, $6,745,000 had been drawn. Subsequent to
year end the full amount was repaid with the proceeds from the initial
public offering described in Note 18.

In conjunction with the bought deal financing announced on March 3, 2005
the Trust entered into contracts to purchase three additional drilling
rigs for an estimated cost of $25 million. The rigs are expected to be
financed with the proceeds of the equity financing and through
additional credit facilities.

17. Contingencies

On the June 30, 2003 corporate tax return of Seamans Drilling 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 reassessed on the basis that 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 Trust would pay an
estimated $148,000 plus interest and penalties. However, it is
management's view that the reorganization costs are an allowable
deduction and therefore no provision for the estimated tax owing has
been recorded in the financial statements. Under the terms of the
purchase agreement between the Partnership and Seamans Drilling, the
Partnership assumed all of the liabilities of Seamans Drilling.
Accordingly, if unsuccessful the amount above would be shown as an
expense on the statement of earnings.

18. Financial Instruments

The Trust's financial instruments recognized on the consolidated balance
sheets include accounts receivable, current liabilities, and capital
leases. The carrying value of the financial instruments approximates
their fair value.

The Trust is exposed to credit risk due to the potential non-performance
of counter parties to the above financial instruments. The Trust
mitigates this risk by dealing mainly with larger, well established
companies and with a major national chartered bank.

The Trust's exposure to interest rate risk lies in its bank
indebtedness, term and callable debt. Interest is calculated at prime to
prime plus 1.25% per annum. The prime interest rate is subject to change.

19. Subsequent Events

Subsequent to year end, on January 6, 2005 the Trust completed its
initial public offering and began trading on the Toronto Stock Exchange.
The initial public offering consisted of 1,666,667 trust units at $12.00
per unit for gross proceeds of $20.0 million. Proceeds from the offering
were used or will be used to repay the demand construction facility,
fund the remaining costs for drilling rigs 7 and 8, fund lease buy outs
as they expire and for general working capital purposes.

On March 3, 2005 the Trust announced that it has entered into a bought
deal financing agreement where the underwriters have agreed to purchase
1,129,033 Trust units for $18.60 per Trust unit resulting in gross
proceeds of $21.0 million. The underwriters have exercised their option
to purchase an additional 53,763 trust units at $18.60 per Trust unit,
bringing the total issue proceeds to $22.0 million. The offering closed
on March 22, 2005. Proceeds from the offering will be used to partially
fund the construction of three additional drilling rigs and for general
working capital purposes.

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