Stoneham Drilling Trust
TSX : SDG.UN

Stoneham Drilling Trust

November 10, 2005 00:00 ET

Stoneham Drilling Trust Financial Results for the Third Quarter Ended September 30, 2005

CALGARY, ALBERTA--(CCNMatthews - Nov. 10, 2005) - Stoneham Drilling Trust (TSX:SDG.UN) ("Stoneham" or the "Trust") achieved record third quarter revenue, net earnings and cash flow from operations, benefiting from additional rigs in operation and continued strong demand for our services. Stoneham surpassed industry utilization by 12% in the third quarter of 2005 and by 20% year to date.


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

Revenue 9,791 5,225 87% 23,729 19,397 22%
Net earnings 2,662 524 408% 5,641 3,671 54%
Per unit (diluted) 0.43 0.17 153% 0.98 1.16 -16%
Cash flow from
operations(1) 3,730 1,138 228% 7,994 5,830 37%
Per unit (diluted) 0.61 0.36 69% 1.39 1.85 -25%
EBITDA(2) 3,684 1,313 181% 7,939 6,432 23%
Units outstanding
(weighted average) 6,157 2,823 118% 5,759 2,823 104%
Units outstanding
(diluted) 6,157 3,156 95% 5,759 3,156 82%

Operating Highlights
Number of rigs 8 6 33% 7 6 17%
Operating days 543 338 61% 1,331 1,145 16%
Utilization rate 70.9% 61.2% 16% 66.5% 69.7% -5%
Industry average 63.2% 46.5% 36% 55.6% 49.8% 12%

(1) Readers are advised 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.

Revenues for the three months ended September 30, 2005, were $9.8 million 87% greater than the same period in 2004. Net earnings and cash flow from operations grew to $2.7 million, and $3.7 million respectively. EBITDA for the three month period was $3.7 million.

Rig operating days increased 61% compared to the same period in 2004. The increase is attributable to the deployment of Rig 7 in February, Rig 8 in July and Rig 9 in September as well as continued strong demand for Stoneham's services. Year-over-year rig operating days increased 16% to 1,331.

Construction on Rigs 10 and 11, both 4,000 metre telescopic triple drilling rigs continued during the quarter, and are expected to be completed in the fourth quarter of 2005 and first quarter of 2006 respectively. Construction costs of the two rigs are and will be financed with proceeds from the private placement financing which closed on March 22, 2005 and through credit facilities. Stoneham announced on September 7, the construction of Rig 12, a 3,500 metre telescopic double drilling rig. The estimated cost of Rig 12 is $7.0 million which will be financed through a combination of additional bank financing and working capital. Rig 12 is scheduled for delivery during the first half of 2006.

Stoneham 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 nine telescopic drilling rigs and three additional rigs currently under construction, Stoneham is an industry leader in operational performance and rig utilization. Stoneham trades on the TSX 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 NINE MONTHS ENDED SEPTEMBER 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 nine month periods ended September 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 November 3, 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 Three months ended Nine months ended
trust unit data and Sept 30, Sept 30,
trust units outstanding 2005 2004 2005 2004
-------------------------------------------------------------------------

Revenue 9,791 5,225 23,729 19,397
Net earnings 2,662 524 5,641 3,671
Per trust unit (basic) 0.43 0.19 0.98 1.30
Per trust unit
(diluted) 0.43 0.17 0.98 1.16
Cash flow from
operations(1) 3,730 1,138 7,994 5,830
Per trust unit
(diluted) 0.61 0.36 1.39 1.85
Total assets 64,005 27,367 64,005 27,367
Long term debt(2) 2,149 11,576 2,149 11,576
Weighted average trust
units outstanding
Basic 6,156,561 2,822,801 5,758,656 2,822,801
Diluted 6,156,561 3,156,134 5,758,656 3,156,134

EBITDA(3) 3,684 1,313 7,939 6,432

(1) Readers are advised 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 achieved record third quarter revenue, net earnings and
cash flow from operations, benefiting from additional rigs in
operation and continued strong demand for our services.

- Rig 8 and Rig 9 commenced field operations in July and September
respectively, thereby increasing our operating days by 61% to 543
for the three month period ended September 30, 2005.

- Stoneham continues to perform at a utilization rate higher than
industry average. Our third quarter utilization rate was 70.9%,
16% higher than the industry average utilization rate of 61.2%.

- One September 7, Stoneham announced the construction of Rig 12, a
3,500 metre telescopic double drilling rig. The estimated
construction cost of $7.0 million will be financed through a
combination of additional bank financing and working capital.
Rig 12 is scheduled for delivery in the first half of 2006.

- During the quarter Stoneham distributed $2.3 million to
unitholders, bringing the year to date total to $5.9 million.

Operational Highlights(1)

Three months ended Nine months ended
Sept Sept Sept Sept
30, 30, % 30, 30, %
2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Operating days 543 338 61% 1,331 1,145 16%
Utilization rate 70.9% 61.2% 16% 66.5% 69.7% -5%
CAODC industry average 63.2% 46.5% 36% 55.6% 49.8% 12%
Number of drilling rigs
in operation 8 6 33% 7 6 17%

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

The Canadian drilling industry is seasonal. Activity builds over the summer and fall and peaks 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 restrictions 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.

Rig operating days increased 61%, compared with the same period in 2004. This is attributable to the deployment of Rig 7 in February, Rig 8 in July and Rig 9 in September as well as continued strong demand for Stoneham's services. Stoneham's utilization rate was 70.9% up from 61.2% in the same period in 2004.

Rig operating days increased 16% year-over-year due to the deployment of the three new drilling rigs in the first nine months of 2005. For the nine month period, Stoneham's utilization decreased slightly to 66.5%. The decrease is attributable to an extended spring break up and wet weather, during the second quarter of 2005, which restricted drilling activity in parts of Alberta.

Stoneham continues to operate with utilization rates higher than the industry average utilization rate and expects this performance to continue. Fourth quarter activity will benefit from the availability of the new Rig 9 throughout the period.

Revenue and Operating Expenses

Three months ended Nine months ended
Sept Sept Sept Sept
30, 30, % 30, 30, %
$ 000s 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Revenue 9,791 5,225 87% 23,729 19,397 22%
Operating expenses 5,329 3,362 59% 13,705 11,633 18%

Revenue for the third quarter increased 87% to $9.8 million. The increase is attributable to a higher number of operating days in the quarter due to the deployment of Rig 7 in February, Rig 8 in July and Rig 9 in September; and improved utilization reflecting favourable weather conditions and customer demand combined with improved pricing due to the demand for Stoneham's services. Rigs 7 and 8 have deeper drilling depth capacity and therefore generate higher daily revenues than the other rigs in the fleet, also contributing to the increase in revenue. These factors resulted in revenue per operating day increasing 16% to $18,032 from $15,459 for the three month period ended September 30, 2004.

For the nine months ended September 30, 2005, revenue increased $4.3 million to $23.7 million. The 22% increase is attributable to the addition of three new drilling rigs during the year and real price increases. Revenue per operating day for the nine month period, increased to $17,828 per operating day from $16,941 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.

The addition of three drilling rigs in 2005 caused operating expenses to increase to $5.3 million or $9,807 per operating day in the third quarter of 2005 from $3.4 million or $9,948 per operating day for the same period in 2004. Certain equipment rentals required in 2004 but not in 2005, caused operating expenses to not increase in proportion to activity.

For the nine month period ended September 30, 2005, operating expenses increased 18% to $13.7 million or $10,297 per operating day from $11.6 million or $10,160 per operating day in 2004 due to an increased number of rigs and operating days.

General & Administrative Expenses

Three months ended Nine months ended
Sept Sept Sept Sept
30, 30, % 30, 30, %
$ 000s 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
General & administrative 778 550 41% 2,085 1,332 57%

General and administrative expenses increased 41% to $0.8 million for the three month period ended September 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 nine month period ending September 30, 2005, general and administrative costs increased 57% over the prior year to $2.1 million, consistent with the discussion above.

Amortization

Three months ended Nine months ended
Sept Sept Sept Sept
30, 30, % 30, 30, %
$ 000s 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Amortization 1,068 615 74% 2,353 2,160 9%

Amortization of property, plant and equipment increased 74% for the three month period ended September 30, 2005, to $1.1 million. This is attributable to an increase in property plant and equipment from the rig construction program and the effect of additional operating days because the majority of Stoneham's assets are amortized on a unit-of-production basis. These same factors were also responsible for the increase in amortization for the nine month period ended September 30, 2005.

Interest Expense

Three months ended Nine months ended
Sept Sept Sept Sept
30, 30, % 30, 30, %
$ 000s 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Interest on term and
callable debt 35 156 -78% 184 547 -66%
Other interest (income) (81) 19 - (239) 55 -

Interest on callable debt, including capital leases, decreased 78% in the third quarter and 66% in the first nine months of 2005. The reduction reflects reduced levels of term debt from repayments 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 nine month periods ended September 30, 2005. The General Partner was acquired on December 15, 2004, therefore its income is not included in the results for the three and nine month periods ended September 30, 2004.

Liquidity and Capital Resources

At September 30, 2005, Stoneham had a working capital balance of $12.0 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 September 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 $11.6 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.

On September 7, 2005, Stoneham announced it had entered into a contract for the construction of Rig 12 in response to customer demand. The estimated cost of construction of the rig is $7.0 million, which is expected to be financed with a combination of additional bank financing and working capital. Delivery of Rig 12 is scheduled for the first half of 2006.

Operating Activities

Three months ended Nine months ended
Sept Sept Sept Sept
30, 30, % 30, 30, %
$ 000s 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Net earnings 2,662 524 - 5,641 3,671 54%
Cash flow from
operations 3,730 1,138 - 7,994 5,830 37%

Net earnings increased to $2.7 million for the third quarter, and cash flow from operations increased to $3.7 million. Increased rig capacity and utilization, real price increases, and lower interest expense contributed to an increase in both net earnings and cash flow from operations. The increase was offset in part by higher fixed operating, general and administrative, and amortization expenses.

Consistent with the discussion above, net earnings and cash flow from operations increased for the nine month period ended September 30, 2005 compared to the same period in 2004.

Investing Activities

Three months ended Nine months ended
Sept Sept Sept Sept
30, 30, % 30, 30, %
$ 000s 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Capital expenditures 5,810 37 - 19,066 316 -

Capital expenditures for the third quarter increased to $5.8 million mainly as a result of the construction costs incurred during the quarter for Rig 9 and Rig 10. The remainder of the construction costs on Rig 10 will be incurred in the fourth quarter, when construction is expected to be completed. Capital expenditures for the same period in 2004 were comprised of maintenance capital items. Construction of Rig 11 is expected to be completed in the first quarter of 2006. Rig 10 and Rig 11 are being partially funded by the equity issue that closed on March 22, 2005, with the remainder to be financed by credit facilities.

For the nine month period ending September 30, 2005, capital expenditures were $19.1 million and included costs for the construction of Rig 7, 8, 9 and a portion of Rig 10. Capital expenditures for the same period in 2004 were comprised of maintenance capital items.

As discussed in the Liquidity and Capital Resources section of this Management's Discussion and Analysis, Stoneham announced construction of Rig 12 during the quarter.

Financing Activities

Three months ended Nine months ended
Sept Sept Sept Sept
30, 30, % 30, 30, %
$ 000s 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Net change in term
debt(1) (621) (1,670) -63% (11,627) (4,962) -
Changes in capital - - - 39,470 - -

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

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 being used to partially fund the construction of drilling Rigs 9, 10 and 11.

Distributions

Three months ended Nine months ended
Sept Sept Sept Sept
$ 000s, except for per 30, 30, % 30, 30, %
trust unit amounts 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Net earnings 2,662 524 - 5,641 3,671 54%
Cash flow from
operations 3,730 1,138 - 7,994 5,830 37%
Distributions paid and
payable 2,309 - - 6,630 - -
Distributions per trust
unit 0.375 - - 1.125 - -

Stoneham makes monthly distributions to unitholders from cash flow from operations, after withholding a portion of 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 $6.6 million or $1.13 per trust unit.

At September 30, 2005 and at November 3, 2005, the Trust had 6,156,561 trust units outstanding compared with 2,822,801 trust units and 400,000 stock options outstanding at September 30, 2004. The Trust does not have an equity option plan for directors, officers or employees.

Selected Quarterly Financial Information

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

Revenue 9,791 5,225 5,144 6,027
Net earnings 2,662 524 867 1,096
Per trust unit (basic) 0.43 0.19 0.14 0.39
Per trust unit (diluted) 0.43 0.17 0.14 0.35
Cash flow from operations 3,730 1,138 1,332 1,808
Per trust unit (diluted) 0.61 0.36 0.22 0.57
Utilization:
Stoneham 71% 61% 47% 63%
Industry 63% 47% 32% 30%



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

Revenue 8,794 8,144 7,758 7,307
Net earnings 2,112 2,051 1,938 1,654
Per trust unit (basic) 0.43 0.73 0.69 0.59
Per trust unit (diluted) 0.43 0.65 0.60 0.53
Cash flow from operations 2,932 2,884 2,715 2,405
Per trust unit (diluted) 0.59 0.91 0.84 0.76
Utilization:
Stoneham 80% 85% 82% 76%
Industry 71% 73% 62% 57%

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

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

Current
Cash and cash equivalents $ 8,935,501 $ -
Accounts receivable 9,149,817 7,004,954
Prepaid expenses 593,251 743,502
-------------------------------------------------------------------------
18,678,569 7,748,456

Property, plant and equipment 45,326,643 28,612,991
-------------------------------------------------------------------------
$64,005,212 $36,361,447
-------------------------------------------------------------------------
-------------------------------------------------------------------------

LIABILITIES

Current
Bank indebtedness (Note 3) $ - $ 1,919,015
Accounts payable and accrued liabilities 4,252,983 2,286,986
Distributions payable (Note 5) 769,570 -
Income taxes payable - 3,733
Current portion of obligations under capital
lease 385,751 3,205,919
Callable debt 1,284,505 9,612,020
Due to unitholders - 1,034,529
Current portion of long-term debt - 187,500
-------------------------------------------------------------------------
6,692,809 18,249,702

Obligations under capital lease 478,525 769,877
-------------------------------------------------------------------------
7,171,334 19,019,579
Commitments (Note 7) and Contingencies (Note 8)
UNITHOLDERS' EQUITY

Unitholders' capital (Note 4) 49,443,452 8,962,071
Accumulated earnings 14,020,857 8,379,797
Accumulated distributions to unitholders
(Note 5) (6,630,431) -
-------------------------------------------------------------------------
56,833,878 17,341,868

$64,005,212 $36,361,447
-------------------------------------------------------------------------
-------------------------------------------------------------------------



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

Three months ended Nine months ended
Sept 30, Sept 30,
2005 2004 2005 2004


REVENUE $ 9,791,191 $ 5,225,242 $23,728,886 $19,396,958
-------------------------------------------------------------------------

EXPENSES

Operating 5,328,828 3,362,326 13,705,157 11,632,670
Amortization 1,068,375 614,665 2,352,801 2,159,565
General and
administrative 778,123 549,916 2,084,733 1,332,243
Interest on term
and callable debt 34,933 155,633 184,450 546,543
Other interest
(income) (81,069) 19,167 (239,315) 55,366
-------------------------------------------------------------------------
7,129,190 4,701,707 18,087,826 15,726,387
-------------------------------------------------------------------------

Net earnings 2,662,001 523,535 5,641,060 3,670,571
-------------------------------------------------------------------------

Accumulated earnings,
beginning of period 11,358,856 5,919,274 8,379,797 2,772,238
-------------------------------------------------------------------------

Accumulated earnings,
end of period $14,020,857 $ 6,442,809 $14,020,857 $ 6,442,809
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Earnings per unit
Basic $ 0.43 $ 0.19 $ 0.98 $ 1.30
Diluted $ 0.43 $ 0.17 $ 0.98 $ 1.16
Weighted average
units outstanding
Basic 6,156,561 2,822,801 5,758,656 2,822,801
Diluted 6,156,561 3,156,134 5,758,656 3,156,134



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

Three months ended Nine months ended
Sept 30, Sept 30,
2005 2004 2005 2004

OPERATING ACTIVITIES
Net earnings for the
period $ 2,662,001 $ 523,535 $ 5,641,060 $ 3,670,571
Adjustment for an
item not affecting
cash:
Amortization 1,068,375 614,665 2,352,801 2,159,565
-------------------------------------------------------------------------
Cash flow from
operations 3,730,376 1,138,200 7,993,861 5,830,136
Change in non-cash
working capital
(Note 6) (4,838,402) 819,266 (2,318,751) 1,472,788
-------------------------------------------------------------------------
(1,108,026) 1,957,466 5,675,110 7,302,924
-------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of property,
plant and equipment (5,810,360) (36,507) (19,066,453) (315,854)
Changes in non-cash
investing working
capital 1,044,870 - 2,286,403 -
-------------------------------------------------------------------------
(4,765,490) (36,507) (16,780,050) (315,854)
-------------------------------------------------------------------------

FINANCING ACTIVITIES
Term and callable
debt repayments (620,580) (1,670,203) (11,626,536) (4,961,912)
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) - (5,860,860) -
Due to Trust
unitholders - 10,584 (22,978) 12,959
-------------------------------------------------------------------------
(2,929,290) (1,659,619) 21,959,456 (4,948,953)
-------------------------------------------------------------------------

(Decrease) Increase
in cash (8,802,806) 261,340 10,854,516 2,038,117
Cash (Bank
indebtedness),
beginning of period 17,738,307 (914,551) (1,919,015) (2,691,328)
-------------------------------------------------------------------------

Cash (Bank
indebtedness), end
of period $ 8,935,501 $ (653,211) $ 8,935,501 $ (653,211)
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Stoneham Drilling Trust
Notes to the Consolidated Financial Statements
September 30, 2005 and September 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 and May are traditionally our slowest operating months.

3. Bank Indebtedness

Pursuant to an agreement dated January 17, 2005, the Trust increased its authorized operating loan to $7,500,000, 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. As at September 30, 2005, no amounts were drawn on the facilities.

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 September 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 0.125 769,570
July, 2005 0.125 769,570
August, 2005 0.125 769,570
September, 2005 (declared and payable in
October, 2005) 0.125 769,570


6. Supplemental Cash Flow Information

Changes in non-cash working capital

Three months ended Nine months ended
Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004
---------------------------------------------------
(Increase)
decrease in
current assets
Accounts
receivable $(5,273,532) $ 3,241,151 $(2,144,863) $ 3,538,990
Prepaid
expenses (322,816) (211,357) 150,251 (52,181)
Deposit on rigs - (1,914,109) - (1,914,109)

(Decrease)
increase in
current
liabilities
Accounts
payable and
accrued
liabilities 757,946 (296,419) (1,089,976) (99,912)
Distributions
payable - - 769,570 -
Income taxes
payable - - (3,733) -
---------------------------------------------------
$(4,838,402) $ 819,266 $(2,318,751) $ 1,472,788
---------------------------------------------------
Interest paid $ 35,807 $ 174,801 $ 187,503 $ 326,497
---------------------------------------------------
Income taxes
paid $ 1,300 $ - $ 2,924 $ -
---------------------------------------------------

7. Commitments

Stoneham has entered into a contract for the construction of Rig 12. The estimated cost of construction is $7.0 million to be funded through a combination of bank financing and general working capital. Rig 12 is scheduled for delivery in the first half of 2006.

8. 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, 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, was expensed. The remainder is considered to be fully recoverable. Under the terms of the purchase agreement between Stoneham Drilling Limited Partnership and Seamans Drilling Inc., 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) Bennett Jones LLP
Calgary, Alberta 4500, 855 - 2nd Street S.W.
Calgary, Alberta T2P 4K7
(1) Chairman of the Board
(2) Member of the Audit Committee Blake Cassels & Graydon LLP
(3) Member of the Compensation 3500, 855 - 2nd Street S.W.
Committee Calgary, Alberta T2P 4J8
(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