Wellco Energy Services Trust
TSX : WLL.UN

Wellco Energy Services Trust

August 05, 2005 07:00 ET

Wellco Announces Second Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 5, 2005) - Wellco Energy Services Trust (TSX:WLL.UN) is pleased to announce its financial results for the three and six months ended June 30, 2005, with comparisons to the comparable periods for the previous year.

Profile

Wellco Energy Services Trust ("Wellco" or "the Trust") provides a comprehensive array of oilfield drilling and production services to organizations engaged in the search for oil and natural gas in Western Canada.



Financial Highlights
(Expressed in thousands of dollars, except per unit amounts)

For the 3 months For the 6 months
ended June 30, ended June 30,
------------------------------------------------------------
% %
2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
Revenue $10,795 $ 9,029 20 % $35,602 $26,866 33 %
------------------------------------------------------------------------
Direct costs 8,039 6,211 29 % 21,195 15,531 36 %
------------------------------------------------------------------------
Gross margin 2,756 2,818 (2)% 14,407 11,335 27 %
------------------------------------------------------------------------
G & A 2,554 2,198 16 % 5,322 3,855 38 %
------------------------------------------------------------------------
Cash flow (1) 114 308 (63)% 8,822 6,829 29 %
Per unit
diluted 0.01 0.02 (50)% 0.62 0.62 0 %
------------------------------------------------------------------------
EBITDA (1) 202 620 (67)% 9,085 7,480 21 %
Per unit
diluted 0.01 0.04 (75)% 0.64 0.68 (6)%
------------------------------------------------------------------------
Net earnings
(loss) (192) 297 (165)% 5,466 4,174 31 %
Per unit
diluted $(0.01) $ 0.02 (150)% 0.38 0.38 0 %
------------------------------------------------------------------------
Number of units
outstanding
Basic 14,176,272 13,686,975 4 % 14,057,837 10,821,283 30 %
Diluted 14,330,550 13,948,814 3 % 14,258,175 11,055,766 29 %
------------------------------------------------------------------------

(1) Refer to the "NON-GAAP Measures" section for further details.


MANAGEMENT DISCUSSION AND ANALYSIS ("MD & A")
(Expressed in thousands of dollars, except per unit amounts)


The following MD&A for the Trust should be read in conjunction with, and is supplemental to, the consolidated financial statements and related notes contained in this interim report for the three and six months ended June 30, 2005 and in the Trust's 2004 Annual Report. This MD&A was prepared effective August 4, 2005. The consolidated financial statements contained in this Interim Report have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") in Canadian dollars.

This MD&A focuses on key statistics from the consolidated financial statements and pertains to known risks and uncertainties relating to the oilfield services industry. This MD&A should not be considered all-inclusive, as it does not incorporate all changes that could occur regarding geopolitical, economic or environmental conditions that could influence the Trust's future financial condition and operating results.

OVERVIEW

The weather conditions experienced in Alberta in June 2005 were a major factor affecting the second quarter results. Wellco incurred a net loss of $(0.2) million (one cent loss per unit diluted) for the three month period ended June 30, 2005 compared to net earnings of $0.3 million (two cents earnings per unit diluted) for the comparable period of 2004. Cash flow for the three months ended June 30, 2005 of $0.1 million (one cent per unit diluted) was marginally lower than the $0.3 million (two cents per unit diluted) achieved in the same period of the prior year. Revenue increased over last year despite the curtailment of activity due to record rainfalls during the quarter. The small negative variances between periods for net earnings and cash flow are attributable to increased costs related to over-due repairs and maintenance and an aggressive operational integration program that included the beginning of a re-branding to new Wellco colours. This type of expense did not occur in the previous comparable period, and much of this activity was delayed due to the high activity levels during Q4/04 and Q1/05.

For the six months ended June 30, 2005 net earnings were $5.5 million ($0.38 per unit diluted), an increase of 31% as compared with $4.2 million ($0.38 per unit diluted), reported for the comparable period in 2004. Cash flow from operations for the first six months of 2005 was $8.8 million ($0.62 per unit diluted), a 29% increase over the $6.8 million ($0.62 per unit diluted), that was generated for the first six months of 2004. For the six month period both net earnings and cash flow per unit amounts have been consistent period over period despite the early break up experienced in the first quarter of 2005 and the record rainfall recorded in southern Alberta in June 2005.

Declared distributions for the six months ended June 30, 2005 totalled $6.6 million ($0.48 per unit) as compared to $5.4 million ($0.48 per unit) in the comparable period of 2004. As a percentage of cash flow, 2005 declared distributions were 75% as compared to 79% in the same period of 2004.

OPERATIONS REVIEW

There was an average 440 drilling rigs reported working in Canada during the first six months of 2005, up 5% over the same period last year. During the second quarter of 2005, the industry reported an average count of 272 drilling rigs working up 9% from the 250 working in 2004. (1) These numbers were achieved despite an early spring break-up and a wet June 2005.

(1) CAODC Statistics.

Activity for July is up over last year, with approximately 100 more rigs working. The 594 active units at the end of July, represents 80% of the total available fleet.

Although second quarter revenues were below our expectations, mainly because of weather conditions experienced, they were 20% higher than those posted for the comparable quarter of 2004.

Drilling Services

Our camp and catering and well-site accommodation product lines, both of which are focused on northerly work, were particularly affected by the extended spring break-up and wet early summer weather. In addition, camps leased by Wellco on a fixed term basis to augment equipment availability created a cost without any off-setting revenue when they were not deployed as expected. These costs were realized during the second quarter.

Demand continues for Wellco's waste water treatment systems, and utilization for this product line met our expectations for the quarter. Our 2005 capital budget adds 34 treatment systems to our fleet and we continue to evaluate our capital program in light of demand. Surface equipment rentals were also on track both for the quarter and the year to date.

Directional drilling and Vacuum and Water service activity fell somewhat below our expectations for the quarter. Vacuum and Water trucks were deployed through much of June to assist with flood control efforts in Southern Alberta, recovering nicely from some of the revenue shortfall experienced earlier in the quarter. Our directional drilling group has now completed its development work on the auto survey tool and we expect improved utilization in this division going forward.

Production Services

Service rig activity in Southern Alberta was severely affected by the heavy rainfall during June, and revenues were reduced accordingly. On a year to date basis our service rig revenues are in line with expectations, although margins have been somewhat affected by increases in personnel costs as we work to remain competitive in a tight labour market.

Blow-back tanks, the utilization of which tracks fracturing activity, was also slow during the quarter, and is approximately 13% behind our expectations for year to date. Notwithstanding this slow start, we expect to recover the shortfall through the next two quarters as completions activity levels increase, particularly in south-eastern Alberta.

Finally, the quarter provided us with one month of contribution from our newly acquired production testing business. Again, activity was impacted by the weather, though a return to higher activity levels has been rapid during July.

An overall increase in our cost of sales is attributable, in part, to our ongoing corporate branding program and operational integration effort. We have embarked on a repainting program that, over the course of the next 10 - 12 months, will create a new visual identity for Wellco. In addition, the relatively slow quarter has permitted us to catch up on delayed repair and maintenance activity, expenditures from which we should benefit through the remainder of the year. We are also continuing the work of reorganizing our operational management to a geographic basis, and over the remainder of the year will focus on deploying all Wellco services into regions of best opportunity.

Note 10 to the June 30, 2005 consolidated interim financial statements includes a detailed breakdown of results and activity for each of our operating segments for the three and six month periods ending June 30, 2005.

REVENUE

Revenue of $10.8 million was generated during the quarter ended June 30, 2005 compared to $9.0 million for the same period in 2004, representing an increase of 20%. For the six months ended June 30, 2005, Wellco recorded revenue of $35.6 million compared to $26.9 million in the same period of 2004. The period over period increase of 33% is due to the increased activity within our current product lines and the effect of acquisitions and internal capital expenditures completed in the previous year.

These acquisitions and internal capital expenditures have also affected the mix of Wellco's revenues from its two operating segments, drilling services and production services, as shown in the following table.



------------------------------------------------------------------------
Three months June 30 Six months June 30
------------------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------------------
REVENUE SOURCE
Drilling Services
------------------------------------------------------------------------
Accommodations & catering 33% 46% 47% 55%
------------------------------------------------------------------------
Surface equipment rentals 35% 28% 32% 29%
------------------------------------------------------------------------
Directional & horizontal drilling 6% 10% 4% 8%
------------------------------------------------------------------------
TOTAL 74% 84% 83% 92%
------------------------------------------------------------------------
Production Services
------------------------------------------------------------------------
Service rigs and tanks 21% 16% 15% 8%
------------------------------------------------------------------------
Production testing 5% n/a 2% n/a
------------------------------------------------------------------------
TOTAL 26% 16% 17% 8%
------------------------------------------------------------------------
TOTAL REVENUE 100% 100% 100% 100%
------------------------------------------------------------------------


For the fiscal year ending December 31, 2005, Wellco anticipates that the allocation between Drilling Services and Production Services revenue will be 80% and 20% respectively.

DIRECT COSTS AND GROSS MARGIN

Direct costs as a percentage of revenue have increased marginally due to increased repair and maintenance of our equipment during the second quarter of 2005 as compared to the second quarter in 2004. Low activity levels resulting from the extreme rainfall that occurred in June of 2005 gave us time to catch up on repair and painting (new Wellco colors) more of our equipment in the second quarter of this year as compared to the previous year when the repairs and maintenance program was distributed more evenly over the second and third quarters. In addition, labour costs have increased compared to our sales prices during the second quarter of 2005, which has historically been the softest period for pricing leverage. We are confident that with increased activity and the backlog of work being experienced by producers and drilling contractors we will have pricing leverage in the third and fourth quarters of 2005 that will cover these increased costs.

For the three month period ended June 30, 2005 direct costs were $8.0 million (74% of revenue) as compared to $6.2 million (69% of revenue) in 2004. Direct costs for the six months ended June 30, 2005 were $21.2 million (60% of revenue) as compared to $15.5 million (58% of revenue) in the corresponding period of 2004.

The gross margin for the three months ended June 30, 2005 was $2.8 million (26% of revenue) compared to $2.8 million (31% of revenue) in the corresponding period of 2004. Gross margin for the six month period increased 27% to $14.4 million at June 30, 2005 as compared to $11.3 million in the same period of 2004. We expect our fiscal year 2005 gross margin to be in the 44-45% range .

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses ("G & A") for the three month period ending June 2005 were $2.6 million (24% of revenue) compared to $2.2 million (24% of revenue) in 2004. General and administrative expenses increased from $3.9 million (14% of revenue) for the six months ended June 30, 2004 to $5.3 million (15% of revenue) for the same period in 2005. The marginal increase for the six month period is due to the company wide integration program discussed earlier and in particular the increased staffing levels in the Human Resources and Safety areas of the Company that were initiated in the later part of the first quarter of 2005.

DEPRECIATION AND AMORTIZATION

For the three months ended June 30, 2005 depreciation and amortization was $0.6 million or 47% higher than the same period in 2004. For the six month period ended June 30, 2005 depreciation expense was $3.3 million and amortization of intangibles and deferred financing costs totalled $0.2 million compared to $2.4 million of depreciation and less than $20 thousand of amortization in the corresponding period of 2004 for an overall increase of 46%. The increases are a direct result of the Trust's investment in corporate acquisitions, internal property and equipment additions and the new credit facility that was entered into at the end of May 2005. Depreciation and amortization was 10% of revenues in the first six months of 2005 compared to 9% in 2004.

INTEREST - LONG-TERM AND OTHER DEBT

Interest expense on long-term and other debt was $0.1 and $0.3 million lower for the three and six months ended June 30, 2005 as compared to the previous respective periods in 2004. The decrease is due to the aggressive program of debt reduction that has been taking place in the prior twelve months, principally to pay off high interest rate debt that was inherited with the corporate acquisitions that were closed in the prior year. Going forward we expect to increase the Trust's leverage slightly to take advantage of the accretiveness of debt as compared to an additional equity financing.

INCOME TAXES

Total income tax (reduction) for the three month period ending June 30, 2005 was $(1.7) million as compared to $(1.4) million in the corresponding period. The reductions period over period are consistent as second quarter slow downs normally experienced in our industry in conjunction with the trust structure enable the Trust to recover taxes that would have been otherwise paid. The total expense (reduction) for income taxes for the six months ended June 30, 2005 totalled $(0.2) million compared to $0.1 million in the prior corresponding period. At the expected combined federal and provincial tax rate of 33.6%, net earnings before income taxes for the six month period ended June 30, 2005 of $5.2 million would have resulted in an income tax provision of $1.8 million compared to the actual reduction provision booked of $(0.2) million. The resulting $2 million positive variance is the result of allocating $6 million of taxable income to unitholders for the first six months of 2005.

DISTRIBUTIONS

The Trust declared distributions to unit holders of $6.6 million ($0.48/unit), or 75% of cash flow for the first six months of 2005 compared to declared distributions of $5.4 million ($0.48/unit) or 79% of cash flow for the period ended June 30, 2004. The Trust's budget for fiscal 2005 is to distribute in the range of 60% to 65% of its cash flow. Although results for this year's second quarter were below our expectations, the Trust still foresees distributions in the original budgeted amount of 60-65% as high activity levels are anticipated during the third and fourth quarters of 2005. For Canadian tax purposes, the non-taxable portion of distributions reduces a unit holder's adjusted cost base of Trust units. Further corporate acquisitions could serve to increase or decrease the non-taxable portion of distributions. The ultimate proportion of taxability of distributions will be determined at December 31, 2005 based on the Trust's activities. The Trust recommends that unitholders consult their tax advisors regarding the tax implications of their investment in Trust units.

PROPERTY AND EQUIPMENT

For the first half of 2005, $6.1 million was expended on additions to property and equipment, excluding corporate acquisitions and disposals. The additions consisted of:

- $0.3 million for accommodations and related equipment;

- $0.8 million for land and buildings;

- $1.1 million for vacuum, hauling and service trucks;

- $0.8 million for wastewater treatment systems and surface rental equipment;

- $2.3 million for equipment in the service rig and flow back tank division; and

- $0.8 million for office and shop equipment.

On March 31, 2005 we closed the purchase of the operating assets of BK Oilfield Disposal Ltd., a business involving oilfield garbage bin rentals and services. The purchase price of $2.2 million was paid with cash and was allocated as follows:



Property and equipment $1.8 million
Intangibles 0.2
Goodwill 0.2
--------------
$2.2 million
--------------


On May 31, 2005, the Trust acquired all of the issued and outstanding shares of Trueline Oilfield Services Inc., a business involving production testing units and various ancillary rentals. The purchase price of $6.9 million was paid by way of $2.7 million in cash and the issuance of 454,060 Trust units at $9.36 per unit and was allocated as follows:



Acquired cash $0.5 million
Current assets 1.2
Property and equipment 3.6
Intangibles 1.1
Goodwill 4.8
Current liabilities (3.3)
Long-term debt (0.3)
Future tax liability (0.7)
--------------
$6.9 million
--------------


Proceeds on disposal of property and equipment for the six month period ended June 30, 2005 totalled $10.1 million. Proceeds were received as follows:



Land and buildings $ 8.3 million
Hauling trucks 1.5
Miscellaneous other 0.3
--------------
$10.1 million
--------------


As mentioned in our first quarter report for 2005, $7.3 million in proceeds was from the sale of our new Edmonton and Grande Prairie facilities, which were sold through sale and leaseback arrangements at our original cost. The additional $1.0 million in land and building proceeds was from the sale of the land and building in Edmonton that Wellco occupied prior to the move to our new facility. The gain on disposal of the property and equipment for the six month period totalled one thousand dollars.



SELECTED SIX MONTH COMPARATIVE INFORMATION
(Expressed in thousands of $'s, except per unit amounts)

------------------------------------------------------------------------
For the six months ended June 30, 2005 2004 2003
------------------------------------------------------------------------
Revenues $ 35,602 $ 26,866 $ 9,970
------------------------------------------------------------------------
Net earnings 5,466 4,174 1,042
Per trust unit
Basic 0.39 0.39 0.24
Diluted 0.38 0.38 0.22
------------------------------------------------------------------------
Total assets 106,081 103,056 29,870
------------------------------------------------------------------------
Current portion of long-term debt 1,589 4,741 3,338
Total long-term financial liabilities 12,606 16,405 7,125
------------------------------------------------------------------------
Cash distributions per trust unit (1) $ 0.48 $ 0.48 $ 0.50
------------------------------------------------------------------------

(1) Fiscal 2003 distributions consisted of quarterly distributions of
$0.25 per trust unit for each of the first two quarters ending March
31 and June 30, and six monthly distributions of $0.08 per month for
the second half of the fiscal year.


FINANCIAL SUMMARY OF QUARTERLY RESULTS
(Expressed in thousands of $'s, except per unit amounts)

Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
2005 2005 2004 2004 2004 2004 2003 2003

Revenue $10,795 $24,807 $18,936 $13,771 $9,029 $17,838 $6,860 $ 4,113
Net
earnings
(loss) (192) 5,658 3,841 1,948 297 3,877 77 327
Per
unit -
weighted $ (0.01)$ 0.40 $ 0.28 $ 0.14 $ 0.02 $ 0.49 $ 0.02 $ 0.07
Per
unit -
diluted $ (0.01)$ 0.40 $ 0.27 $ 0.14 $ 0.02 $ 0.48 $ 0.02 $ 0.07


LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2005 Wellco had working capital $5.1 million including the current portion of long-term debt. In addition on May 26, 2005 the Trust announced that it had executed a $40 million credit agreement. The facility consists of an extendible revolving operating credit line of $15 million, which includes a $5 million seasonality bulge for peak activity periods, and an extendible revolving acquisition facility of up to $25 million to finance corporate and internal growth. Both facilities are currently being charged at bank prime rate of 4.25%. Management also believes that, dependent on capital and market conditions, the Trust has the ability to raise additional capital through the public or private issue of additional Trust units, if required. Management considers the resources available sufficient to fund Wellco's existing commitments and working capital requirements for at least the next year.

All covenants of the new banking facility were satisfied at June 30, 2005. The Trust does not anticipate any covenant issues restricting its future operating, investing or financing activities.



Wellco's contractual financial obligations are summarized as follows:

Payments Due by Period
------------------------------------------------------------------------
Contractual Next 12 1-3 4-5 After 5
Obligations Total months years Years years
------------------------------------------------------------------------
Long-term debt $ 8,434 $ 1,589 $ 6,822 $ 23 -
------------------------------------------------------------------------
Operating leases 8,864 2,244 4,921 1,699 -
------------------------------------------------------------------------
Total Contractual
Obligations $17,298 $ 3,833 $11,743 $1,722 -
------------------------------------------------------------------------
------------------------------------------------------------------------


CAPITALIZATION

The following table summarizes changes to Wellco's capitalization during the first six months of fiscal 2005.



Outstanding Balance
January 1, 2005 June 30, 2005
--------------------------------
Trust units 13,423,176 14,098,632
Series 'A' exchangeable shares 20,001 -
Series 'B' exchangeable shares 327,500 306,833
Series 'C' exchangeable shares 104,000 46,800
Trust unit options 1,184,835 1,225,040


June 30 six months ended 2005 Trust Unit issues
-----------------------------------------------
Issued on acquisition of Trueline Oilfield Services Inc. 454,060
Issued on exchange of Series 'A' Exchangeable Shares 28,793
Issued on exchange of Series 'B' Exchangeable Shares 24,118
Issued on exchange of Series 'C' Exchangeable Shares 63,527
Issued on exercise of options 104,958
------------------------------------------------------------------------
Total trust units issued during period 675,456
Beginning trust units, January 1, 2005 13,423,176
------------------------------------------------------------------------
Ending trust units, June 30, 2005 14,098,632
------------------------------------------------------------------------
------------------------------------------------------------------------


OFF BALANCE SHEET ARRANGEMENTS

Wellco has not entered into any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of its operations or its financial condition.

TRANSACTIONS WITH RELATED PARTIES

There were no transactions with related parties during the first six months ended June 30, 2005.

SEASONALITY AND WEATHER

The Trust's operations are carried out exclusively in western Canada. The industry's ability to relocate heavy equipment in the traditional Canadian exploration and production areas is dependent on weather conditions. With the onset of spring, melting snow together with frost leaving the ground, render many secondary roadways incapable of supporting the weight of heavy equipment until such time as they have thoroughly dried out. During excessively rainy periods, equipment moves may be delayed, thereby adversely affecting operations. In addition, the exploration areas of northern Canada are typically only accessible during winter months, when the surface is frozen hard enough to support heavy equipment. The timing of these periods of "spring breakup" and "winter freezeup" have a direct bearing upon the Trust's activity levels. Accordingly, the Trust's prime operating seasons are usually late November through mid March and July through late September.

CRITICAL ACCOUNTING ESTIMATES

In the opinion of management, the material accounting estimates in the financial statements as contained herein, involve property and equipment, unit based compensation, goodwill, intangibles, the determination of depreciation and amortization expense and allowance for doubtful accounts receivable.

The value of property and equipment, goodwill and intangibles are subject to market conditions in the oil and gas industry. Depreciation is determined taking into account the estimated useful lives of assets and their residual values. These estimates could change for a variety of reasons, including, but not limited to, abnormal wear and tear conditions, changes in technology and other economic factors that could result in obsolescence. Such changes could have a material effect on future depreciation expense. A schedule of these estimates is contained in the notes to the audited annual consolidated financial statements.

Unit based compensation expense, associated with unit options at grant date, is subject to the changes in risk free interest rates, unit price volatility and distribution yield rates. This estimate may vary due to changes in actual unit price.

The Trust performs credit evaluations of its customers and grants credit based on past payment history, financial conditions and anticipated industry conditions. Customer payments are monitored regularly and an allowance for doubtful accounts provision is established based on specific situations. Given the cyclical nature of the oil and gas industry, these credit risks are subject to change.

NON-GAAP MEASURES

The financial statements have been prepared in accordance with GAAP. Certain supplementary information and measures not recognized under GAAP are provided where Management believes they assist the reader in understanding Wellco's results. These measures include:

1. Cash flow - Cash flow is defined as cash flow from operations before changes in non-cash working capital items. Cash flow is not a recognized measure under GAAP. Management believes that cash flow is a useful supplementary measure as it provides an indication of cash flow generated by operations before working capital adjustments. The Consolidated Statement of Cash Flows in the interim financial statements at June 30, 2005 includes a reconciliation of cash flow from operations.

2. EBITDA - EBITDA is defined as earnings before interest, taxes, depreciation and amortization and (gain) or loss on sale of property and equipment. EBITDA is not a recognized measure under GAAP. Management believes however that EBITDA is a useful supplementary measure as it provides a measure of operating results without regard to how these activities were financed or the how the results were taxed.

Wellco's method of calculating these measures should not be used as an alternative to GAAP as both the cash flow and EBITDA calculations made by Wellco may differ from those of other companies, and accordingly may not be directly comparable to measures used by other companies.

CHANGES IN ACCOUNTING POLICIES

Management does not expect to change existing accounting policies during the 2005 fiscal year but will adopt new accounting policies as required under Canadian GAAP.

FINANCIAL INSTRUMENTS

Wellco's financial instruments consist of accounts receivable, an operating line of credit, long-term debt and accounts payable and accrued liabilities. There are no significant differences between the carrying values of these financial instruments and their estimated fair values. Of Wellco's financial instruments, only its accounts receivable represents credit risk. Management views the credit risks with its customers as normal for the industry. Approximately 11% of the Trust's total sales for the six month period were derived from one customer. The customer is considered a senior oil and gas producer and is one of the largest in the industry.

OUTLOOK

There are few, if any, industry analysts indicating anything other than continuing high levels of activity for the Western Canadian oilfield through the remainder of 2005 and into 2006. A recent report indicates rig utilization (a benchmark for service industry activity) for July was 62% of a fleet which is 14% larger than it was this time last year.

At Wellco we are looking forward to a busy latter half of 2005. Activity levels in all product lines have accelerated and we expect to benefit from the effort across the industry to make up for time lost during the first half of the year. We are also noticing that our larger clients are wishing to negotiate long term supply contracts, an indicator that high activity levels can be expected for some time.



"Kenneth M. Bagan" "Corey Zahn"
----------------------- -------------------------
Kenneth M. Bagan Corey Zahn
President & Vice President, Finance &
Chief Executive Officer Chief Financial Officer


Additional information relating to Wellco including its most recent annual information form is available for review on SEDAR at www.sedar.com

This MD&A may contain forward looking statements. All statements other than statements of historical fact contained herein are forward-looking statements, including without limitation, statements regarding Wellco Trust's future financial position, business strategy, projected costs and plans and objectives of management for future operations. Many of these statements can be identified by looking for words such as "believe", "will", "intends", "projects", "anticipates", "estimates", "continues" or similar words or the negative thereof. Wellco Trust cannot assure that the plan, intentions or expectations upon which its forward-looking statements are based will occur. Wellco Trust's forward-looking statements are subject to risks, uncertainties and assumptions, including those discussed elsewhere in this MD&A. Although Wellco Trust believes that the expectations represented in such forward-looking statements are reasonable, Wellco Trust cannot assure that its expectations will prove to be correct. Some of the risks which could affect Wellco Trusts' future results and could cause results to differ materially from those expressed in Wellco Trust's forward-looking statements include: risks inherent in the future prices of oil and natural gas, risks inherent in the United States to Canadian dollar exchange rates, risks inherent in the prices for services and government fiscal regimes and the risk that actual results will vary from the results forecasted and such variations may be material.



Consolidated Financial Statements of

WELLCO ENERGY SERVICES TRUST

Three and six months ended June 30, 2005 and 2004

WELLCO ENERGY SERVICES TRUST
Consolidated Balance Sheets

(Expressed in thousands of dollars)

------------------------------------------------------------------------
June 30, December 31,
2005 2004
------------------------------------------------------------------------
(unaudited) (audited)
Assets

Current assets:
Accounts receivable $ 16,832 $ 18,869
Inventory 375 517
Prepaid expenses and deposits 784 684
Lands and buildings held for sale - 6,815
-----------------------------------------------------------------------
17,991 26,885

Property and equipment (note 4) 66,655 61,777

Intangibles 1,265 -

Goodwill 20,004 14,989

Deferred financing costs 166 218

------------------------------------------------------------------------
$ 106,081 $ 103,869
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Unitholders' Equity

Current liabilities:
Operating line of credit (note 5) $ 3,079 $ 1,162
Accounts payable and accrued liabilities 7,020 10,013
Distributions payable 1,128 1,074
Income taxes payable 30 170
Current portion of long-term debt (note 6) 1,589 3,066
-----------------------------------------------------------------------
12,846 15,485

Long-term debt (note 6) 6,845 6,305

Future income tax liability 5,761 5,300

Unitholders' equity:
Trust units (note 7(a)) 84,320 78,916
Exchangeable shares (note 7(a)) 1,756 2,266
Contributed surplus (note 7(b)) 226 143
Accumulated earnings 18,636 13,170
Accumulated cash distributions (24,309) (17,716)
-----------------------------------------------------------------------
79,452 76,779
Commitments (note 8)

------------------------------------------------------------------------
$ 106,081 $ 103,869
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

Approved on behalf of the Board of Directors of Wellco Energy Services
Inc., Administrator of Wellco Energy Services Trust:

"Kenneth M. Bagan" Director "Martin Hall" Director
--------------------------- ----------------------


WELLCO ENERGY SERVICES TRUST
Consolidated Statements of Earnings and Accumulated Earnings

(Expressed in thousands of dollars, except per unit amounts)
(Unaudited)

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

Revenue $ 10,795 $ 9,029 $ 35,602 $ 26,866

Direct costs 8,039 6,211 21,195 15,531
------------------------------------------------------------------------
2,756 2,818 14,407 11,335

Expenses:
General and administrative 2,554 2,198 5,322 3,855
Interest - long-term debt 175 330 326 679
Interest - other 20 6 57 25
Depreciation and amortization 1,867 1,270 3,481 2,382
(Gain) loss on disposal of
property and equipment 6 97 (1) 97
-----------------------------------------------------------------------
4,622 3,901 9,185 7,038

------------------------------------------------------------------------
Earnings (loss) before
income taxes (1,866) (1,083) 5,222 4,297

Income taxes:
Current (recovery) (39) 45 (9) 45
Future (reduction) (1,635) (1,425) (235) 78
------------------------------------------------------------------------
(1,674) (1,380) (244) 123

------------------------------------------------------------------------
Net earnings (loss) (192) 297 5,466 4,174

Accumulated earnings,
beginning of period 18,828 7,084 13,170 3,207

------------------------------------------------------------------------
Accumulated earnings,
end of period $ 18,636 $ 7,381 $ 18,636 $ 7,381
------------------------------------------------------------------------
------------------------------------------------------------------------

Earnings (loss) per unit:
Basic $ (0.01) $ 0.02 $ 0.39 $ 0.39
Diluted $ (0.01) $ 0.02 $ 0.38 $ 0.38
------------------------------------------------------------------------
------------------------------------------------------------------------

Weighted average number of
units outstanding:
Basic 14,176,272 13,686,975 14,057,837 10,821,283
Diluted 14,330,550 13,948,814 14,258,175 11,055,766
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


WELLCO ENERGY SERVICES TRUST
Consolidated Statements of Cash Flows

(Expressed in thousands of dollars)
(Unaudited)

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

Cash provided by (used in):

Operating:
Net earnings (loss) $ (192) $ 297 $ 5,466 $ 4,174
Items not affecting cash:
Depreciation 1,692 1,260 3,297 2,363
Future income taxes
(reduction) (1,635) (1,425) (235) 78
Amortization 175 10 184 19
Trust unit option
compensation 68 69 111 98
(Gain) loss on disposal of
property and equipment 6 97 (1) 97
-----------------------------------------------------------------------
Cash flow from operations 114 308 8,822 6,829

Net change in non-cash
working capital items
(note 9) 6,827 5,316 (545) (5,537)
-----------------------------------------------------------------------
6,941 5,624 8,277 1,292

Financing:
Repayment of long-term debt (5,517) (2,822) (6,454) (4,533)
Proceeds of long-term debt 5,250 - 5,250 680
Distribution payments (3,299) (3,060) (6,539) (4,751)
Increase (decrease) in
operating line of credit 965 - 1,917 (4,475)
Issue of trust units 232 99 616 57,748
Increase in deferred
financing costs (148) (50) (97) (50)
Trust unit issue costs - (47) - (3,284)
-----------------------------------------------------------------------
(2,517) (5,880) (5,307) 41,335

Investing:
Purchase of property and
equipment (4,008) (5,905) (6,108) (7,035)
Proceeds on disposal of
property and equipment 2,466 421 10,102 433
Business acquisitions net
of cash acquired (note 3) (2,138) (1,419) (4,352) (8,428)
Change in non-cash working
capital (note 9) (744) - (2,612) -
-----------------------------------------------------------------------
(4,424) (6,903) (2,970) (15,030)

------------------------------------------------------------------------
Increase (decrease) in cash
position - (7,159) - 27,597

Cash beginning of period - 34,995 - 239

------------------------------------------------------------------------
Cash end of period $ - $ 27,836 $ - $ 27,836
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


WELLCO ENERGY SERVICES TRUST
Notes to Consolidated Financial Statements

Three and six months ended June 30, 2005
(Expressed in thousands of dollars, except per unit amounts)
(Unaudited)


1. Basis of presentation:

Wellco is a diversified Canadian energy services trust operating in western Canada. The Trust has two operating segments which provide a diversified suite of drilling and production services to oil and gas contractors and producers.

These interim unaudited consolidated financial statements of Wellco Energy Services Trust include the accounts of the Wellco Energy Services Trust and its wholly-owned subsidiaries, (collectively referred to as "Wellco" or "the Trust"). The financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles for interim financial statements and following the same accounting policies and methods of computation as the consolidated financial statements for the fiscal year ended December 31, 2004 except as follows:

Intangible assets:

In conjunction with the acquisitions disclosed in note 3, the Trust has acquired intangible assets of $1,300 all of which are subject to amortization. The aggregate carrying amount is comprised of identifiable intangible assets including customers relationships and non-competition agreements. These assets are amortized on a straight-line basis over their estimated useful lives. During the period, $35 has been recorded as amortization expense relating to the intangible assets.

The disclosures provided below are incremental to those included in the annual consolidated financial statements such that these interim financial statements and the notes thereto 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:

The Trust's operations are carried out exclusively in western Canada. The industry's ability to relocate heavy equipment in the traditional Canadian exploration and production areas is dependent on weather conditions. With the onset of spring, melting snow together with frost leaving the ground, render many secondary roadways incapable of supporting the weight of heavy equipment until such time as they have thoroughly dried out. During excessively rainy periods, equipment moves may be delayed, thereby adversely affecting operations. In addition, the exploration areas of northern Canada are typically only accessible during winter months, when the surface is frozen hard enough to support heavy equipment. The timing of these periods of "spring breakup" and "winter freezeup" have a direct bearing upon the Trust's activity levels. Accordingly, the Trust's prime operating seasons are usually late November through mid March and July through late September.


3. Acquisitions:

(a) BK Oilfield Disposal Ltd.:

On March 31, 2005, the Trust purchased substantially all of the operating assets of BK Oilfield Disposal Ltd. and BK Disposal Ltd. for $2,200 plus transaction costs of $14.

(b) Trueline Oilfield Services Inc.:

On May 31, 2005, the Trust acquired all of the issued and outstanding shares of Trueline Oilfield Services Inc., a business involving the deployment of production testing units and various ancillary rentals. The purchase price of $6,934 was paid by way of $2,660 and 454,060 Trust Units at a price of $9.36 per unit, plus transaction costs of $24.

The allocation of the purchase prices are as follows.



------------------------------------------------------------------------
------------------------------------------------------------------------
BK Disposal Trueline Oilfield
------------------------------------------------------------------------

Acquired cash $ - $ 546
Current assets 16 1,231
Property and equipment 1,805 3,548
Intangibles 200 1,100
Goodwill 193 4,822
Current liabilities - (3,350)
Long-term debt - (267)
Future income tax liability - (696)

------------------------------------------------------------------------
$ 2,214 $ 6,934
------------------------------------------------------------------------
------------------------------------------------------------------------

Consideration:
Cash, including costs $ 2,214 $ 2,684
Trust units - 4,250

------------------------------------------------------------------------
$ 2,214 $ 6,934
------------------------------------------------------------------------
------------------------------------------------------------------------

4. Property and equipment:

------------------------------------------------------------------------
------------------------------------------------------------------------
June 30, December 31,
2005 2004
Accumulated Net book Net book
Cost depreciation value value
------------------------------------------------------------------------

Service equipment $ 79,474 $ 15,272 $ 64,202 $ 59,485
Office and shop
equipment 2,395 622 1,773 915
Building and leasehold
improvements 46 2 44 743
Land 636 - 636 634

------------------------------------------------------------------------
$ 82,551 $ 15,896 $ 66,655 $ 61,777
------------------------------------------------------------------------
------------------------------------------------------------------------


Included in property and equipment at June 30, 2005 is certain equipment under capital lease.

5. Operating line of credit:

The Trust has a $15,000 extendible revolving operating credit facility, which includes a $5,000 seasonality increase for peak activity periods. Drawings bear interest at bank prime rate. The facility is secured by a general security agreement covering all of the assets of the Trust. The effective interest rate at June 30, 2005 was 4.25%. At June 30, 2005, $3,079 (December 31, 2004 - $1,162) was drawn on the facility.



6. Long-term debt:

------------------------------------------------------------------------
------------------------------------------------------------------------
June 30, December 31,
2005 2004
------------------------------------------------------------------------

Extendible revolving acquisition facility of up
to $25,000 requiring no principal payments
during the term, secured by a general assignment
of book debts and a security arrangement
covering all assets of the Trust; the effective
interest rate at June 30, 2005 was 4.25%.
The facility expires on May 25, 2006 renewable
at the lenders option, for an additional 364 day
period. If not renewed, the facility is
repayable over a period of three years $ 5,250 $ -

Term debt, repayable in monthly instalments of
$78 plus interest at rates varying from 1.9%
to 10.9%, maturing between September 2005 and
January 2010, secured by the specific equipment 2,091 2,896

Obligations under capital leases, repayable in
monthly installments of $44 plus interest at
rates varying from 8.3% to 16.5%, secured
by the specific equipment 1,093 1,163

Term debt, repayable in monthly instalments of
$108, plus interest at the lenders' base rate
plus 3% and secured by fixedand floating
charges on specific equipment subordinate to
the bank operating facility - 5,312
------------------------------------------------------------------------
8,434 9,371

Less current portion 1,589 3,066

------------------------------------------------------------------------
$ 6,845 $ 6,305
------------------------------------------------------------------------
------------------------------------------------------------------------


7. Trust units and exchangeable shares:

(a) Issued:

------------------------------------------------------------------------
------------------------------------------------------------------------
Trust Units: Number Amount
------------------------------------------------------------------------

Balance, December 31, 2004 13,423,176 $ 78,916

Issued on exchange of exchangeable shares 116,438 510
Issued on exercise of options 104,958 616
Issued on acquisition of Trueline Oilfield
Services Inc. 454,060 4,250
Transfer from contributed surplus on
exercise of trust options - 28

------------------------------------------------------------------------
Balance, June 30, 2005 14,098,632 $ 84,320
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
------------------------------------------------------------------------
Exchangeable Shares: Number Amount
------------------------------------------------------------------------

Series A
Balance, December 31, 2004 20,001 $ 54
Exchanged for trust units (20,001) (54)
-----------------------------------------------------------------------
Balance, June 30, 2005 - -

Series B:
Balance, December 31, 2004 327,500 1,562
Exchanged for trust units (20,667) (99)
-----------------------------------------------------------------------
Balance, June 30, 2005 306,833 1,463

Series C:
Balance, December 31, 2004 104,000 650
Exchanged for trust units (57,200) (357)
-----------------------------------------------------------------------
Balance, June 30, 2005 46,800 293

------------------------------------------------------------------------
Balance, June 30, 2005 353,633 $ 1,756
------------------------------------------------------------------------
------------------------------------------------------------------------


The Exchangeable Shares are not eligible to receive cash distributions from the Trust.

The Exchangeable Shares are exchangeable for Trust Units based upon an exchange ratio, initially being one-to-one but then cumulatively adjusted each time a distribution is made to unitholders. Effective June 15, 2005 the exchange ratio of the Exchangeable Shares was 1.1764 Trust Units per Series B Exchangeable Share and 1.14835 Trust Units per Series C Exchangeable Share.

(b) Trust unit option plan:

In January 2003 a trust unit option plan was established providing for the issuance of units with a term not to exceed 5 years. The options vest equally over a 3 year period from the date of issuance. The initial exercise price cannot be less than the current market price of the Trust Units at the time of grant. The exercise price may be adjusted downwards if trust distributions exceed certain levels.

Changes in the number of options, with their weighted average exercise prices are summarized below:



------------------------------------------------------------------------
------------------------------------------------------------------------
Weighted
average
Number of exercise
options price
------------------------------------------------------------------------

Total options outstanding, beginning of period 1,184,835 $ 8.22
Granted 303,500 10.29
Exercised (104,958) 5.84
Cancelled (158,337) 8.83

------------------------------------------------------------------------
Outstanding, June 30, 2005 1,225,040 $ 8.86
------------------------------------------------------------------------
------------------------------------------------------------------------

Exercisable at June 30, 2005 286,343 $ 8.18
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Options outstanding Options exercisable
------------------------------------ ----------------------
Number Weighted Number
Range of outstanding average Weighted exercisable Weighted
Exercise at remaining average at average
Prices June 30, contractual exercise June 30, exercise
Outstanding 2005 life (months) price 2005 price
------------------------------------------------------------------------

$5.00 - $6.35 233,206 38 $ 5.38 64,862 $ 5.09
$8.70 - $10.95 991,834 50 $ 9.59 221,481 $ 9.09
------------------------------------------------------------------------
------------------------------------------------------------------------


The Trust recorded trust unit option compensation expense and contributed surplus of $111 (2004 - $98) for the six months ended June 30, 2005. The fair value of options issued during the period was estimated using a modified Black-Scholes pricing model with the following assumptions: risk-free interest rate ranging from 3.2% to 3.4%, volatility ranging from 18% to 22%, life of 5 years, distribution yield rates between 8% and 9.6%, and corresponding changes in exercise prices during the life of the option.

Contributed surplus was reduced and unit capital was increased by $28 (2004 - $ Nil) for options that were exercised during the six months ended June 30, 2005.

8. Commitments:

The Trust rents premises and equipment under multiple operating contracts with varying expiration dates. The minimum lease payments under these leases over the next five years are as follows:



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

2005 $ 1,154
2006 2,181
2007 1,992
2008 1,839
2009 979

------------------------------------------------------------------------
$ 8,145
------------------------------------------------------------------------
------------------------------------------------------------------------


9. Supplemental cash flow information:

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

Interest paid $ 195 $ 336 $ 383 $ 704
Interest received 5 157 7 -
------------------------------------------------------------------------
------------------------------------------------------------------------

Income taxes paid $ - $ - $ 184 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------

Changes in non-cash working
capital components:
Accounts receivable $ 10,001 $ 10,544 $ 3,254 $ 5,681
Income taxes recoverable - - - 489
Inventory 77 18 159 116
Prepaid expenses and deposits 495 (1,395) (86) (1,603)
Accounts payable and accrued
liabilities (3,737) (3,856) (3,709) (10,183)
Income taxes payable (9) 5 (163) (37)
------------------------------------------------------------------------
6,827 5,316 (545) (5,537)

Investing changes in
non-cash working capital (744) - (2,612) -

------------------------------------------------------------------------
$ 6,083 $ 5,316 $ (3,157) $ (5,537)
------------------------------------------------------------------------
------------------------------------------------------------------------


10. Segmented information:

The Trust operates in two industry segments which are in one geographic segment. Drilling services includes accommodations and catering, directional drilling, wastewater treatment systems, hauling, vacuum and water trucks, oilfield surface equipment rentals and environmental technicians. Production services include service rigs, production testing and the rental of frac blow back tanks.

The drilling services operating segment includes services and rentals which assist oil and gas companies and contractors in drilling the oil and gas wells. The production services operating segment includes services and rentals which assist oil and gas companies produce from the successful drilling of the oil and gas wells.



------------------------------------------------------------------------
Drilling Production
Services Services Corporate Total
------------------------------------------------------------------------

Three months ended
June 30, 2005:
Revenue $ 8,012 $ 2,783 $ - $ 10,795
Depreciation and amortization 1,464 160 243 1,867
Interest on long-term debt - - 175 175
Net earnings (loss) (953) 791 (30) (192)
Goodwill 12,695 7,309 - 20,004
Property and equipment 51,345 13,978 1,332 66,655
Capital expenditures (1) 865 2,165 978 4,008
------------------------------------------------------------------------
------------------------------------------------------------------------

Three months ended
June 30, 2004:
Revenue $ 7,671 $ 1,358 $ - $ 9,029
Depreciation and amortization 1,165 74 31 1,270
Interest on long-term debt - - 330 330
Net earnings (loss) (132) 531 (102) 297
Goodwill 12,502 1,483 - 13,985
Property and equipment 45,884 5,189 326 51,399
Capital expenditures (1) 5,405 369 131 5,905
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) Excludes business acquisitions


Approximately 13% (2004 - 19%) of the Trust's total sales for the period were derived from one customer. This accounts for 14% (2004-0%) of the revenue in the production services division and 13% (2004-23%) of the drilling services revenue.



------------------------------------------------------------------------
Drilling Production
Services Services Corporate Total
------------------------------------------------------------------------

Six months ended
June 30, 2005:
Revenue $ 29,838 $ 5,764 $ - $ 35,602
Depreciation and amortization 2,889 294 298 3,481
Interest on long-term debt - - 326 326
Net earnings (loss) 6,606 1,801 (2,942) 5,465
Goodwill 12,695 7,309 - 20,004
Property and equipment 51,345 13,978 1,332 66,655
Capital expenditures (1) 2,695 2,293 1,120 6,108
------------------------------------------------------------------------
------------------------------------------------------------------------

Six months ended
June 30, 2004:
Revenue $ 24,733 $ 1,933 $ 200 $ 26,866
Depreciation and amortization 2,187 141 54 2,382
Interest on long-term debt - - 679 679
Net earnings (loss) 6,509 644 (2,979) 4,174
Goodwill 12,502 1,483 - 13,985
Property and equipment 45,884 5,189 326 51,399
Capital expenditures (1) 6,468 369 198 7,035
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) Excludes business acquisitions


Approximately 11% (2004 - 8%) of the Trust's total sales for the period were derived from one customer. This accounts for 16% of the revenue in the production services division and 10% of the drilling services revenue.

Wellco Energy Services Trust is a growth oriented income trust that provides a diversified suite of oilfield services to the Canadian energy industry.

The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of this news release.

Contact Information

  • Wellco Energy Services Trust
    Kenneth M. Bagan
    President & Chief Executive Officer
    (403) 232-6334
    (403) 232-6338 (FAX)
    Email: info@wellcoenergy.com