Wellco Energy Services Trust
TSX : WLL.UN

Wellco Energy Services Trust

November 03, 2006 06:00 ET

Wellco Announces Third Quarter Results-November 3rd, 2006

CALGARY, ALBERTA--(CCNMatthews - Nov. 3, 2006) - Wellco Energy Services Trust (TSX:WLL.UN) is pleased to announce its financial results for the three and nine months ended September 30, 2006, with comparisons to the comparable periods of last year.

PROFILE

Wellco Energy Services Trust ("Wellco" or "the Trust") provides a comprehensive array of integrated oilfield drilling and production services to organizations engaged in the exploration and production of oil and natural gas in Western Canada. Drilling services include accommodations and catering provided for crews of various sizes as well as on-site accommodation for industry professionals, wastewater treatment systems and a suite of products that assist oil and gas companies in their efforts to conduct their activities in an environmentally responsible manner. The production services segment provides production testing and frac blow-back tanks as well as completion, work-over and abandonment services through a fleet of service rigs.

MANAGEMENT DISCUSSION AND ANALYSIS ("MD & A")



FINANCIAL HIGHLIGHTS

(Expressed in thousands of $, except per unit amounts)


For the 3 months ended September 30,
-------------------------------------
2006 2005 Change
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Revenue $ 25,105 $ 18,517 36%
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Gross Margin 10,128 7,629 33%
Gross Margin % 40% 41% (1%)
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G & A Expenses 3,994 3,064 30%
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Funds from operations (1) 5,779 4,398 31%
Per unit diluted 0.32 0.30 7%
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Cash distributions declared 4,827 3,391 42%
Cash Payout Ratio (1) 84% 77% (7%)
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EBITDA (1) 6,134 4,565 34%
Per unit diluted 0.34 0.31 10%
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Net earnings 3,539 2,689 32%
Per unit diluted 0.20 0.18 11%
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Number of units outstanding
Basic 17,870,946 14,544,696 23%
Diluted 18,032,967 14,779,426 22%
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For the 9 months ended September 30,
-------------------------------------
2006 2005 Change
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Revenue $ 84,443 $ 54,119 56%
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Gross Margin 33,946 22,036 54%
Gross Margin % 40% 41% (1%)
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G & A Expenses 12,249 8,386 46%
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Funds from operations (1) 20,875 13,220 58%
Per unit diluted 1.20 0.92 30%
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Cash distributions declared 13,844 9,984 39%
Cash Payout Ratio (1) 66% 76% 10%
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EBITDA (1) 21,697 13,650 59%
Per unit diluted 1.25 0.95 32%
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Net earnings 13,478 8,155 65%
Per unit diluted 0.77 0.56 38%
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Number of units outstanding
Basic 17,258,243 14,227,854 21%
Diluted 17,425,139 14,442,231 21%
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(1) Refer to the "NON-GAAP Measures" section for further details.


This MD&A for the Trust, dated November 3, 2006, focuses on key statistics from the consolidated financial statements and pertains to known risks and uncertainties relating to the oilfield services industry. This discussion should not be considered all-inclusive, as it excludes changes that may occur in general economic, political and environmental conditions. This discussion and analysis of the financial condition and results of operations for the three and nine months ended September 30, 2006, should be read in conjunction with the unaudited interim consolidated financial statements for the three and nine months ended September 30, 2006 and related notes and material contained in other parts of this report. As well, this discussion and analysis of the financial condition and results of operations for the three and nine months ended September 30, 2006, should be read in conjunction with the audited annual consolidated financial statements for the year ended December 31, 2005 and related notes and material contained in other parts of the 2005 Annual Report as well as the Trust's Annual Information Form ("AIF").

Additional information relating to Wellco, including Wellco's AIF, may be found on SEDAR at www.sedar.com, and is supplemental to, the consolidated financial statements and related notes contained in this interim report for the three and nine months ended September 30, 2006 and in the Trust's 2005 Annual Report. This MD&A was prepared effective November 3, 2006. 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 may contain forward looking statements. All statements other than statements of historical fact contained herein are forward-looking statements, including without limitation, statements regarding the 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. The Trust cannot assure that the plan, intentions or expectations upon which its forward-looking statements are based will occur. The Trust's forward-looking statements are subject to risks, uncertainties and assumptions, including those discussed elsewhere in this MD&A. Although the Trust believes that the expectations represented in such forward-looking statements are reasonable, the Trust cannot assure that its expectations will prove to be correct. Some of the risks, among others noted in "Business Risks", which could affect the Trust's future results and could cause results to differ materially from those expressed in the Trust's forward-looking statements include: risks inherent in the future prices of oil and natural gas and risks inherent in the prices for services and government fiscal regimes. Actual results may differ from those forecasted and such variations may be material.

THIRD QUARTER HIGHLIGHTS

For the period ending September 30, 2006 the Trust delivered record results for the fifth consecutive quarter for revenue, funds from operations and net earnings as measured against comparable quarters in the previous periods. These strong results were delivered in a market where the number of wells drilled on a completion basis in the quarter decreased by over 27%, and drilling rig utilization declined by over 7% as compared to 2005. The Trust had positive results which exceeded expectations in the accommodations and catering, wastewater treatment and service rig lines. This can be attributed to strong market demand due to accommodation shortages as well as increased equipment capacity. Lower natural gas prices due to concerns over inventory levels negatively impacted our production testing product line. For the third quarter production testing failed to meet our internal expectations as the result of this slow activity. The decline in natural gas prices along with high storage levels, as mentioned in our second quarter analysis, have prompted some producers to reduce their capital programs, particularly in areas of shallow gas drilling, resulting in lower than expected utilization in our production testing product line. In addition, wet weather in September negatively impacted company wide results. The remaining product line, surface equipment rentals, was marginally below our expectations for the quarter. Leveraged by a strong balance sheet and cash flows, the Trust has maintained it's previously announced capital program to facilitate organic growth and continued expansion of market share.

Revenues increased 36% to $25.1 million for the three months ended September 30, 2006 as compared to $18.5 million in the corresponding period a year earlier. Wellco generated net earnings of $3.5 million, or 20 cents per unit diluted, for the three month period ended September 30, 2006 compared to $2.7 million, or 18 cents per unit diluted, for the comparable period of 2005, representing an increase of $0.8 million or 32%. Funds from operations for the three months ended September 30, 2006 were $5.8 million, or 32 cents per unit diluted, compared to $4.4 million, or 30 cents per unit diluted, achieved in the same period of the prior year, representing an increase of $1.4 million or 31%. These favourable variances are a direct result of increased equipment capacity from internal growth, business acquisitions made in 2005 and efficiencies realized from our company wide integration strategy.

In May of this year we increased our distributions to unitholders by 5.9% to $1.08 per unit annually. Distributions declared to unitholders for the three month period ended September 30, 2006 were $4.8 million or 27 cents per unit, representing 84% of funds from operations for the period as compared to distributions of $3.4 million or 23 cents per unit, representing 77% of funds from operations for the same period of 2005. The 7% increased payout ratio as a percentage of funds from operations was anticipated as it reflects the Trust's three million unit financing that was completed in March 2006. The funds raised from the financing are being utilized for the current year internal capital build program which will enhance our operations moving forward into 2007.



OVERALL PERFORMANCE
($ thousands)

Nine months ended
September 30
----------------------------------
2003 2004 2005 2006
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Revenues 14,083 40,637 54,119 84,443
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Nine months ended
September 30
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2003 2004 2005 2006
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Declared Distributions 3,208 8,509 9,984 13,844
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Funds from operations 2,812 10,303 13,220 20,875
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Despite only a 2% increase in wells drilled on a completion basis in the oil and gas industry in Western Canada compared to the same nine month period in 2005, the Trust has continued to improve over the prior year nine month comparable period as demand for its service lines was maintained. A softening of natural gas prices during the first nine months of 2006 has curtailed capital being spent on shallow natural gas exploration by some producers which has negatively impacted our production testing product line. However, the Trust has maintained growth through continued success in the accommodations and catering, surface equipment, wastewater treatment, and service rig product lines.



For the 3 months For the 9 months
ended September 30, ended September 30,
---------------------------------------------
2006 2005 Change 2006 2005 Change
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Wells Drilled
- Completion Basis 4,307 5,921 (27.3%) 15,471 15,168 2.0%
Western Canada (1)
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Drilling Rig
Utilization (2) 63% 71% (7.3%) 65% 64% 1.1%
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(1) Source: Daily Oil Bulletin ("DOB")
(2) Source: Canadian Association of Oilwell Drilling Contractors ("CAODC")


Revenue of $84.4 million for the nine months ended September 30, 2006 increased 56% or $30.3 million compared to the same period of 2005. Net earnings for the nine months ended September 30, 2006 were $13.5 million, or 77 cents per unit diluted, an increase of 65% as compared with $8.2 million, or 56 cents per unit diluted, reported for the equivalent period in 2005.

Wellco's operations are reported in two segments. The drilling segment includes accommodations and catering, waste water treatment and surface equipment rentals. The production services area includes both service rigs and production testing / blow back divisions. The following is a discussion of these two operating segments:

- The Drilling Services operating segment generated revenue of $17.4 million or 69% of the Trust's total revenue for the three months ended September 30, 2006, compared to $13.2 million or 71% for the comparable period in 2005. For the first nine months of 2006, $57.8 million or 68% of the Trust's total revenue was derived from Drilling Services as compared to $43.0 million or 80% for the same period in 2005. The $14.8 million or 34% increase in revenue over the same nine month period of 2005 was the result of strong utilization driven by increased market demand as well as capital additions and improved pricing in a number of the segments product lines.

- The Production Services operating segment contributed $7.7 million in revenue or 31% of the Trust's total revenue for the three months ended September 30, 2006, compared to $5.3 million or 29% for the same period in 2005. For the first nine months of 2006, $26.6 million or 32% of the Trust's total revenue was derived from Production Services as compared to $11.1 million or 20% for the same period in 2005. The $15.5 million or 140% increase over the same nine month period in 2005 was the result of acquisitions made during fiscal 2005 and internal capital expenditures. The acquisitions also increased the percentage of production service revenue vs. drilling services for the Trust.

For the nine months ended September 30, 2006, funds from operations were $20.9 million, or $1.20 per unit, a 58% increase as compared to $13.2 million, or 92 cents per unit diluted, in the same period of 2005. The increase in funds from operations is attributable to the increase in revenues as noted above as well as dedicated cost management in all areas of the company. Funds from operations as a percentage of revenue was 25% for the nine months ended September 30, 2006 compared to 24% for the same time period of 2005. Despite two distribution increases since late 2005 the cash payout ratio improved to 66% in the first nine months of 2006 vs. 76% in the same period of 2005. This 10% improvement in our cash payout ratio results in additional cash retained for future growth opportunities, capital programs and debt repayment. The Trust's target is to distribute in the range of 60% to 65% of its funds from operations and we are on target to meet this range for the current fiscal year.

The Trust's results for the first nine months of this year are a direct result of the hard work and dedication of our valued employees. In addition, the increased demand from our customers for our services as well as the integration of our operations into a single and standardized corporate culture has contributed to Wellco's overall success. We have and will continue to focus our culture around two key areas; excellence, by exceeding our customers' expectations both in the quality of our products and the integrity and performance of our people. Secondly, expertise, by being a key player in each of our product lines to ensure that we maintain and grow our market position. Both of these, in addition to our continued dedication to safety and providing a respectful workplace, are the focus of our day-to-day activities which have resulted in the overall success of the Trust. As well, with the significant investment in capital and acquisitions over the past two years, Wellco is committed to meeting the demands of its customers and becoming a prominent service company in all of the Trust's areas of operation.

RESULTS OF OPERATIONS

Revenue

Revenue of $25.1 million was generated during the third quarter of 2006 compared to $18.5 million for the same period in 2005, an increase of 36%. For the nine months ended September 30, 2006, Wellco recorded revenue of $84.4 million compared to $54.1 million in the same period of 2005, an increase of 56%. The period over period increase was due in large part to increased activity within the drilling segment of our business as well as the Trust's capital build program in an effort to expand market share and meet customer demands. In addition, corporate acquisitions completed in 2005 impacted our overall year over year growth.



A summary of the Trust's mix of revenues from our two operating segments
is shown in the following table:

Three months Nine months
September 30, September 30,
-----------------------------------
2006 2005 2006 2005
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REVENUE SOURCE
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Drilling Services:
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Accommodations & Catering 39% 33% 38% 41%
Surface Equipment Rentals 17% 22% 16% 23%
Wastewater Treatment 13% 10% 14% 11%
Directional Drilling (divested Oct
2005) 0% 6% 0% 5%
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TOTAL - DRILLING SERVICES 69% 71% 68% 80%
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Production Services:
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Production testing/blow-back tanks 16% 13% 20% 6%
Service rigs 15% 16% 12% 14%
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TOTAL - PRODUCTION SERVICES 31% 29% 32% 20%
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TOTAL 100% 100% 100% 100%
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We had originally estimated at the beginning of 2006 an allocation between drilling services and production services revenue to be 64% and 36% respectively. However, based on the recent market developments negatively impacting the production testing product line accompanied by the fact that accommodations and catering have exceeded expectations we now are forecasting that the allocation will be approximately 69% drilling services and 31% production services for fiscal 2006.

Direct Costs and Gross Margin

For the three month period ended September 30, 2006 direct costs were $15.0 million (60% of revenue) as compared to $10.9 million (59% of revenue) in the comparable period of 2005. Direct costs for the nine months ended September 30, 2006 were $50.5 million (60% of revenue) as compared to $32.1 million (59% of revenue) in the corresponding period of 2005. Gross margin for the three months ended September 30, 2006 was $10.1 million (40% of revenue) compared to $7.6 million (41% of revenue) in the corresponding period of 2005. Gross margin for the nine month period increased 54% to $33.9 million (40% of revenue) at September 30, 2006 as compared to $22.0 million (41% of revenue) in the same period of 2005.

Given the increased cost structure to conduct business in the oil and gas services industry, we are pleased to report that the Trust has been able to maintain 2005 margin levels in the 40% range. One of the key areas that has impacted the Trust's economics is the cost of labour. It has been a challenge to find and maintain quality staffing levels given the labour shortages seen in the current marketplace. To help with this, management continually reviews the compensation platform to ensure it offers competitive reward packages as well as developmental training to enhance skills and career advancement within the organization. As a result, direct costs were affected by higher compensation expenses. We also had anticipated slightly higher costs as a percentage of revenue in 2006 vs. 2005, due to our business mix being impacted by the production testing businesses we acquired in 2005. The production testing product line has a lower gross margin than our other product lines. We have focused on and have been successful with operating efficiencies and selective price increases to help offset the increases in our operating costs. We anticipate a 40-41% gross margin for the 2006 fiscal year which will be consistent with our prior year amounts.

General and Administrative Expenses

General and administrative expenses ("G&A") for the three month period ended September 30, 2006 were $4.0 million (15.9% of revenue) compared to $3.1 million (16.5% of revenue) in the comparable period of 2005. General and administrative expenses increased from $8.4 million (15.5% of revenue) for the nine months ended September 30, 2005 to $12.2 million (14.5% of revenue) for the same period in 2006. The year over year increase of $3.8 million is primarily attributable to the overall head count additions needed to provide the infrastructure associated with the considerable growth of the Trust. As well, the increase is due to higher employee compensation costs required to remain competitive in the industry. Despite the increase in total G&A, the amount as a percentage of revenue for the first nine months of the year has decreased compared to the same period of 2005. As well, compared to the overall nine month revenue growth of 56%, G&A has only increased at a rate of 46% in comparison.

Depreciation and Amortization

For the three months ended September 30, 2006 depreciation expense was $2.4 million and amortization of intangible assets and deferred financing costs totalled $0.1 million, an overall increase of 35% compared to $1.8 million of depreciation and $0.1 million of amortization in the corresponding period of 2005. For the nine month period ended September 30, 2006 depreciation expense was $6.7 million and amortization of intangibles and deferred financing totalled $0.4 million compared to $5.1 million of depreciation and $0.3 million of amortization in the corresponding period of 2005 for an overall nine month comparable increase of 32%. The increases are a direct result of the Trust's prior business acquisitions and internal capital build programs. Depreciation and amortization was 10% and 10.1% of revenues for the three month periods of 2006 and 2005 respectively. For the nine month period ended September 30, 2006 and 2005, depreciation and amortization was 8.4% and 9.9% of revenues respectively.

Interest - Long-Term and Other Debt

Interest expense on long-term and other debt increased by $170 thousand and $443 thousand respectively for the three and nine months ended September 30, 2006 compared to the same periods in 2005. This was due to the increased amount of long-term debt as of September 30, 2006 ($22 million) compared to the same time period of 2005 ($12 million). During the third quarter of 2006 a drawdown of our credit facility in the amount of $15 million occurred to fund the Trust's internal capital expenditure program. The increase on interest expense on long-term and other debt was also partially due to the Canadian prime bank rate change from 4.50% at September 30, 2005 to 6.0% at September 30, 2006.

Loss on Disposal of Property and Equipment

The loss on disposal of property and equipment for the three month period ending September 30, 2006 was $33 thousand compared to $12 thousand in 2005. For the nine months ended September 30, 2006, the loss on disposal of property and equipment was $218 thousand compared to $11 thousand for the prior year period. The year to date loss is mainly related to the write off of one wellsite trailer due to a fire and the sale or write off of service equipment, primarily vehicles, during the first half of 2006.

Income Taxes

Total income tax reduction for the three month period ending September 30, 2006 was ($326) thousand as compared to ($204) thousand in the corresponding period of 2005. The total reduction for income taxes for the nine months ended September 30, 2006 was ($87) thousand compared to ($448) thousand in the prior corresponding period. At the expected combined federal and provincial tax rate of 32.12%, net earnings before income taxes for the nine month period ended September 30, 2006 of $13.4 million would have resulted in an income tax provision of $4.3 million compared to the actual provision booked of ($87) thousand. The variance of $4.4 million in the provision from what would be expected was the result of a reduction to the provision of $4.0 million for income allocated to Unitholders, a reduction of $0.5 million as a result of announced reductions in federal and provincial corporate tax rates and an increase of $0.1 million in the provision for non-deductible and other items for income tax purposes.

Distributions

The distributions declared to unitholders for the nine month period ending September 30, 2006, were $13.8 million ($0.79/unit) or 66% of funds from operations compared to $10.0 million ($0.72/unit) or 76% of funds from operations in 2005. The improvement in the payout ratio by 10% for the nine months ending September 30, 2006 compared to the same period of 2005 is primarily driven by leverage on our fixed cost structure and the accretive growth of the Trust over the past year through acquisitions and capital expenditures.

Pursuant to the trust indenture, distributions may be reduced, increased or suspended entirely depending on the operations of Wellco and the performance of its assets. The actual cash flow available for distribution to holders of the trust units is a function of numerous factors including: the financial performance of the company; debt covenants and obligations; working capital requirements; maintenance and expansion capital requirements for the purchase of property and equipment; and the number of trust units outstanding.

For Canadian tax purposes, the non-taxable portion of distributions reduces a Unitholder's adjusted cost base of Trust units. Further corporate acquisitions and financing could serve to increase or decrease the non-taxable portion of distributions. The ultimate proportion of taxability of distributions will be determined each year 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 (see Business Risks section of this MD&A for further information).



SUMMARY OF QUARTERLY RESULTS

(Expressed in thousands of $'s, except per unit amounts)
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Q 3 Q 2 Q 1 Q 4
2006 2006 2006 2005
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Revenue $ 25,105 $ 17,490 $ 41,848 $ 30,257
Net earnings (loss) 3,539 917 9,022 6,044
Per unit - basic 0.20 0.05 0.56 0.41
Per unit - diluted 0.20 0.05 0.56 0.41
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Q 3 Q 2 Q 1 Q 4
2005 2005 2005 2004
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Revenue $ 18,517 $ 10,795 $ 24,807 $ 18,936
Net earnings (loss) 2,689 (192) 5,658 3,841
Per unit - basic 0.18 (0.01) 0.40 0.28
Per unit - diluted 0.18 (0.01) 0.40 0.27
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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 bringing melting snow together with frost leaving the ground, this can render many secondary roadways incapable of supporting the weight of heavy equipment. 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 and hard enough to support heavy equipment. The timing of these periods, "spring break-up" and "winter freeze-up", have a direct bearing upon the Trust's activity levels. Accordingly, the Trust's prime operating seasons are usually November through mid-March and July through late September.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2006 Wellco had working capital of $6.7 million including the current portion of long-term debt which was an increase of $3.4 million compared to the 2005 year-end level of $3.3 million. In addition the Trust has a credit facility in place with total availability of $60 million. At September 30, 2006, $26.4 million of the available $60 million was drawn and outstanding. The facility consists of an extendible revolving operating credit line of $20 million and an extendible revolving acquisition and capital expenditure facility of up to $40 million to finance corporate and internal growth. Both facilities are currently being charged at bank prime rate (6.0%). All covenants of the banking facility were satisfied at September 30, 2006. The Trust does not anticipate any covenant issues restricting its future ability to pay distributions, or fund operating, investing or financing activities.

On February 23, 2006, the Trust closed a unit offering of 3,000,000 Trust Units. The offering was made on a bought-deal basis through a syndicate of underwriters. At closing, a total of 3,000,000 Trust Units were issued at a price of $10.75 per Trust Unit for gross proceeds of $32.3 million. The net proceeds of the offering of $30.5 million were used to reduce bank indebtedness, which has partially to date been redrawn and applied to finance the Trust's 2006 capital build program. Management also believes that, dependent on capital and market conditions, the Trust has the ability to raise additional capital through the public or private issuance of additional Trust Units, if required.



Wellco's contractual financial obligations are summarized as follows:

Payments Due by Period
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Contractual Less than 1-3 4-5 After 5
Obligations Total 1 Year years Years years
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Long-term debt $ 24,456 $ 2,693 $ 11,969 $ 9,794 $ -
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Operating leases $ 25,803 $ 2,958 $ 7,137 $ 4,438 $ 11,270
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Obligations under capital
lease $ 622 $ 251 $ 371 $ - $ -
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Total Contractual
Obligations $ 50,881 $ 5,902 $ 19,477 $ 14,232 $ 11,270
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Capital Expenditures

For the nine months ended September 30, 2006, $39.0 million was expended on additions to property and equipment which included $6.1 million on lands and buildings under construction and $0.9 million for deposits on assets under construction. During fiscal 2005 the Trust purchased land in Brooks, Alberta and Fort St. John, British Columbia, then contracted a construction company to erect a building on each piece of land to the Trust's specifications and requirements; this accounted for $5.0 million of the $6.1 million expended on lands and buildings. On September 28, 2006, the Trust completed the sale and leaseback of these facilities for gross proceeds of $7.8 million which was equal to their carrying value. The agreement to leaseback these assets will be accounted for as an operating lease. The remaining $1.1 million of the $6.1 million is related to costs incurred to date with regards to our Grande Prairie facility expansion, that once completed will be handled in the same manner as the Brooks and Fort St. John deals.



The additions to property and equipment, excluding additions to lands and
buildings under construction, consisted of:

- $15.4 million for accommodations and related equipment;

- 9.4 million for wastewater treatment systems;

- 0.5 million for surface rental equipment;

- 4.1 million for service rigs and related equipment;

- 1.3 million for production testing and blow-back tank equipment;

- 0.8 million for revenue producing vehicles related to various product
lines; and

- 1.4 million for ancillary operating equipment and infrastructure costs.
-----
$32.9 million
-----
-----

The remaining costs yet to be incurred for the planned 2006 capital build
program of $44.6 million consists of the following:

- $ 4.8 million for accommodations and related equipment;

- 2.4 million for wastewater treatment systems;

- 1.4 million for surface rental equipment;

- 0.7 million for service rigs and related equipment;

- 1.7 million for production testing and blow-back tank equipment;

- 0.5 million for revenue producing vehicles related to various product
lines; and

- 0.2 million for ancillary operating equipment and infrastructure costs.
-----
$11.7 million
-----
-----


The remaining capital expenditures to be incurred for 2006 will be financed with funds from operations in excess of what is distributed to unitholders and the utilization of our credit facility. We anticipate that the majority of equipment for the 2006 capital build program will be delivered by the end of the year and be available for use in the winter drilling season, assuming no unanticipated delays by suppliers. The only exception will be two drill camps that will be delivered in January 2007.

Outstanding Unit/Share Data

The following table summarizes changes to Wellco's capitalization as of October 31, 2006:



Outstanding Balance as at,
Dec. 31, 2005 October 31, 2006
-------------------------------
Trust units 14,722,620 17,882,158
Trust unit options 1,402,510 1,329,693
Series 'C' exchangeable shares 46,800 -


Jan. 1, 2006 to October 31, 2006 Trust Unit issuances
-----------------------------------------------------
Issued on public offering 3,000,000
Issued on exercise of options 102,814
Issued on exchange of Series 'C' Exchangeable Shares 56,724
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Total trust units issued during period 3,159,538
Total trust units, December 31, 2005 14,722,620
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Ending trust units, October 31, 2006 17,882,158
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Management considers the financial resources available sufficient to fund existing commitments, the remaining 2006 capital build program and working capital requirements for the next fiscal year.

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 period ended September 30, 2006.

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, intangible assets, the determination of depreciation and amortization expense and allowance for doubtful accounts receivable.

The value of property and equipment, goodwill and intangible assets 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 and 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 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.

CHANGES IN ACCOUNTING POLICIES

Management does not expect to change existing accounting policies during the 2006 fiscal year but will adopt new accounting policies as required under 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 25% of the Trust's total sales for the nine month period ended September 30, 2006 were derived from two customers. These customers are considered senior oil and gas producers and are among the largest in the industry.

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. Funds from operations - Funds from operations is defined as funds generated from operating activities before changes in non-cash working capital items. Funds from operations is not a recognized measure under GAAP. Management believes that funds from operations is a useful supplementary measure as it provides an indication of funds generated by operations before working capital adjustments. Investors should be cautioned, however, that funds from operations should not be construed as an alternative to cash provided by (used in) operating activities, determined in accordance with GAAP, as an indicator of the Trust's performance. The Consolidated Statement of Cash Flows in the interim consolidated financial statements at September 30, 2006 includes a reconciliation of funds from operations. Wellco's method of calculating funds from operations may differ from those of other companies, and accordingly, funds from operations may not be directly comparable to measures used by other companies.



The following is a reconciliation of cash flow provided by operating
activities to funds from operations:

Three months ended Nine months ended
September 30, September 30,
(in thousands of $) 2006 2005 2006 2005
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Cash flow provided by operating
activities $ 1,109 $ 128 $ 23,669 $ 8,405
Changes in non-cash working capital
items (4,670) (4,270) 2,794 (4,815)
---------------------------------------------------------------------------
Funds from operations 5,779 4,398 20,875 13,220
---------------------------------------------------------------------------


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 an indication of the operating results without regard to how these activities were financed or how the results were taxed. Investors should be cautioned, however, that EBITDA should not be construed as an alternative to net income determined in accordance with GAAP as an indicator of the Trust's performance. Wellco's method of calculating EBITDA may differ from those of other companies, and accordingly, EBITDA may not be directly comparable to measures used by other companies.



The following is a reconciliation of net income to EBITDA:

Three months ended Nine months ended
September 30, September 30,
(in thousands of $) 2006 2005 2006 2005
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net Income $ 3,539 $ 2,689 $ 13,478 $ 8,155
Add:
Depreciation and amortization 2,512 1,862 7,056 5,343
Interest - long-term debt 235 160 713 486
Interest - other 141 46 319 103
Loss on disposal of
property and equipment 33 12 218 11
---------------------------------------------------------------------------
6,460 4,769 21,784 14,098
Income taxes:
Current - 10 (38) 1
Future (326) (214) (49) (449)
---------------------------------------------------------------------------
EBITDA 6,134 4,565 21,697 13,650
---------------------------------------------------------------------------


3. Cash Payout Ratio - Cash payout ratio is calculated as cash distributions declared divided by funds from operations. Cash payout ratio is not a recognized measure under GAAP. Management believes this ratio provides an indication of the amount of cash retained for future growth opportunities, debt repayment or incremental future distribution to unitholders. Wellco's method of calculating Cash Payout Ratio may differ from those of other companies, and accordingly, may not be directly comparable to measures used by other companies.

BUSINESS RISKS

Certain activities of the Trust are affected by factors that are beyond the Trust's control or influence, some of which are summarized in the 2005 Annual Management Discussion and Analysis as well as the 2005 Annual Information Form. During the nine month period ended September 30, 2006, there have been no significant changes to those risks. Additional risks and uncertainties that management may be unaware of, or that they determine to be immaterial, may also become important factors which affect the Trust.

Subsequent to September 30, 2006 on October 31, 2006 the Canadian Federal Department of Finance made an announcement relating to proposed changes to the taxation of income trusts. Included in this announcement was a proposed tax on distributions paid on publicly traded income trusts. As Wellco is an existing trust, these proposed changes would not impact Wellco until 2011. This proposed change still needs to be approved by the Canadian government before becoming legislation. If this plan is implemented, it may have an impact on cash available for distribution and the Trust's payout ratio.

DISCLOSURE CONTROLS

The Chief Executive Officer and the Chief Financial Officer have evaluated the effectiveness of the Trust's disclosure controls and procedures, as of the end of the period covered by the interim filings, and have concluded that such disclosure controls and procedures were effective to provide reasonable assurance that material information related to the Trust or its subsidiaries is made known to them. It should be noted that while the Trust's Chief Executive Officer and Chief Financial Officer believe that the Trust's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objective of the control system is met.

OUTLOOK

Wellco is pleased with the financial performance for the quarter and nine month ended September 30, 2006. The third quarter of 2006 was another strong period for the Trust. Growth was driven by our drilling services segment as our customers demand for these product lines continued to show stable growth. Production testing was negatively impacted by the continuing concerns over natural gas prices. The decrease in natural gas prices has caused many producers to review the financial viability of gas exploration, drilling and development programs. This reduction is anticipated to continue into the fourth quarter as wet weather in early October and the weakness in natural gas prices has affected the urgency with which customers are approaching their upcoming winter drilling programs. For the balance of the fourth quarter, we expect most of our customers to continue with their exploration and development programs planned for the remainder of 2006 and into 2007.

Although most analysts and forecasters have downgraded industry forecasts for wells drilled in Western Canada for the remainder of 2006, the Trust to date has not been significantly impacted by the low natural gas prices and the slowdown in drilling activity by its customers. Some analysts point out that unlike similar downturns in natural gas prices, this downturn is not a result of excess wells being drilled. On the contrary, they attribute the weakness in gas prices due to the surplus of gas storage, driven by the warm weather last winter. The associated surplus has remained in place since that time. Moving forward, some analysts believe, as do we, that drilling activity should recover as these surplus gas storage levels are diminished moving into the latter part of 2007.

The Trust continually monitors strategies for reducing costs and achieving further market penetration in all areas which we operate. As stated in last quarter's report to unitholders, Wellco management is prepared to respond quickly to any prolonged or broader based slowdown in the industry. For 2007 we plan to be even more focused on maximizing unitholder value by optimizing prior capital investments complemented with our increasing customer demands for our complimentary group of product lines.

Because application to the Trust of the proposed tax changes is delayed four years, there is time to monitor the situation and formulate a longer-term plan. We must also remember that these proposed changes have no direct or immediate impact on the day-to-day operations of the Trust. Those operations remain a function of the oil and gas industry fundamentals. The Trust's policy of maintaining unit holder distributions in the range of 60% to 65% of funds from operations remains unchanged under the current tax regime.

Overall, we are cautious with respect to the fourth quarter of 2006. With the significant investment in equipment and key prior year acquisitions, Wellco is committed to meeting customer demand and is well positioned to deliver solid financial and operational performance for the rest of this fiscal year and beyond.



Kenneth M. Bagan,
President & Chief Executive Officer

Corey Zahn,
Vice President, Finance & Chief Financial Officer


WELLCO ENERGY SERVICES TRUST
Consolidated Balance Sheets

(Expressed in thousands of dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30, December 31,
2006 2005
---------------------------------------------------------------------------
(unaudited) (audited-note 3)

Assets

Current assets:
Accounts receivable $ 22,262 $ 28,661
Inventory 548 558
Prepaid expenses and deposits 827 2,274
---------------------------------------------------------------------------
23,637 31,493

Property and equipment (note 4) 112,995 88,642
Intangible assets (note 5) 1,730 2,069
Goodwill 26,293 26,293
Deferred financing costs 222 255
---------------------------------------------------------------------------
$ 164,877 $ 148,752
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Liabilities and Unitholders' Equity

Current liabilities:
Operating line of credit (note 6) $ 2,941 $ 2,200
Accounts payable and accrued liabilities 9,431 17,345
Distributions payable 1,609 1,251
Income taxes payable - 39
Current portion of long-term debt (note 7) 2,944 7,316
---------------------------------------------------------------------------
16,925 28,151

Long-term debt (note 7) 22,134 25,664

Future income tax liability 10,279 10,328

Unitholders' equity:
Trust units (note 8(a)) 119,514 88,060
Exchangeable shares (note 8(a)) - 293
Contributed surplus (note 8(b)) 414 279
Deficit (4,389) (4,023)
115,539 84,609

Commitments (note 9)

---------------------------------------------------------------------------
$ 164,877 $ 148,752
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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 Deficit

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

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
Revenue $ 25,105 $ 18,517 $ 84,443 $ 54,119
Direct costs 14,977 10,888 50,497 32,083
---------------------------------------------------------------------------
10,128 7,629 33,946 22,036

Expenses:
General and administrative 3,994 3,064 12,249 8,386
Interest - long-term debt 235 160 713 486
Interest - other 141 46 319 103
Depreciation and
amortization 2,512 1,862 7,056 5,343
Loss on disposal of
property and equipment 33 12 218 11
---------------------------------------------------------------------------
6,915 5,144 20,555 14,329

---------------------------------------------------------------------------
Earnings before income taxes 3,213 2,485 13,391 7,707

Income taxes:
Current recovery - 10 (38) 1
Future reduction (326) (214) (49) (449)
---------------------------------------------------------------------------
(326) (204) (87) (448)

---------------------------------------------------------------------------
Net earnings 3,539 2,689 13,478 8,155

Deficit, beginning of period (3,101) (5,673) (4,023) (4,546)

Cash distributions declared (4,827) (3,391) (13,844) (9,984)

---------------------------------------------------------------------------
Deficit, end of period $ (4,389) $ (6,375) $ (4,389) $ (6,375)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Earnings per unit:
Basic $ 0.20 $ 0.18 $ 0.78 $ 0.57
Diluted $ 0.20 $ 0.18 $ 0.77 $ 0.56
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Weighted average number of
units outstanding:
Basic 17,870,946 14,544,696 17,258,243 14,227,854
Diluted 18,032,967 14,779,426 17,425,139 14,442,231
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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 Nine months ended
September 30, September 30,
---------------------- -----------------------
2006 2005 2006 2005
---------------------------------------------------------------------------

Cash provided by (used in):

Operating:
Net earnings $ 3,539 $ 2,689 $ 13,478 $ 8,155
Items not affecting cash:
Depreciation 2,382 1,790 6,662 5,087
Future income taxes reduction (326) (214) (49) (449)
Amortization 130 72 394 256
Loss on disposal of property
and equipment 33 12 218 11
Trust unit option
compensation (note 8(b)) 21 49 172 160
---------------------------------------------------------------------------
Funds from operations 5,779 4,398 20,875 13,220

Net change in non-cash working
capital items (note 10) (4,670) (4,270) 2,794 (4,815)
---------------------------------------------------------------------------
1,109 128 23,669 8,405
Financing:
Proceeds of long-term debt 15,000 6,200 23,500 11,450
Distribution payments (4,826) (3,386) (13,486) (9,925)
Operating line of credit 512 1,611 741 3,528
Repayment of long-term debt (333) (380) (31,402) (6,834)
Issue of trust units, net of
costs (note 8 (a)) 118 370 31,124 986
Increase in deferred financing
costs (8) - (22) (97)
---------------------------------------------------------------------------
10,463 4,415 10,455 (892)

Investing:
Purchase of property and
equipment (20,577) (5,061) (39,026) (11,169)
Proceeds on disposal of
property and equipment 7,752 9 7,793 10,111
Change in non-cash working
capital (note 10) 1,253 509 (2,891) (2,103)
Business acquisitions
net of cash acquired - - - (4,352)
---------------------------------------------------------------------------
(11,572) (4,543) (34,124) (7,513)

---------------------------------------------------------------------------
Change in cash position - - - -

Cash, beginning of period - - - -

---------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

WELLCO ENERGY SERVICES TRUST

Notes to Consolidated Financial Statements

Three and nine months ended September 30, 2006
(Amounts expressed in thousands of dollars, except per unit amounts)
(Unaudited)


1. Basis of presentation:

Wellco Energy Services Trust (the "Trust") is an open-ended unincorporated investment trust governed by laws of the Province of Alberta and created pursuant to a Declaration of Trust dated May 28, 2002. The Trust is a diversified Canadian energy services trust operating in western Canada. The Trust has two operating segments which provide drilling and production services to oil and gas contractors and producers.

These interim unaudited consolidated financial statements of the Trust have been prepared by management in accordance with Canadian generally accepted accounting principles for interim financial statements and follow the same accounting policies and methods of computation as the consolidated financial statements for the fiscal year ended December 31, 2005. 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, 2005 contained in the Trust's 2005 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, "spring breakup" and "winter freeze up", have a direct bearing upon the Trust's activity levels. Accordingly, the Trust's prime operating seasons are usually November through mid March and July through late September.

3. Lands and buildings under construction:

During fiscal 2005 the Trust purchased land in Brooks, Alberta and Fort St. John, British Columbia, then contracted a construction company to erect a building on each piece of land to the Trust's specifications and requirements. On September 28, 2006, the Trust completed the sale and leaseback of these facilities for gross proceeds of $7,750 which was equal to their carrying value. The agreement to leaseback these assets will be accounted for as an operating lease. At June 30, 2006, accumulated costs for the land and building construction of $6,631 had been included in property and equipment. At December 31, 2005, costs related to the construction of these facilities, in the amount of $2,759 were included in current assets. The balance sheet at December 31, 2005 has been restated to include these amounts in property and equipment.



4. Property and equipment:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30, December 31,
2006 2005
Accumulated Net book Net book
Cost depreciation value value
---------------------------------------------------------------------------

Service equipment $ 128,886 $ 21,691 $ 107,195 $ 82,037
Office and shop
equipment 4,510 1,317 3,193 2,508
Building and leasehold
improvements 1,019 60 959 2,415
Land 1,648 - 1,648 1,682

---------------------------------------------------------------------------
$ 136,063 $ 23,068 $ 112,995 $ 88,642
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Included in property and equipment at September 30, 2006 is certain equipment under capital lease with a cost of $1,468 and a net book value of $1,246. This equipment is classified as service equipment and is depreciated on the same basis as other service equipment.

The Trust has made various deposits on assets under construction totaling $856 which has been included above. The amount deposited on service equipment is $813 and $43 on office and shop equipment. These amounts are not depreciated until the equipment is received and put into use by the Trust. In addition, no depreciation has been accounted for building costs in the amount of $375 currently under construction.



5. Intangible assets:

---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30, December 31,
2006 2005
Accumulated Net book Net book
Cost amortization value value
---------------------------------------------------------------------------

Customer relationships
and other $ 2,255 $ 525 $ 1,730 $ 2,069
---------------------------------------------------------------------------
---------------------------------------------------------------------------


6. Operating line of credit:

The Trust has a $20,000 extendible revolving operating credit facility. 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 September 30, 2006 was 6.00% . At September 30, 2006, $2,941 (December 31, 2005 - $2,200) was drawn on the facility.



7. Long-term debt:

---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30, December 31,
2006 2005
---------------------------------------------------------------------------

Extendible revolving acquisition facility of up
to $40,000 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 September 30,
2006 was 6.0%. The facility expires on May 30,
2007 renewable at the lenders option, for an
additional 364 day period. If not renewed, the
facility is repayable over a period of three
years $ 23,500 $ 30,250

Term debt, repayable in monthly installments of
$81 plus interest at rates varying from 0% to
10.9%, maturing between January 2007 and
December 2009 secured by the specific equipment 956 1,659

Obligations under capital leases, repayable in
monthly installments of $43 plus interest at
rates varying from 0% to 16.5%, secured by
the specific equipment 622 1,071
---------------------------------------------------------------------------
25,078 32,980

Less current portion 2,944 7,316

---------------------------------------------------------------------------
$ 22,134 $ 25,664
---------------------------------------------------------------------------
---------------------------------------------------------------------------


8. Trust units and exchangeable shares:

(a) Issued:

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

Balance, December 31, 2005 14,722,620 $ 88,060

Issued on public offering, net of costs 3,000,000 30,442
Issued on exercise of options 99,481 719
Issued on exchange of exchangeable shares 56,724 293

---------------------------------------------------------------------------
Balance, September 30, 2006 17,878,825 $ 119,514
---------------------------------------------------------------------------
---------------------------------------------------------------------------



On February 23, 2006, the Trust closed a public unit offering of 3,000,000 Trust Units at a price of $10.75 per Trust Unit less issue costs of $1,808 for net proceeds of $30,442.




---------------------------------------------------------------------------
---------------------------------------------------------------------------
Exchangeable Shares: Number Amount
---------------------------------------------------------------------------
Series C:
Balance, December 31, 2005 46,800 $ 293
Exchanged for trust units (46,800) 293
--------------------------------------------------------------------------
Balance, September 30, 2006 - -

---------------------------------------------------------------------------
Balance, September 30, 2006 - $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


On January 26, 2006 the remaining Series "C" exchangeable shares were converted to Trust Units based on an exchange ratio of 1.2121 Trust Units per share.

(b) Trust unit option plan:

In January 2003 a trust unit option plan was established providing for the issue of units. At September 30, 2006 a total of 1,787,883 options to purchase trust units are reserved to be granted to employees and directors. Of the amount reserved, 1,331,359 options have been granted. Under this plan, the exercise price of each option equals the market value of the Trust Units on the date of the grant and an option's maximum term is five years. The exercise price may be adjusted downwards if trust distributions exceed certain levels. Options vest equally over a period of three years from the date of grant as employees or directors render continuous service to the Trust.



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

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

Total options outstanding, beginning of period 1,402,510 $ 9.38
Granted 147,500 10.48
Exercised (99,481) 6.87
Cancelled (119,170) 8.90

---------------------------------------------------------------------------
Outstanding, September 30, 2006 1,331,359 $ 9.74
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Exercisable at September 30, 2006 386,651 $ 8.86
---------------------------------------------------------------------------
---------------------------------------------------------------------------


---------------------------------------------------------------------------
---------------------------------------------------------------------------
Options outstanding Options exercisable
------------------------------------ ----------------------
Number Weighted Number
Range of outstanding average Weighted exercisable Weighted
Exercise at remaining average at average
Prices September 30, contractual exercise September 30, exercise
Outstanding 2006 life (months) price 2006 price
---------------------------------------------------------------------------

$ 5.00 - 6.35 85,837 21 $ 5.39 65,001 $ 5.22
$ 8.70 - 10.00 497,022 35 $ 9.38 255,320 $ 9.28
$ 10.13 - 11.59 748,500 48 $ 10.47 66,330 $ 10.79
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The Trust recorded trust unit option compensation expense and contributed surplus of $172 (2005 - $111) on options granted and vested for the nine months ended September 30, 2006. The amount of compensation expense was reduced for options granted during the period but cancelled prior to vesting. 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 4.0% to 4.2%; volatility ranging from 25% to 30%, life of 5 years; distribution yield rates between 8% and 9.45%, and corresponding changes in exercise prices during the life of the option.

Contributed surplus was reduced and unit capital was increased by $37 (2005 - $28) for options that were exercised during the period.

9. Commitments:

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



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

2006 $ 764
2007 2,910
2008 2,804
2009 2,086
2010 2,089

---------------------------------------------------------------------------
$ 10,653
---------------------------------------------------------------------------
---------------------------------------------------------------------------

10. Supplemental cash flow information:

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2006 2005 2006 2005
---------------------------------------------------------------------------

Interest paid $ 329 $ 206 $ 970 $ 589
Interest received 2 5 9 12
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Income taxes paid $ - $ - $ 41 $ 184
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Changes in non-cash working
capital components:
Accounts receivable $ (5,052) $ (764) $ 6,399 $ 2,490
Inventory (127) (140) 10 18
Prepaid expenses and deposits 57 (2,218) 1,447 (2,304)
Accounts payable and
accrued liabilities 452 (1,171) (5,023) (4,879)
Income taxes payable - 23 (39) (140)
--------------------------------------------------------------------------
(4,670) (4,270) 2,794 (4,815)
Changes in non-cash working
capital items in investing
activities 1,253 509 (2,891) (2,103)
---------------------------------------------------------------------------
$ (3,417) $ (3,761) $ (97) $ (6,918)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


11. Segmented information:

The Trust operates exclusively in western Canada, in two industry segments. Drilling services includes accommodations and catering, wastewater treatment systems and surface equipment rentals. Production services includes service rigs, production testing and 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 September
30, 2006:
Revenue $ 17,408 $ 7,697 $ - $ 25,105
Depreciation and amortization 1,787 476 249 2,512
Interest on long-term debt - - 235 235
Net earnings (loss) 4,630 1,326 (2,417) 3,539
Goodwill 12,695 13,598 - 26,293
Property and equipment 80,028 31,355 1,612 112,995
Capital expenditures 17,873 2,267 437 20,577
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Three months ended September
30, 2005:
Revenue $ 13,188 $ 5,329 $ - $ 18,517
Depreciation and amortization 1,500 218 144 1,862
Interest on long-term debt - - 160 160
Net earnings (loss) 2,391 1,777 (1,479) 2,689
Goodwill 12,695 7,309 - 20,004
Property and equipment 50,043 14,678 1,905 66,626
Capital expenditures(a) 3,469 936 656 5,061
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(a) Excludes business acquisitions


Approximately 16% (2005 - 13%) of the Trust's total sales for the period were derived from one customer (2005 - one customer). This accounts for 23% (2005 - 13%) of the revenue in the drilling services division and 0% (2005 - 14%) of the production services revenue.



---------------------------------------------------------------------------
Drilling Production
Services Services Corporate Total
---------------------------------------------------------------------------
Nine months ended September
30, 2006
Revenue $ 57,824 $ 26,619 $ - $ 84,443
Depreciation and amortization 5,016 1,323 717 7,056
Interest on long-term debt - - 713 713
Net earnings (loss) 16,829 4,954 (8,305) 13,478
Goodwill 12,695 13,598 - 26,293
Property and equipment 80,028 31,355 1,612 112,995
Capital expenditures 30,788 7,539 699 39,026
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Nine months ended September
30, 2005:
Revenue $ 43,026 $ 11,093 $ - $ 54,119
Depreciation and amortization 4,389 512 442 5,343
Interest on long-term debt - - 486 486
Net earnings (loss) 8,998 3,578 (4,421) 8,155
Goodwill 12,695 7,309 - 20,004
Property and equipment 50,043 14,678 1,905 66,626
Capital expenditures(a) 6,164 3,229 1,776 11,169
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(a) Excludes business acquisitions


Approximately 25% (2005 - 11%) of the Trust's total sales for the period were derived from two customers (2005 - one customer). This accounts for 31% (2005 - 10%) of the revenue in the drilling services division and 11% (2005 - 16%) of the production services revenue.

12. Comparative figures:

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

Contact Information

  • Wellco Energy Services Trust
    Kenneth M. Bagan
    President & Chief Executive Officer
    (403) 232-6334
    or
    Wellco Energy Services Trust
    Corey Zahn
    Vice President, Finance & Chief Financial Officer
    (403) 232-6334
    (403) 232-6338 (FAX)
    Email: info@wellcoenergy.com
    Website: www.wellcoenergy.com