Xtreme Coil Drilling Corp.
TSX : XDC

Xtreme Coil Drilling Corp.

November 13, 2008 21:56 ET

Xtreme Coil Reports Record Quarter and Updates Operations

CALGARY, ALBERTA--(Marketwire - Nov. 13, 2008) - Xtreme Coil Drilling Corp. ("Xtreme Coil", the "company") (TSX:XDC) provides an operations update and announces financial and operating results for the three and nine months ended September 30, 2008 ("2008 3Q"), with comparative data for same period in 2007 ("2007 3Q") and for the year ended December 31, 2007.

Highlights

- 2008 3Q record revenue increased 175 percent from 2007 3Q;

- achieved 91 percent rig utilization in United States operations;

- added two Coil Over Top Drive® ("COTD™") drilling rigs to four previously contracted by Weatherford de Mexico S.A. de C.V.;

- two rigs in Mexico began drilling operations in 2008 3Q;

- first well ever drilled with coil in west Texas Waddell Ranch achieved record pace;

- entered joint marketing agreement with Baker INTEQ.

Operations Update

In 2008 3Q, Xtreme Coil achieved record revenues as activity ramped up for our COTD™ drilling rigs in the United States and rigs in Mexico began operations. This quarter recorded 947 operating days and utilization reached 83 percent.

At September 30, 2008 Xtreme Coil had in place long-term contracts throughout the United States and Mexico, for 11 COTD™ drilling rigs. In 2008 4Q, we now have 16 rigs in the field. We are achieving continuing technical success and demonstrating the cost savings that drilling with coiled tubing can deliver. Recently, Xtreme Coil's XTC 200DT(Plus) drilled the first well ever undertaken with coil in the Waddell Ranch field of west Texas. Drilling in a carbonate formation, the rig reached total depth in 10.5 days, approximately 5 days faster than our customer had projected.

In 2008 3Q, two rigs in Mexico began drilling operations. In early November, a third rig commenced activity and we anticipate the remaining three rigs will begin operations during 2008 4Q. Initially, most rigs in Mexico experience some standby time waiting for completion of locations before drilling operations can commence.

In October 2008, Xtreme Coil entered into a joint marketing agreement with INTEQ, a division of the world-wide drilling services company, Baker Hughes Incorporated. Under the agreement, we will work together to provide innovative solutions to customers who use Xtreme Coil's COTD™ drilling rigs and Baker INTEQ's directional drilling tools. The initial focus will be field testing our coiled tubing drilling using the TruTrak™ rotary steerable tool and undertaking re-entry projects with the CoilTrak® bottom hole assembly system. Xtreme Coil believes combining COTD™ drilling rigs with Baker INTEQ tools has the potential to deliver significant technical drilling improvements to our current and future E&P customers.

Xtreme Coil continues to engage current and potential new customers in discussions focused on coiled tubing's technical applications to re-entry projects. We expect this will uncover new opportunities for Xtreme Coil as a number of producers have expressed interest in evaluating the capability of our technology and in capturing the cost efficiencies possible.

We have decided to temporarily suspend our 2008 capital expenditures program as a result of the worldwide economic turmoil. Going forward, Xtreme Coil plans to re-establish COTD™ rig construction concurrent with the negotiation of long-term contracts. To offset the current uncertainty in North American markets, we are committed to our strategy of marketing our innovative drilling technology to a broad range of global energy projects.



Tom Wood Rod Uchytil
Chairman and Chief Executive Officer President


2008 Third Quarter Highlights

($ thousand except
where indicated) 2008 Sep 30 2007 Sep 30 % Change
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Revenue 26,328 9,574 175
Net income (loss) 1,278 (1,338) 196
Net income (loss) per share ($) 0.03 (0.04) 180
Capital assets 231,392 167,788 38
Operating days (1) 947 398 138
Rig utilization (percentage) (1) 83 62 34
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(1) see Non-GAAP measures in MD&A


Management's Discussion and Analysis ("MD&A")

For the three and nine months ended September 30, 2008

Management for Xtreme Coil Drilling Corp. ("Xtreme Coil", the "company", "we", "our") based this MD&A on the operating and financial results for the three and nine months ended September 30, 2008. Management recommends reading this discussion and analysis of Xtreme Coil's financial condition and results of operations in conjunction with the audited consolidated financial statements for the year ended December 31, 2007. No update is provided where an item is not material or where there has been no material change from the discussion in the MD&A for the year ended December 31, 2007. Management has prepared these interim consolidated financial statements in accordance with Canadian generally accepted accounting principles ("GAAP") and expressed all amounts in Canadian dollars unless otherwise stated. Management's discussion and analysis is based on information available as at November 12, 2008.

Forward-Looking Statements

This MD&A, or documents incorporated herein, may include certain information, statements and assumptions regarding management's view of future events, expectations, plans, initiatives or prospects that constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to Xtreme Coil's future outlook and anticipated events or results and may include statements related to anticipated future contracts; commodity pricing; rates of currency exchange; rig building, completion or deployment; operating expenses; capital expenditures and other 2008 guidance provided throughout this MD&A.

These statements are based on certain factors and assumptions regarding, among others: projection of current operations; ongoing and future business negotiations and opportunities; timing of capital expenditures; market costs and other variables affecting rig building and operating expenses; the ability of vendors to provide rig component equipment, services and supplies, including labour, in a cost-effective and timely manner; the availability and costs of financing; foreign currency exchange rates; the receipt of applied-for patents; and government regulations. Although Xtreme Coil considers these assumptions reasonable, as of the current date based on information currently available to management, the assumptions may ultimately prove incorrect.

Forward looking-information is also subject to certain factors, including risks and uncertainties that could cause actual results to differ materially from what we currently expect. These factors include, but are not limited to: the cyclical nature of drilling markets, currency exchange rates, and commodity prices; access to credit facilities and equity markets; competition for customers from other drilling contractors, labour and vendor-provided rig components. Because of these risks and uncertainties, actual results, expectations, achievements or performance may differ materially from those anticipated and indicated by these forward-looking statements.

Financial outlook information contained in this MD&A about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned such financial outlook information contained in this MD&A should not be used for purposes other than for which it is disclosed herein.

Readers should not place undue importance on forward-looking information and should not rely on this information as of any other date. Xtreme Coil disclaims any intention, and assumes no obligation, to update or revise any forward-looking statements to reflect actual results, whether as a result of new information, future events, changes in assumptions, changes in factors affecting such forward-looking statements or otherwise, except as required pursuant to applicable securities laws.

Description of the Business

Xtreme Coil is a drilling contractor designing, building and operating Coil Over Top Drive® ("COTD™") drilling rigs which employ new patented and patent-pending coil designs and technologies. In addition to their coil capabilities, these drilling rigs can drill with conventional jointed drill pipe. Xtreme Coil builds drilling rigs in Canada under contracts with several third parties. Upon completion of the COTD™ drilling rigs, Xtreme Coil operates the rigs under contract to oil and natural gas exploration and production ("E&P") companies. Xtreme Coil currently conducts drilling operations in the United States and Mexico. We continuously pursue opportunities for our drilling contract services within and beyond our current areas of operation.

Xtreme Coil's corporate and head office is in Calgary, Alberta, Canada. Xtreme Coil has United States field offices in Casper, and Cheyenne, Wyoming. During 2008 3Q, Xtreme Coil established offices in Houston, Texas and near Poza Rica, in the state of Veracruz, Mexico.

At September 30, 2008 Xtreme Coil had several long-term drilling contracts with two major E&P companies in the United States. On an on-going basis, we conduct contract negotiations with current and potential new customers. During 2008 3Q, Xtreme Coil signed two further long-term contracts for operations in Mexico. Currently, this customer has six COTD™ rigs contracted and has signed a letter of intent to contract a seventh drilling rig for delivery to Mexico on a mutually agreed date in 2009.

At September 30, 2008, the United States Patent and Trademark office had issued four patents to Xtreme Coil. Xtreme Coil has more than 60 further patent applications pending in the United States, Canada and other jurisdictions. Our issued patents and patent applications cover Xtreme Coil's coiled tubing drilling and transportation technology including equipment and methods for coiled tubing drilling to deeper horizons of 3,000 meters (10,000 feet) or more.

Xtreme Coil's common shares trade on the Toronto Stock Exchange under the symbol "XDC".

Equipment under Construction

Xtreme Coil has designed six models of COTD™ drilling rigs with five designs completed and deployed to field operations. At September 30, 2008, Xtreme Coil had 15 COTD™ rigs completed (2007 3Q - eight rigs). Of the 15 rigs completed, ten rigs were in the United States and five were either in Mexico or in transit from Canada to locations in Mexico. During 2008 3Q, we completed three drilling rigs for Mexico - two XTC 300 models and one XTC 400. In addition, we redeployed two XTC 200ST rigs to Mexico and continued the final phases of commissioning one more XTC 400 drilling rig in preparation for its deployment to Mexico in early 2008 4Q. Currently, we have a number of components in stock or on order for two further drilling rigs, but have temporarily suspended our drilling rig construction program due to global economic uncertainty.



Selected Quarterly Financial Information (unaudited)

Three months ended
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2008 2008 2008 2007
($ thousand, except where noted) 30 Sep 30 Jun 31 Mar 31 Dec
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Revenue 26,328 10,527 12,335 12,416
Net income (loss) 1,278 (1,541) 496 (204)
Net income (loss) per share (dollars) 0.03 (0.04) 0.01 (0.01)
Capital assets 231,392 211,948 192,855 188,913
Total assets 279,457 249,043 219,049 213,464
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Operating days(1) 947 473 579 579
Rig utilization (percentage) (1) 83 52 74 77
Weighted average rigs in service 12.4 10.0 9.0 8.1
Completed rigs, end of quarter 15 12 11 11
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2007 2007 2007 2006
30 Sep 30 Jun 31 Mar 31 Dec
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Revenue 9,574 5,416 4,789 3,620
Net income (loss) (1,338) (1,144) (517) (781)
Net income (loss) per share (dollars) (0.04) (0.03) (0.02) (0.03)
Capital assets 167,788 148,503 111,908 88,511
Total assets 190,191 175,358 168,612 117,735
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Operating days (1) 398 280 235 163
Rig utilization (percentage) (1) 62 66 65 79
Weighted average rigs in service 7.0 4.6 4.0 2.3
Completed rigs, end of quarter 8 7 4 4
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(1) see Non-GAAP measures


Xtreme Coil's revenue and operating days increased quarterly until year-end December 2007 as more rigs were deployed and drilling operations expanded. During 2008 2Q, lower utilization reduced revenue and operating days from the previous quarter. In 2008 3Q, both revenue and operating days improved from prior quarters with the completion of more drilling rigs, continuous operations for ten rigs in the United States and commencement of drilling operations in Mexico.

In 2008 3Q, revenue increased from 2008 2Q reflecting a 91 percent utilization rate for United States drilling operations. As well, in 2008 3Q Xtreme Coil transferred to Mexico two XTC 200ST rigs that had previously operated in Canada.

Capital asset increases in successive quarters primarily reflect Xtreme Coil's rig build program.



Results of Operations

Revenue

Three months ended Nine months ended
2008 2007 % 2008 2007 %
Sep 30 Sep 30 Change Sep 30 Sep 30 Change
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Total revenue 26,328 9,574 175 49,190 19,779 149
Operating days 947 398 138 1,999 913 119
Revenue per operating day 27.8 24.1 16 24.6 21.7 14
Rig utilization (percentage) 83 62 34 70 64 8
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For the three and nine months ended September 30, 2008 the increase over the prior year in Xtreme Coil's revenue and operating days reflects the increase in the number of drilling rigs in operation.

Included in 2008 3Q revenue is an amount earned for mobilizing most of the five rigs that were either in Mexico or in transit to Mexico by September 30, 2008. The increase in revenue per operating day also reflects the growing proportion of larger rigs in Xtreme Coil's fleet operating at higher daily rates.

In 2008 3Q, total revenue increased from 2008 2Q as a result of increased operating days with ten rigs active in the United States. In addition, two rigs commenced drilling operations in Mexico during 2008 3Q under contracts secured in 2008 2Q, while three more rigs were waiting for well locations or were in transit.



Operating Expenses

Three months ended Nine months ended
2008 2007 % 2008 2007 %
Sep 30 Sep 30 Change Sep 30 Sep 30 Change
----------------------------------------------------------------------------
Operating expenses 18,178 9,053 101 35,705 18,240 96
Operating expenses
(percentage of revenue) 69 95 (27) 73 92 (21)
Operating expenses per
operating day 19.2 22.7 (16) 17.9 20.0 (11)
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As with revenue, the increase in operating expenses for the three and nine months ended September 30 is primarily determined by the increase in the number of drilling rigs in operation. Specifically, for 2008 3Q, the weighted average number of drilling rigs in operation increased to 12.4 rigs (2007 3Q - 7.0 rigs).

Included in 2008 3Q operating expenses is an amount for expenses incurred for mobilizing most of the five rigs that were either in or in transit to Mexico by the end of the quarter.

As a percentage of revenue, operating expenses were lower since infrastructure expenses moderated in proportion to the expansion of Xtreme Coil's rig fleet.



Gross Margin (1)

Three months ended Nine months ended
2008 2007 % 2008 2007 %
Sep 30 Sep 30 Change Sep 30 Sep 30 Change
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Gross margin 8,150 521 1,464 13,485 1,539 776
Gross margin (percentage
of revenue) 31 5 525 27 8 252
Gross margin
per operating day 8.6 1.3 557 6.7 1.7 300
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(1) see Non-GAAP measures


In 2008 3Q, the improvement in gross margin from the previous three and nine month periods resulted primarily from economies of scale.

Gross margin was higher for 2008 3Q, compared to 2008 2Q, primarily due to the higher activity levels outlined previously.



Selling, General and Administration Expense ("SG&A")

Three months ended Nine months ended
2008 2007 % 2008 2007 %
Sep 30 Sep 30 Change Sep 30 Sep 30 Change
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SG&A 2,251 863 161 4,617 2,901 59
SG&A (percentage of revenue) 9 9 (5) 9 15 (36)
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For 2008 3Q, total SG&A increased from the previous three and nine month periods as continued expansion of operations required additional infrastructure, specifically for establishing the Houston and Mexico offices and drilling operations in Mexico. Included in 2008 3Q were certain expenses we do not expect to incur in the future.

SG&A in 2008 3Q, as a percentage of revenue, decreased from the prior period and the previous quarter due primarily to higher revenue generated by Xtreme Coil's growing rig fleet.



Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")(1)

Three months ended Nine months ended
2008 2007 % 2008 2007 %
Sep 30 Sep 30 Change Sep 30 Sep 30 Change
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EBITDA 5,899 (342) 1,825 8,868 (1,362) 751
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(1) see Non-GAAP measures


In 2008 3Q, the improvement in EBITDA over the previous three and nine month periods resulted primarily from increased gross margin generated by Xtreme Coil's expanded fleet of drilling rigs.

EBITDA for 2008 3Q is higher compared to 2008 2Q due to the increase in activity levels discussed earlier.



Depreciation and Amortization

Three months ended Nine months ended
2008 2007 % 2008 2007 %
Sep 30 Sep 30 Change Sep 30 Sep 30 Change
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Depreciation and amortization 2,361 1,077 119 5,612 2,183 157
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Depreciation, calculated on a unit-of-production basis, increases in relation to the number of operating days. For the three and nine months ended September 30, 2008 depreciation increased from the comparative periods and from 2008 2Q, reflecting the higher number of operating days, the deployment of additional drilling rigs and the higher rate of depreciation for larger rigs.



Stock-based Compensation

Three months ended Nine months ended
2008 2007 % 2008 2007 %
Sep 30 Sep 30 Change Sep 30 Sep 30 Change
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Stock-based compensation 420 142 196 720 415 73
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In 2008 3Q, stock-based compensation increased from 2007 3Q, and compared to 2008 2Q, as the board of directors responded to growth in Xtreme Coil's operations in the United States and Mexico by approving new grants of options to purchase common shares.



Foreign Exchange

Three months ended Nine months ended
2008 2007 % 2008 2007 %
Sep 30 Sep 30 Change Sep 30 Sep 30 Change
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Foreign exchange loss 309 189 63 231 503 (54)
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Foreign exchange gains or losses result from a translation of Xtreme Coil's net working capital balances denominated in United States ("US") dollars or Mexican pesos and from the portion of revolving debt denominated in US dollars. During 2008 3Q Xtreme Coil commenced operations in Mexico, thereby introducing exposure to another foreign currency, and also commenced drawing a portion of the revolving debt facility in US dollars. Most revenue from operations in Mexico is denominated in US funds.



Interest Expense and Income

Three months ended Nine months ended
2008 2007 % 2008 2007 %
Sep 30 Sep 30 Change Sep 30 Sep 30 Change
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Interest expense 904 133 580 2,003 228 779
Interest income (6) (37) (84) (22) (634) (97)
Net interest expense (income) 898 96 835 1,981 (406) 588
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During 2008 3Q, Xtreme Coil continued to draw on the $70 million revolving credit facility as well as the $15 million operating line. We used the facilities primarily to complete the construction of additional drilling rigs which totalled 15 at September 30, 2008, as well as to provide cash for ongoing operating requirements.

Throughout most of the first nine months of 2007, Xtreme Coil had a cash surplus which generated interest income. During 2007 Q3, we commenced drawing on our debt facilities and incurring larger interest expenses. The use of credit facilities to fund Xtreme Coil's expanding fleet of drilling rigs has continued since 2007, supplemented by equity raised in 2008 2Q.



Net Income (Loss) Before Tax

Three months ended Nine months ended
2008 2007 % 2008 2007 %
Sep 30 Sep 30 Change Sep 30 Sep 30 Change
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Net income (loss) before tax 1,873 (1,846) 201 286 (4,057) 107
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For the three and nine month periods in 2008 3Q, Xtreme Coil recorded income before tax in contrast to a loss before tax. This was a result of increased gross margins.

The 2008 3Q income before tax, compared to 2008 2Q, reflects improved gross margin from higher activity levels.



Income Taxes

Three months ended Nine months ended
2008 2007 % 2008 2007 %
Sep 30 Sep 30 Change Sep 30 Sep 30 Change
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Income tax expense (recovery) 595 (508) 217 53 (1,058) 105
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For the three and nine months ended September 30, 2008, income tax expense was recorded, as a result of the income recorded in 2008 3Q. Losses in the comparable periods of 2007 resulted in a tax recovery.



Net Income (Loss)

Three months ended Nine months ended
2008 2007 % 2008 2007 %
Sep 30 Sep 30 Change Sep 30 Sep 30 Change
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Net income (loss) 1,278 (1,338) 196 233 (2,999) 108
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Financial Condition, Liquidity and Capital Resources

($ million) 2008 Sep 30 2007 Dec 31 % Change
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Cash balance (.9) 0.4 125
Working capital (deficit) 13.2 (10.0) 232
Long-term liabilities 52.9 30.0 77
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During 2008 3Q, Xtreme Coil made substantial investments for working capital requirements for Mexico. The most significant items included funding for rig mobilization expenses and the remittance of value-added tax ("VAT") payments to the government of Mexico for equipment imported into the country. While these VAT payments are refundable and included in accounts receivable, it could take several months to receive the funds.



Capital Expenditures and Commitments

Three months ended Nine months ended
2008 2007 % 2008 2007 %
($ million) Sep 30 Sep 30 Change Sep 30 Sep 30 Change
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Capital expenditures 21.8 20.3 7 47.9 81.2 (41)
Commitments 4.5 35.0 (87) 4.5 35.0 (87)
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In 2008 3Q, investment in fixed assets was required for continued construction of drilling rigs and to prepare rigs for deployment to Mexico. Xtreme Coil's rig build program increased in 2008 3Q from 2008 2Q when we secured additional financing.

Capital expenditure levels were similar for 2008 3Q and 2007 3Q. However, for the nine months ended September 30, 2008 capital expenditures were 41 percent lower than for the same period in 2007 due to a larger capital expenditures program during 2007.

For 2008 3Q, compared to 2008 2Q, capital expenditures increased to $21.8 million (2007 2Q - $15.1 million), and commitments reduced to $4.5 million (2007 2Q - $10.7 million). We exited the quarter with 15 rigs completed and early in 2008 4Q completed one more rig. To preserve cash for ongoing operations, we have interrupted Xtreme Coil's 2008 capital expenditures related to completing the two remaining drilling rigs to prudently manage our balance sheet.

Xtreme Coil will reinvest cash flow from operations to fund future capital requirements or to reduce debt.

During 2008 2Q, Xtreme Coil entered into an agreement for new credit facilities with our existing lender and another lender on a syndicated basis. The new credit facilities include a $15 million revolving operating line and a revolving extendible facility, initially at $70 million to be reduced to $60 million by December 31, 2008. The credit facilities require Xtreme Coil to maintain certain financial covenants. At September 30, 2008, Xtreme Coil was in compliance with the covenants.



This table summarizes Xtreme Coil's contractual obligations as at September
30, 2008.

Payments due by period

Less than 1 1 - 3 4 - 5
Contractual Obligations Total year years years
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Capital lease obligations 90 78 12 -
Operating leases 2,016 637 830 549
Revolving credit facility 58,188 - - 58,188
Commitments 4,500 4,500 - -
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Total contractual obligations 64,794 5,215 842 58,737
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In 2008 2Q, Xtreme Coil entered into an agreement for new credit facilities, extending the revolving facility until May 2009. Xtreme Coil's financial statements include an amount for current portion of long-term debt, representing the portion that would become due within one year if the bank did not renew the facility (see note 7). The above table is presented on the basis of the revolving facility being renewed.

Segmented Information

For the three and nine months ended September 30, this table summarizes results of operations for Xtreme Coil's three geographic operating segments of Canada, the United States and Mexico.



Three months ended
Three months ended 2008 Sep 30 2007 Sep 30
United United
Canada States Mexico Total Canada States Total
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Revenue 1,306 18,465 6,557 26,328 1,203 8,371 9,574
Operating days 74 818 55 943 71 327 398
Revenue (per day) 17.6 22.6 119.2 27.8 16.9 25.6 24.1
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Nine months ended
Nine months ended 2008 Sep 30 2007 Sep 30
United United
Canada States Mexico Total Canada States Total
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Revenue 3,783 38,850 6,557 49,190 2,781 16,998 19,779
Operating days 200 1,744 55 1,999 143 770 913
Revenue (per day) 18.9 22.3 119.2 24.6 19.4 22.1 21.7
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During 2008 3Q, Xtreme Coil commenced drilling operations in Mexico and transferred the two Canadian rigs to that region. This reduced expectations for 2008 3Q revenue from drilling operations in Canada. We anticipate opportunities in Mexico will exceed those that may have been possible in Canada and no revenue from drilling operations is expected for Canada in 2008 4Q. Included in 2008 3Q revenue is an amount earned for mobilizing most of the five rigs that were either in Mexico or in transit to Mexico on September 30, 2008.



Outstanding Common Shares

2008 Sep 30 2007 Dec 31 % Change
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Common shares, beginning of period 33,965,407 27,723,625 23
Private placement 5,872,896 5,360,000 11
Warrants exercised 666,666 666,667 -
Agent options exercised - 6,315 -
Options exercised 171,200 208,800 (95)
Options exercised under share buy-back
and cancelled (60,000) - -
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Common shares issued 6,650,762 6,241,782 7
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Common shares, end of period 40,616,169 33,965,407 20
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As at September 30, 2008, Xtreme Coil had outstanding 2,504,000 (2007 3Q - 1,964,200) options to purchase common shares at a weighted average exercise price of $5.89 per share (2007 3Q - $4.51).

In January 2008, the holder exercised 333,333 vested Series 1 Performance Warrants and 333,333 vested Series 2 Performance Warrants. After this transaction, no Series 1 or Series 2 Performance Warrants remain outstanding.

On May 1, 2008 Xtreme Coil and our joint venture partner completed a private placement pursuant to which our joint venture partner subscribed for 4,780,000 common shares of Xtreme Coil at a price of $7.32 per share for aggregate gross proceeds of $34,989,600.

In addition, Xtreme Coil completed the acquisition of the 49 percent interest held by our joint venture partner in Coil-X, including their outstanding loan to Coil-X, by the issuance of 1,092,896 common shares of Xtreme Coil at a price of $7.32 per common share, 1,000,000 purchase warrants and 700,000 performance warrants. Each whole warrant will entitle our joint venture partner (once vested in the case of the performance warrants) to purchase one common share of Xtreme Coil for $9.87 for a period of 24 months following the date of closing of the transaction.

Previously, the Coil-X joint venture partner held 2,092,574 warrants. On closing the purchase of the joint venture partner's interest, these warrants were cancelled.

Share capital on November 10, 2008 was $207.5 million (40,726,169 common shares). The aggregate effect of adding the previously described options and warrants would increase Xtreme Coil's outstanding common shares to 45,323,169.

Disclosure Controls and Procedures and Internal Controls over Financial Reporting

The Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") are responsible for establishing and maintaining disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR") for the company. In accordance with the requirements of Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, evaluations of the design and operating effectiveness of DC&P and the design effectiveness of ICFR were carried out under their supervision as of September 30, 2008.

Based on these evaluations, the CEO and CFO have concluded Xtreme Coil's DC&P are designed and operating effectively to provide reasonable assurance material information relating to the company, including its consolidated subsidiaries, is made known to them by others within those entities. They have also concluded Xtreme Coil's ICFR is designed effectively to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

No change to the company's internal control over financial reporting occurred during the most recent interim period that has materially affected, or is reasonably likely to materially affect, Xtreme Coil's ICFR.

Non-GAAP Measures

Xtreme Coil uses both GAAP and non-GAAP measures to assess performance and believes the non-GAAP measures provide useful supplemental information to investors. 'Operating days', 'utilization' 'gross margin' and 'EBITDA' do not have standardized meanings prescribed by GAAP. Xtreme Coil's method of calculating operating days, rig utilization, gross margin and EBITDA may differ from methods used by other companies and may not be comparable to measures used by others.

Operating Days

Operating days represent the total of all drilling, moving, standby and other revenue days in the period. Management uses operating days to measure rig utilization which quantifies the revenue-generating activity of the fleet of drilling rigs.

Rig Utilization

Xtreme Coil calculates rig utilization as operating days divided by total days after drilling rigs commence initial field operations.

Gross Margin

Gross margin represents the revenue minus operating expenses. Management believes that gross margin is a useful supplemental measure of the financial performance of our principal business activities before considering how activities are financed or taxed, as well as other expenses not closely associated with activity levels.

EBITDA

EBITDA is defined as earnings before interest, taxes, depreciation and amortization, stock-based compensation, foreign exchange gains or losses and gains or losses on sale of equipment. Management believes that EBITDA is a useful supplemental measure of the financial performance of Xtreme Coil's principal business activities before considering how activities are financed or taxed, and before the impact of stock-based compensation, foreign exchange rate fluctuations or sales of equipment.

Critical Accounting Policies and Estimates

Management has used accounting policies in the preparation of the accompanying unaudited interim consolidated financial statements consistent with those used in Xtreme Coil's 2007 audited annual consolidated financial statements and described in Note 2 therein, except for the changes in accounting policies described below.

The preparation of financial statements, in conformity with Canadian GAAP, requires management to make estimates and assumptions that affect the results of operation and financial position. By their nature, these judgments are subject to an inherent degree of uncertainty and are based on historical experience, trends in the industry and information available from outside sources. Management reviews these estimates on an ongoing basis. Different accounting policies, or changes to estimates or assumptions could potentially have a material effect, positive or negative, on Xtreme Coil's financial position and results of operations. Actual results could differ from those reported. There have been no material changes to critical accounting estimates as described in Xtreme Coil's 2007 annual report.

New accounting policies adopted

- Goodwill

Goodwill represents the excess of the purchase price over the fair value of the assets purchased. Goodwill is not subject to amortization but is tested for impairment at least annually by applying a fair value based test. Any goodwill impairment will be recognized as an expense if the carrying amount of the goodwill exceeds its fair value.

- Financial instruments - recognition and measurement

Long-term debt is recognized at fair value, net of transaction costs directly attributable to the issuance of the debt. Transaction costs capitalized as a portion of long-term debt will be amortized using the effective interest method over the life of the debt.

New accounting standards adopted

The Canadian Institute of Chartered Accountants (CICA) issued three new accounting standards: section 1535, Capital Disclosures; sections 3862 and 3863, Financial Instruments - Disclosures and Presentation; and section 3031, Inventories. Xtreme Coil adopted these new standards effective January 1, 2008.

Section 1535, Capital Disclosures, establishes disclosure requirements related to an entity's capital and how it is managed. The purpose is to enable users of financial statements to evaluate the entity's objectives, policies and processes for managing capital as further discussed in Note 12. This standard had no impact on the classification or measurement of Xtreme Coil's consolidated financial statements.

Sections 3862 and 3863, Financial Instruments - Disclosure and Presentation, revise and enhance disclosure requirements, and carrying forward, unchanged, presentation requirements. These new sections place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks as discussed further in Note 10. These standards had no impact on the classification or measurement of Xtreme Coil's consolidated financial statements.

Section 3031, Inventories provides more extensive guidance on measurement, and expands disclosure requirements to increase transparency. The new standard requires additional disclosures in relation to inventories carried at net realizable value, the amount of inventories recognized as an expense, and the amount of any write-downs of inventories. There was no impact on the valuation of Xtreme Coil's inventory as at January 1, 2008 or on the net income for current or prior periods. The reader is referred to Note 4.

New accounting pronouncements

In February 2008, the CICA approved Handbook Section 3064, Goodwill and Intangible Assets, replacing previous guidance. The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets subsequent to the initial recognition. This new standard is applicable to fiscal years after October 2008. Xtreme Coil will adopt this standard on January 1, 2009 and is evaluating disclosure and presentation requirements of the new standard.

Business Risks and Uncertainties

A number of risks and uncertainties affect Xtreme Coil's operations. Although Xtreme Coil can take actions to mitigate some of these risks, many are beyond our control. The risks discussed herein do not comprise an exhaustive list of all possible risks.

When significant assets were under construction and an aggressive building program was underway, Xtreme Coil was dependent on suppliers to deliver equipment on schedule and to meet required quality standards. Failure of suppliers in any aspect of the equipment building program severely impacted Xtreme Coil's planned expansion of operations and retention of customers. Issues of poor quality standards from suppliers can adversely affect Xtreme Coil while equipment is operating in terms of financial performance, reputation, and retention of customers.

Xtreme Coil accounts for, and reports all, activities in Canadian dollars. Certain contracts are denominated in United States dollars and Mexican pesos and the rates of exchange to the Canadian dollar fluctuate. This foreign exchange risk may create gains or losses which have an effect on Xtreme Coil's financial results.

Integral to Xtreme Coil's equipment are certain technologies which require proving in actual field operations. We cannot assure the effectiveness of these technologies in field operations. Competing technologies could prove more effective than those developed and used by Xtreme Coil. In addition, patents applied-for may not be issued.

Management's ability to expand contracted drilling and related services depends on attracting qualified personnel when needed. Demand is strong for highly skilled oilfield employees and supply is limited. Any unexpected loss of Xtreme Coil's key personnel, or inability to retain or recruit skilled personnel, could have an adverse effect on Xtreme Coil's business, results of operations and cash flows.

As Xtreme Coil has commenced operations in foreign countries, including the United States and Mexico, it is exposed to the economic and political policies and business environments of those countries.

In addition, demand for Xtreme Coil's coiled tubing drilling services is largely dependent on the level of oil and natural gas industry activity in North America. Numerous factors, over which Xtreme Coil has no control, influence industry activity including, but not limited to, changes in crude oil and natural gas prices, government legislation, regulatory and economic conditions, global political and military events, and international trade barriers or disputes, as well as fuel and environmental conservation.

Readers are referred to Xtreme Coil's Annual Information Form for additional discussion of risks and uncertainties.

Outlook

Xtreme Coil's business strategy focuses on expanding drilling operations. Our objective is to provide our E&P customers with the advantage of cost savings associated with generally faster drilling times achieved with coiled tubing. Xtreme Coil's leading-edge coiled tubing drilling technology has application to a broad spectrum of crude oil and natural gas exploration and development programs in the United States, Mexico, Canada and other oil producing regions of the world.

We continue to strengthen and extend Xtreme Coil's market applications as we prove our Coil Over Top Drive® drilling rigs can perform more efficiently and cost effectively for our E&P customers than conventional drilling rigs. Our new rigs are expanding the depth range of current coiled tubing drilling technology. We have designed Xtreme Coil's patented and patent-pending coiled tubing drilling rigs to drill with up to 3-1/2 inch coil to depths of up to 3,000 meters (approximately 10,000 feet) and 4,100 meters (approximately 14,000 feet) with jointed drill pipe. We have also had success in both vertical and directional drilling applications with coil, in both soft and hard formations.

During 2008 2Q and 3Q, we expanded marketing of long-term contracts for Xtreme Coil's drilling rigs beyond the United States and Canada by signing six new long-term contracts for drilling rigs for deployment to operations 365 days per year in Mexico. Further, Xtreme Coil signed a letter of intent with the same customer who intends to contract a seventh rig during 2009. Early in 2008 4Q, the sixth rig began moving to Mexico. Contract negotiations with existing and potential new customers are ongoing.

Since the close of 2008 3Q, Xtreme Coil has completed 16 Coil Over Top Drive® rigs. While we generally expect the improved operating results achieved in 2008 3Q to continue, some rigs may not maintain the strong utilization levels experienced in this period. Particularly in the United States, gaps in drilling activity may occur when certain rigs operate under shorter term contracts. Since two rigs from Canada were relocated to Mexico, we do not expect changes in the Canadian drilling market will directly impact Xtreme Coil's financial and operating results in the near future.

Current economic uncertainty involving credit and equity markets, volatile commodity prices and E&P capital programs, impact Xtreme Coil's activity levels. We are seeing signs of weaker drilling market conditions in the United States. In response we will continue to market the potential cost advantages of our COTD™ drilling rigs.

In 2008 4Q, we have temporarily suspended Xtreme Coil's rig construction program to conserve capital. As Xtreme Coil successfully negotiates new contracts, we are prepared to build additional Coil Over Top Drive® drilling rigs. We are actively pursuing global energy projects where contracts involving several of our rigs would have the potential to achieve high utilization and strong revenue.

Additional Information

Information relating to Xtreme Coil is available on SEDAR at www.sedar.com. To obtain copies of published corporate information, contact Xtreme Coil Drilling Corp., 1402, 500 Fourth Avenue SW, Calgary, AB T2P 2V6 (telephone +1 403.262 9500), visit Xtreme Coil's website www.xtremecoildrilling.com or e-mail ir@xtremecoil.com.



Consolidated Balance Sheets

($ thousand)

(unaudited) 2008 Sep 30 2007 Dec 31
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ - $ 383
Accounts receivable 34,591 13,039
Prepaid expenses 600 1,311
Inventory (note 4) 764 335
----------------------------------------------------------------------------
35,955 15,068

Future income tax 5,609 4,530

Equipment (note 5) 231,392 188,913

Intangible assets (note 6) 4,871 4,953
Goodwill (note 8 ) 1,630 --
----------------------------------------------------------------------------
$ 279,457 $ 213,464
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities
Bank indebtedness (note 7a) 948 -
Accounts payable and accrued liabilities 16,969 19,877
Current portion of obligations under capital
leases 78 78
Current portion of long-term debt (note 7b) 4,813 5,104
----------------------------------------------------------------------------
22,808 25,059
Long-term liabilities
Obligations under capital leases 12 73
Long-term debt, net of financing cost (note 7b) 52,944 29,896
----------------------------------------------------------------------------
75,764 55,028

Shareholders' Equity
Share capital (note 9) 207,132 162,514
Warrants (note 8 ) 1,630 1,235
Contributed surplus (note 9b) 3,077 3,066
Deficit (8,146) (8,379)
----------------------------------------------------------------------------
203,693 158,436
----------------------------------------------------------------------------

$ 279,457 $ 213,464
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Commitments (note 11)

See accompanying notes to the consolidated financial statements

On behalf of the board of directors,
Signed "Marc Staniloff" Signed "David Tuer"
Director Director



Consolidated Statements of
Operations, Comprehensive Income (Loss) and Deficit
($ thousand except share and per share data)

Three Months Three Months Nine Months Nine Months
ended ended ended ended
(unaudited) 2008 Sep 30 2007 Sep 30 2008 Sep 30 2007 Sep 30
----------------------------------------------------------------------------
Revenue $ 26,328 $ 9,574 $ 49,190 $ 19,779

Expenses
Operating expenses 18,178 9,053 35,705 18,240
Selling, general and
administrative 2,251 863 4,617 2,901
Depreciation of capital
assets 2,293 1,012 5,410 2,013
Amortization of
intangibles 68 65 202 170
Stock-based compensation 420 142 720 415
Foreign exchange loss (gain) 309 189 231 503
Loss on sale of equipment 38 - 38 -
Interest on long-term
debt and capital leases 904 133 2,003 228
Interest (income) (6) (37) (22) (634)
----------------------------------------------------------------------------
Net income (loss) before
tax 1,873 (1,846) 286 (4,057)
Future tax expense
(recovery) 595 (508) 53 (1,058)
----------------------------------------------------------------------------
Net income (loss) for
the period and
comprehensive income
(loss) 1,278 (1,338) 233 (2,999)
Deficit, beginning of
period (9,424) (6,837) (8,379) (5,176)
----------------------------------------------------------------------------
Deficit, end of period $ (8,146) (8,175) $ (8,146) (8,175)
----------------------------------------------------------------------------

Net income (loss) per
common share
- basic and diluted $ 0.03 $ (0.04) $ 0.01 $ (0.09)

Weighted average number
of common shares
- basic (note 9e) 40,559,647 33,797,554 37,859,072 32,699,437
Weighted average number
of common shares
- diluted (note 9e) 41,491,684 35,653,479 38,875,260 34,773,325

See accompanying notes to the consolidated financial statements



Consolidated Statement of Cash Flows
($ thousand)

Three Months Three Months Nine Months Nine Months
ended ended ended ended
(unaudited) 2008 Sep 30 2007 Sep 30 2008 Sep 30 2007 Sep 30
----------------------------------------------------------------------------
Cash provided by
(used in) operating
activities
Net income (loss) for
the period $ 1,278 $ (1,338) $ 233 $ (2,999)

Items not affecting
cash:
Depreciation and
amortization 2,361 1,059 5,612 2,163
Stock-based compensation 420 142 720 415
Loss on sale of equipment 38 - 38 -
Amortization of
financing cost 153 - 206 -
Unrealized foreign
exchange loss (gain) 294 136 294 198
Future income tax 595 (508) 53 (1,058)
----------------------------------------------------------------------------
5,139 (509) 7,156 (1,279)

Changes in non-cash
operating working
capital (21,952) 4,075 (22,023) (3,509)
----------------------------------------------------------------------------
(16,813) 4,584 (14,867) (4,788)
----------------------------------------------------------------------------
Financing activities
Proceeds from shares
issued - 627 35,030 56,942
Share issue costs (42) - (890) (3,440)
Proceeds from exercise
of stock options 300 - 300 -
Proceeds from other
long-term liabilities - 17,000 4,080 17,000
Proceeds from
long-term debt 24,337 - 22,757 -
Capital lease payments (21) (20) (61) (46)
----------------------------------------------------------------------------
24,574 17,607 61,216 70,456
----------------------------------------------------------------------------

Investing activities
Purchase of equipment (21,786) (20,263) (47,889) (81,209)
Proceeds from sale of
equipment to the
joint venture - - 5,873 -
Increase in intangibles (64) (105) (120) (187)
Changes in non-cash
working capital
relating to capital
items 3,525 (3,665) (5,544) 1,757
----------------------------------------------------------------------------
(18,325) (24,033) (47,680) (83,153)
----------------------------------------------------------------------------

Increase (decrease) in
cash and cash equivalents
during the period (10,564) (11,010) (1,331) (17,485)

Cash and cash equivalents,
beginning of period 9,616 $ 10,265 383 $ 16,740

----------------------------------------------------------------------------
Cash and cash equivalents
(bank indebtedness),
end of period $ (948) $ (745) $ (948) $ (745)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplemental disclosure
of cash flow information
Interest received $ 5 $ 54 $ 22 $ 646
Interest paid 434 133 1,481 227
Income tax paid - - - -

Non-cash transactions
Purchase of patents in
exchange for warrants - - - $ 2,990
Issuance of shares for
joint venture purchase;
repayment of joint
venture loan - - 8,000 -

See accompanying notes to the consolidated financial statements


Contact Information

  • Xtreme Coil Drilling Corp.
    Tom Wood
    Chairman and Chief Executive Officer
    (403) 262-9500
    (403) 262-9522 (FAX)
    or
    Xtreme Coil Drilling Corp.
    Rod Uchytil
    President
    (403) 262-9500
    (403) 262-9522 (FAX)
    or
    Xtreme Coil Drilling Corp.
    1402, 500 Fourth Avenue SW
    Calgary, Alberta T2P 2V6
    Email: ir@xtremecoil.com
    Website: www.xtremecoildrilling.com