Overview

Cathedral Energy Services completed the first quarter of 2009 with quarterly revenues of $31,368 compared with first quarter of 2008 at $46,253. The first quarter of 2009 revenues was lead by Cathedral Energy Services’ directional drilling division which represented 65% (first quarter of 2008- 75%) of first quarter 2009 revenues. The decline in drilling in the oil and gas sector because of low commodity prices and the overall decline in the economy have resulted in a significant decline in revenues as compared to first quarter of 2008, when Cathedral Energy Services achieved record quarterly revenues. Cathedral Energy Services’ production testing and wire line divisions continue to be negatively affected by the decline in natural gas drilling in western Canada.

The first quarter of 2009 EBITDAS was $6,237 ($0.19 per diluted trust unit) which represents a $9,158 or 59% decrease from $15,395 ($0.48 per diluted trust unit) in 2008. Cathedral Energy Services’ net income for first quarter of 2009 was $1,404 (2008 – $9,917) or $0.04 (2008 – $0.31) per diluted trust unit.

The first quarter of 2009 revenues were $31,368 which represented a decrease of $14,885 or 32% from first quarter of 2008 revenues of $46,253. The decline is primarily attributed to the decline in oil and natural gas activity in 2009 which has been caused by low commodity prices and the global recession.

The directional drilling division revenues have decreased from $34,523 in 2008 to $20,349 in 2009. This decrease is the net result of: i) the 52% decrease in activity days from 4,005 in 2008 to 1,929 in 2009; and ii) the increase in the average day rate from $8,419 in 2008 to $10,253 in 2009, which was due in large part to the increase in US rates because of the decrease in the Canadian dollar compared with 2008 Q1. On a year-to-date basis Canadian activity days decreased from 2,500 to 1,129 and the US activity days decreased from 1,505 to 800.

Expansion to the US resulted in increased revenues for Cathedral Energy Services’ production testing division. Cathedral Energy Services’ production testing division contributed $6,180 in revenues during first quarter of 2009 which is a 49% increase over 2008 revenues of $4,150. The wire line division has been affected the most by the decline in oil and natural gas activity. The wire line division generated revenues of $4,839 for first quarter of 2009 which compares with $7,580 for 2008 which represents a 36% decrease.

The gross margin for first quarter of 2009 was 45% compared to 49% in first quarter of 2008. The decrease is attributed to a number of factors including quarter-over-quarter increases in directional field labor rates and increased equipment repairs.

Labor costs as a percentage revenue increased, in spite of decreases in directional drilling labor rates which went into effect during first quarter of 2009, because of the overall change in revenue mix as wire line and production testing revenues as a percentage of total revenues has increased. These divisions have historically had higher labor costs. In the current quarter the US directional drilling division incurred higher repair costs than one year ago.

In addition, due to the fall off in the level of activity some annual maintenance was started in first quarter of 2009. This did not begin until the spring break up in second quarter of 2008.

General and administrative expenses

General and administrative expenses were $7,765 in first quarter of 2009; an increase of $334 compared with $7,431 in 2008. The increase was primarily related to increased personnel and office/shop rental costs as well as costs associated with establishing international business opportunities. As a percentage of revenues, general and administrative expenses were 25% in first quarter of 2009 and 16% in first quarter of 2008. Recognizing the expected lower activity levels, Cathedral Energy Services has taken several initiatives to improve operating results and further strengthen its balance sheet. Cathedral Energy Services’ operating entities are undertaking a detailed review of all operating costs and general and administrative expenditures and have initiated cost reductions to enhance profitability including layoff of staff and wage rollbacks ranging from 4 – 12%.

Depreciation and amortization

Depreciation for first quarter of 2009 was $3,833 which compares to $2,851 in first quarter of 2008. This increase is due to the increase in capital in the drilling and production testing divisions as compared with first quarter of 2008, because of the expansion of the equipment fleet in second quarter of 2008 to fourth quarter of 2008 and in part due to the US expansion. As a percentage of revenues, depreciation amounted to 12% for 2009 and 6% for 2008.

Interest expense

Interest expense related to long-term debt increased from $276 in first quarter of 2008 to $372 in first quarter of 2009 because of the combined net effect of: i) an increase in the average level of debt outstanding; and ii) a decrease in the effective interest rate on the related debt. Other interest expense, which increased marginally on a quarter-over-quarter basis from $99 in first quarter of 2008 to $115 in first quarter of 2009, relates mainly to interest charges on use by Cathedral Energy Services of its bank indebtedness/line of credit facility.

Foreign exchange gain/loss

Cathedral Energy Services’ foreign exchange gain/loss has changed from a $33 gain in first quarter of 2008 to a loss of $639 in first quarter of 2009 because of the fluctuations in the Canadian dollar. Upon consolidation Cathedral Energy Services’ foreign operations are considered to be self-sustaining and therefore gains and losses due to fluctuations in the foreign currency exchange rates are recorded in other comprehensive income (OCI) on the balance sheet as a component of equity. However, gains and losses in the Canadian entity on US denominated inter company balances continue to be recognized in the statement of income. Included in the first quarter of 2009 foreign currency loss are unrealized losses of $548 related to inter company balances.

Unit-based compensation expense

For first quarter of 2009 Cathedral Energy Services had unit-based compensation expense of $277 which compares to $579 for first quarter of 2008. The value of the options is being amortized against income over the three-year vesting period.

Gain on disposal of property and equipment

During first quarter of 2009 Cathedral Energy Services had a gain on disposal of property and equipment of $720, which compares to $226 in first quarter of 2008. Cathedral Energy Services’ gains are mainly due to recoveries of lost-in-hole equipment costs including previously expensed depreciation on the related assets. The timing of lost-in-hole recoveries is not in the control of Cathedral Energy Services and therefore can fluctuate significantly from quarter-to-quarter.

Taxes

For first quarter of 2009, Cathedral Energy Services had a tax expense of $351 (effective tax rate of 20%) as compared to $1,772 (effective tax rate of 15.2%) in first quarter of 2008. At the beginning of first quarter of 2009 Cathedral Energy Services’ US subsidiary sold the majority of its operating assets to Cathedral Energy Services’ Canadian operating entity, Cathedral Energy Services Limited Partnership, as part of an internal reorganization related to ownership of operating assets within Cathedral Energy Services. This transaction created a one-time current tax expense in the amount of $4,168 (current taxable income was created mainly due to US recaptured tax depreciation) and a recovery of future taxes in the amount of $3,210; for a net tax cost of $958. Subsequent to this transaction, Cathedral Energy Services’ US subsidiary leases the majority of its operating equipment from Cathedral Energy Services Limited Partnership.