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CATHEDRAL ENERGY SERVICES LTD. REPORTS RESULTS FOR 2010 Q3 AND 2010 Q4 DIVIDEND

Canada NewsWire
Venezuela
Nov 3, 2010
6:00am

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, Nov. 3 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) is pleased to report its results for 2010 Q3 and 2010 Q4 dividend. Dollars are in '000's except for day rates and per share amounts.

    <<
    FINANCIAL HIGHLIGHTS
    $ in 000's except per share amounts

                                     Three months ended    Nine months ended
                                           September 30         September 30
                                     -------------------  -------------------
                                         2010      2009       2010      2009
    -------------------------------------------------------------------------
    Revenues (excluding discontinued
     operations 2010 YTD - $2,359;
     2009 YTD - $10,465)             $ 38,864  $ 20,176   $ 98,519  $ 57,359

    Gross margin %(1)                     47%       51%        46%       49%

    EBITDAS from continuing
     operations(1)                   $ 11,775  $  5,586   $ 25,999  $ 13,408
      Per share - diluted            $   0.32  $   0.15   $   0.71  $   0.39

    EBITDAS (1)                      $ 11,967  $  5,724   $ 24,861  $ 10,788
      Per share - diluted            $   0.33  $   0.16   $   0.68  $   0.31

    Income before taxes and
     discontinued operations         $  8,459  $  3,992   $ 15,811  $  6,361

    Net income                       $  7,056  $  3,125   $ 10,353  $  3,045
      Basic per share and diluted    $   0.19  $   0.09   $   0.28  $   0.09

    Dividends declared per share     $   0.06  $   0.04   $   0.18  $   0.31

    Property and equipment additions $  8,701  $  1,333   $ 24,929  $  7,309

    Weighted average shares
     outstanding:
      Basic ('000)                     36,423    36,198     36,411    34,370
      Diluted ('000)                   36,578    36,198     36,741    34,370

                                                         September  December
                                                           30 2010   31 2009
    -------------------------------------------------------------------------

    Working capital                                       $ 15,717  $ 22,451

    Long-term debt excluding current portion              $ 34,508  $ 39,526

    Shareholders' equity                                  $103,012  $ 97,422
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Refer to MD&A; see "NON-GAAP MEASUREMENTS"
    >>

MANAGEMENT'S DISCUSSION & ANALYSIS

This Management's Discussion & Analysis ("MD&A") for the three and nine months ended September 30, 2010 should be read in conjunction with the annual audited consolidated financial statements and notes thereto for the year ended December 31, 2009, as well as the MD&A in the 2009 Annual Report of Cathedral Energy Services Ltd. (the "Company" / "Cathedral"). This MD&A has been prepared as of November 2, 2010. Dollar amounts are in '000's except for day rates and per share amounts.

FORWARD LOOKING STATEMENTS

This MD&A contains certain forward-looking statements and forward-looking information (collectively referred to herein as "forward-looking statements") within the meaning of applicable Canadian securities laws. All statements other than statements of present or historical fact are forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "anticipate", "achieve", "believe", "plan", "intend", "objective", "continuous", "ongoing", "estimate", "outlook", "expect", "may", "will", "project", "should" or similar words suggesting future outcomes. In particular, this MD&A contains forward-looking statements relating to: access to capital; projected capital expenditures and commitments and the financing thereof; equipment delivery and deployment dates; establishment of new operating bases; customer commitments; financial results; activity levels; technology advances; IFRS adjustments; commencement of Venezuela operations and dividends. The Company believes the expectations reflected in such forward-looking statements are reasonable as of the date hereof but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon.

Various material factors and assumptions are typically applied in drawing conclusions or making the forecasts or projections set out in forward-looking statements. Those material factors and assumptions are based on information currently available to the Company, including information obtained from third party industry analysts and other third party sources. In some instances, material assumptions and material factors are presented elsewhere in this MD&A in connection with the forward-looking statements. You are cautioned that the following list of material factors and assumptions is not exhaustive. Specific material factors and assumptions include, but are not limited to:

    <<
    -   the performance of the Company's businesses, including current
        business and economic trends;
    -   oil and natural gas commodity prices and production levels;
    -   capital expenditure programs and other expenditures by the Company
        and its customers;
    -   the ability of the Company to retain and hire qualified personnel;
    -   the ability of the Company to obtain parts, consumables, equipment,
        technology, and supplies in a timely manner to carry out its
        activities;
    -   the ability of the Company to maintain good working relationships
        with key suppliers;
    -   the ability of the Company to market its services successfully to
        existing and new customers;
    -   the ability of the Company to obtain timely financing on acceptable
        terms;
    -   currency exchange and interest rates;
    -   risks associated with foreign operations including Venezuela;
    -   the ability of the Company to realize the benefit of its conversion
        from an income trust to a corporation;
    -   risks associated with the formation of Cathedral's joint venture
        company in Venezuela which is required prior to commencement of
        Venezuela operations, some of which are out of the control of
        Cathedral;
    -   risks associated with Venezuela joint venture company being awarded
        work by the Venezuela state run oil and natural gas corporation;
    -   changes under governmental regulatory regimes and tax, environmental
        and other laws in Canada, United States and Venezuela; and
    -   a stable competitive environment.
    >>

Forward-looking statements are not a guarantee of future performance and involve a number of risks and uncertainties some of which are described herein. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause the Company's actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the risks identified in this MD&A and in the Company's Annual Information Form under the heading "Risk Factors". Any forward-looking statements are made as of the date hereof and, except as required by law, the Company assumes no obligation to publicly update or revise such statements to reflect new information, subsequent or otherwise.

All forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement. Further information about the factors affecting forward-looking statements is available in the Company's current Annual Information Form and Annual Report which have been filed with Canadian provincial securities commissions and are available on www.sedar.com.

NON-GAAP MEASUREMENTS

This MD&A refers to certain financial measurements that do not have any standardized meaning within Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may not be comparable to similar measures provided by other companies.

The specific measures being referred to include the following:

    <<
    i)     "Gross margin" - calculated as revenues less operating expenses is
           considered a primary indicator of operating performance (see
           tabular calculation under Results of Operations);
    ii)    "Gross margin %" - calculated as gross margin divided by revenues
           is considered a primary indicator of operating performance (see
           tabular calculation under Results of Operations);
    iii)   "EBITDAS" - defined as earnings before interest on long-term debt,
           taxes, depreciation, non-cash compensation expense and unrealized
           foreign exchange gain/loss; this measure is considered an
           indicator of the Company's ability to generate funds flow from
           operations prior to consideration of how activities are financed,
           how the results are taxed and measured and non-cash expenses. The
           definition of EBITDAS was changed in 2009 Q2 to adjust for
           unrealized foreign exchange gain/loss. Comparative amounts
           presented have been restated to the new calculation (see tabular
           calculation under EBITDAS);
    iv)    "EBITDAS from continuing operations" - defined as earnings before
           interest on long-term debt, taxes, depreciation, non-cash
           compensation expense and unrealized foreign exchange gain/loss
           excluding the portion due from discontinued operations in each
           component of the calculation;
    v)     "EBITDAS from discontinued operations" - defined as earnings
           before interest on long-term debt, taxes, depreciation, non-cash
           compensation expense and unrealized foreign exchange gain/loss
           from discontinued operations of the Company's former wireline
           division in each component of the calculation;
    vi)    "Maintenance capital expenditures" - refers to capital
           expenditures required to maintain existing levels of service but
           excludes replacement cost of lost-in-hole equipment to the extent
           the replacement equipment is financed from the proceeds on
           disposal of the equipment lost-in-hole; and
    vii)   "Funds from continuing operations" - calculated as cash flow from
           continuing operating activities before changes in non-cash working
           capital is considered an indicator of the Company's ability to
           generate funds flow from operations but excluding changes in non-
           cash working capital which is financed using the Company's bank
           indebtedness/line of credit facility.
    >>

OVERVIEW

The Company is incorporated under the Business Corporations Act (Alberta) (the "Act"). The Company was created as a result of the conversion of Cathedral Energy Services Income Trust (the "Trust") to a corporation pursuant to a Plan of Arrangement under the Act, entered into by various entities including the Trust, Cathedral Energy Services Ltd. and SemBioSys Genetics Inc. (the "Reorganization"). The Reorganization was completed on December 18, 2009 (see 2009 Annual Report for further details). As a result of the application of the continuity of interests method of accounting, certain terms such as shareholders'/unitholders', dividends/distributions and share-based/unit-based may be used interchangeably throughout this MD&A.

In 2010 Q1, the Company made the decision to discontinue its operations of the wireline division. On March 31, 2010, it closed its Canadian slickline operations and on April 20, 2010 completed the sale of its U.S. wireline operations. As such, for the three and nine months ended September 30, 2010 the revenues and expenses for the wireline business have been included in the statements of operations and retained earnings and statements of cash flows as discontinued operations and the related assets are classified as held for sale in the balance sheet. The 2009 figures have been reclassified to be consistent with this presentation.

On April 20, 2010, the Company closed the sale of its U.S. based electric wireline business to Pure Energy Services Ltd. ("Pure") in exchange for the operating assets of Pure's Motorworks division and $2,112 cash. The Motorworks division includes 58 drilling motors, 23 drilling jars, spare mud motor power sections and shop equipment valued at $4,980. The assets of the Motorworks operations are being utilized in Cathedral's directional drilling business, and the net sale proceeds were used to reduce bank indebtedness.

The Company completed 2010 Q3 with quarterly revenues of $38,864 and year-to-date revenues of $98,519 compared to 2009 Q3 revenues of $20,176 and 2009 year-to-date revenues of $57,359. Year-to-date revenues have increased 72% from 2009. The 2010 Q3 revenues were comprised of 78% (2009 Q3 - 83%) from the directional drilling division and 22% (2009 Q3 - 17%) from the production testing division.

2010 Q3 EBITDAS was $11,967 ($0.33 per share diluted) which represents a $6,243 or 109% increase from 2009 Q3 EBITDAS of $5,724 ($0.16 per share diluted). For the three months ended September 30, 2010, the Company's net income was $7,056 ($0.19 per share diluted) as compared to a $3,125 ($0.09 per share diluted) in 2009.

2010 year-to-date EBITDAS was $24,861 ($0.68 per share diluted) which represents a $14,073 or 130% increase from $10,788 ($0.31 per share diluted) in 2009. On a 2010 year-to-date basis, the Company's net income was $10,353 ($0.28 per share diluted) as compared to a $3,045 ($0.09 per share diluted) in 2009.

    <<
    RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2010
    Revenues and operating expenses

                                 2010 Q3     2009 Q3      Change           %
    -------------------------------------------------------------------------
    Revenues                   $  38,864   $  20,176   $  18,688          93
    Operating expenses            20,605       9,864      10,741         109
    -------------------------------------------------------------------------

    Gross margin - $           $  18,259   $  10,312   $   7,947          77
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Gross margin - %                 47%         51%         (4%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                            Three months ended            Three months ended
                            September 30, 2010            September 30, 2009
    -------------------------------------------------------------------------
                   Direct-   Produc-             Direct-   Produc-
                    ional      tion               ional      tion
    Revenues      drilling   testing     Total  drilling   testing     Total
    -------------------------------------------------------------------------

    Canada        $ 19,314  $  4,075  $ 23,389  $ 11,836  $  1,495  $ 13,331
    United
     States         10,835     4,640    15,475     4,863     1,982     6,845

    -------------------------------------------------------------------------
                  $ 30,149  $  8,715  $ 38,864  $ 16,699  $  3,477  $ 20,176
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    >>

2010 Q3 revenues were $38,864 which represented an increase of $18,688 or 93% from 2009 Q3 revenues of $20,176. The increase is primarily attributed to the focus on horizontal, multi-stage fracturing technology to complete conventional and unconventional resource plays in both Canada and the U.S. which has allowed for continued strength in activity levels for the oilfield services sector.

The directional drilling division revenues have increased from $16,699 in 2009 to $30,149 in 2010. This increase is mainly the result of: i) a 78% increase in activity days from 1,874 in 2009 to 3,339 in 2010; and ii) a slight increase in the average day rate from $8,754 in 2009 to $8,897 in 2010. Canadian activity days increase from 1,372 to 2,179 and U.S. activity days increased from 502 to 1,160.

The Company's production testing division contributed $8,715 in revenues during 2010 Q3 which is a 151% increase over 2009 revenues of $3,477. This increase is attributable in part to the year-over-year increase in production testing units from 35 in 2009 Q3 to 51 in 2010 Q3 and to the overall increase in oilfield service activities on a year-over-year basis.

The gross margin for 2010 Q3 was 47% compared to 51% in 2009 Q3. The decrease is attributed to a number of factors including increases in labour rates net of reductions in repair expenses.

General and administrative General and administrative expenses were $7,935 in 2010 Q3, an increase of $3,395 compared with $4,540 in 2009. The increase was primarily related to increases in payroll related expenses and facility rental costs as well as other general increases due to increased activity levels. As a percentage of revenues, general and administrative expenses were 20% in 2010 Q3 and 23% in 2009 Q3.

Depreciation Depreciation for 2010 Q3 was $2,894 as compared to $2,622 in 2009 Q3. This increase is due to additions to property and equipment. In addition, the Company reviewed its estimate of useful lives of assets as at January 1, 2010 and adjusted its declining balance depreciation rates accordingly (refer to note 1 to the interim financial statements for the three and nine months ended September 30, 2010). As a percentage of revenues, depreciation amounted to 7% for 2010 and 13% for 2009.

Interest Interest expense related to long-term debt increased from $297 in 2009 Q3 to $350 in 2010 Q3 due to a slight increase in effective interest rates. Other interest expense increased from $51 in 2009 Q3 to $122 in 2010 Q3; this relates mainly to interest charges on use by the Company of its bank indebtedness/line of credit facility.

Foreign exchange gain/loss The Company's foreign exchange gain was $1,404 in 2009 Q3 compared to $778 in 2010 Q3 due to the fluctuations in the Canadian dollar in comparison to the U.S. dollar. Upon consolidation, the Company's 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 U.S. denominated intercompany balances continue to be recognized in the statement of operations. Included in the 2010 Q3 foreign currency gains are unrealized losses of $603 related to intercompany balances as compared to unrealized losses of $1,525 in the same period in 2009.

Share-based compensation For 2010 Q3 the Company had share-based compensation expense of $675 as compared to $200 for 2009 Q3. The increase is mainly due to options issued during 2010, which are amortized against income over three-year vesting periods.

Gain on disposal of property and equipment During 2010 Q3 the Company had a gain on disposal of property and equipment of $1,398, compared to a loss of $14 in 2009 Q3. The Company's 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 the Company and therefore can fluctuate significantly from quarter-to-quarter.

Taxes For 2010 Q3, the Company had a tax expense of $1,319 as compared to $275 in 2009 Q3. All of the Company's current taxes are due to taxable income of its U.S. operations. All of the Company's Canadian taxable income was reduced to $nil due to the utilization of tax pools and tax loss carry-forwards. The Company's future tax provision for the utilization of these pools was offset by a $1,062 decrease in the Company's deferred credit.

    <<
    RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2010
    Revenues and operating expenses

                                      2010 YTD  2009 YTD    Change         %
    -------------------------------------------------------------------------

    Revenues                          $ 98,519  $ 57,359  $ 41,160        72
    Operating expenses                  52,820    29,043    23,777        82
    -------------------------------------------------------------------------

    Gross margin - $                  $ 45,699  $ 28,316  $ 17,383        61
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Gross margin - %                       46%       49%       (3%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                             Nine months ended             Nine months ended
                            September 30, 2010            September 30, 2009
    -------------------------------------------------------------------------
                    Direct-   Produc-             Direct-   Produc-
                     ional      tion               ional      tion
    Revenues      drilling   testing     Total  drilling   testing     Total
    -------------------------------------------------------------------------

    Canada        $ 45,416  $ 11,812  $ 57,228  $ 26,001  $  5,530  $ 31,531
    United States   29,812    11,434    41,246    19,713     6,115    25,828
    International       45         -        45         -         -         -

    -------------------------------------------------------------------------
                  $ 75,273  $ 23,246  $ 98,519  $ 45,714  $ 11,645  $ 57,359
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    >>

2010 revenues were $98,519 which represented an increase of $41,160 or 72% from 2009 revenues of $57,359. The increase is primarily attributed to the focus on horizontal, multi-stage fracturing technology to complete conventional and unconventional resource plays in both Canada and the U.S. which has allowed for continued strength in activity levels for the oilfield services sector.

The directional drilling division revenues have increased from $45,714 in 2009 to $75,273 in 2010 or 65%. This increase is mainly the net result of: i) an 85% increase in activity days from 4,636 in 2009 to 8,555 in 2010; and ii) a decrease in the average day rate from $9,634 in 2009 to $8,635 in 2010, which was due in large part to the strength of the Canadian dollar in 2010 compared with 2009. Overall day rates have declined on a year-over-year basis due to market pressures. Canadian activity days increased from 2,855 to 5,359 and U.S. activity days increased from 1,781 to 3,196.

The Company's production testing division contributed $23,246 in revenues during 2010 which is a 100% increase over 2009 revenues of $11,645. This increase is attributable in part to the year-over-year increase in production testing units from 35 in 2009 Q3 to 51 in 2010 Q3 and to the overall increase in oilfield service activities on a year-over-year basis.

The gross margin for 2010 was 46% compared to 49% in 2009. The decrease is attributed to a number of factors including increases in labour and rental expense for auxiliary and specialty equipment.

General and administrative General and administrative expenses were $22,062 in 2010, an increase of $6,945 compared with $15,117 in 2009. The increase was primarily related to increases in payroll related expenses and facility rental costs as well as other general increases due to increased activity levels. As a percentage of revenues, general and administrative expenses were 22% in 2010 and 26% in 2009.

Depreciation Depreciation for 2010 was $7,488 as compared to $8,523 in 2009. This decrease is due to in part the declining balance depreciation method used by the Company and is expected as its assets get older. In addition, the Company reviewed its estimate of useful lives of assets as at January 1, 2010 and adjusted its declining balance depreciation rates accordingly (refer to note 1 to the interim financial statements for the three and nine months ended September 30, 2010). Despite additional capital expenditures in the year the previous factors resulted in a decrease in depreciation. As a percentage of revenues, depreciation amounted to 8% for 2010 and 15% for 2009.

Interest Interest expense related to long-term debt increased from $962 in 2009 to $964 in 2010 due to a slight increase in interest rates. Other interest expense increased from $214 in 2009 to $306 in 2010; this relates mainly to interest charges on use by the Company of its bank indebtedness/line of credit facility.

Foreign exchange gain/loss The Company's foreign exchange gain was $2,838 in 2009 compared to $346 in 2010 due to the fluctuations in the Canadian dollar in comparison to the U.S. dollar. Upon consolidation, the Company's 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 OCI on the balance sheet as a component of equity. However, gains and losses in the Canadian entity on U.S. denominated intercompany balances continue to be recognized in the statement of operations. Included in the 2010 foreign currency gain are unrealized losses of $284 related to intercompany balances as compared to unrealized gains of $3,178 in the same period in 2009.

Share-based compensation expense For 2010, the Company had share-based compensation expense of $2,020 as compared to $740 for 2009. The increase is mainly due to options issued during 2010, which are amortized against income over three-year vesting periods.

Gain on disposal of property and equipment During 2010 the Company had a gain on disposal of property and equipment of $2,606, as compared to $763 in 2009. The Company's 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 the Company and therefore can fluctuate significantly from quarter-to-quarter.

Taxes For 2010, the Company had a tax expense of $2,790 as compared to tax recovery of $502 in 2009. All of the 2010 year-to-date current income tax provision of $978 (2009 - $5,195) relates to the Company's U.S. operations. All of the Company's Canadian taxable income was reduced to $nil due to the utilization of tax pools and tax loss carry-forwards. The Company's future tax provision for the utilization of these pools was offset by a $1,617 decrease in the Company's deferred credit.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal source of liquidity is cash generated from operations. The Company also has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. At September 30, 2010, the Company had an operating line of credit with a major Canadian bank in the amount of $20,000 (December 31, 2009 - $20,000) of which $14,273 (December 31, 2009 - $2,181) was drawn. In addition, the Company has a non-reducing revolving term loan facility in the amount of $45,000 (December 31, 2009 - $45,000) of which $34,500 was drawn as at September 30, 2010 (December 31, 2009 - $39,500). In addition, at September 30, 2010, the Company had other long-term debt of $50 (December 31, 2009 - $234).

Operating activities Cash flow from (used in) operating activities for the three and nine months ended September 30, 2010 was $2,463 and $14,118 as compared to ($5,085) and $16,389 in the same periods in 2009. Funds from continuing operations (see Non-GAAP Measurements) for 2010 were $9,783 and $21,451 as compared to $4,979 and $6,488 in 2009. This increase was caused mainly by an increase in earnings due to increased activity levels. The Company has a working capital position at September 30, 2010 of $15,717 as compared to $22,451 at December 31, 2009. During 2010 Q2, the Company used excess cash/working capital to reduce its term loan by $5,000.

Investing activities Cash used in investing activities for the three and nine months ended September 30, 2010 amounted to $7,555 and $15,923 as compared to $1,382 and $9,620 for the same periods in 2009. During the three and nine months ended 2010, the Company invested a total of $8,701 and $24,929 (2009 - $1,333 and $7,309) in property and equipment with the main additions for the nine months ended September 30, 2010 being 3 pulse Measurement-While-Drilling ("MWD") systems, resistivity logging while drilling ("LWD") equipment, 16 production testing units (including 9 production testing units acquired from a private company), production testing auxiliary equipment and $4,473 of maintenance capital, which was mainly related to the retrofit and upgrades to downhole tools. These additions do not include the $4,980 of directional drilling assets acquired in the asset swap with Pure during 2010 Q2. The Company received a total of $2,798 and $9,233 from the sale of property and equipment for the three and nine months ended September 30, 2010 (2009 - $800 and $2,426); excluding $4,980 of wireline equipment disposed of in the asset swap with Pure during 2010 Q2. At September 30, 2010, the Company's operating entities had 100 MWD systems and 51 production testing units.

Financing activities Cash provided by (used in) financing activities for the three and nine months ended September 30, 2010 amounted to $4,679 and $2,754 as compared to $2,754 and ($12,741) for the same periods in 2009. The Company repaid long-term debt of $24 and $5,184 during the three and nine months ended September 30, 2010 (2009 - $48 and $5,154). Advances on (repayments of) bank indebtedness during the three and nine months ended September 30, 2010 were $6,718 and $12,091 (2009 - $5,705 and ($9,701)). During the three and nine months ended September 30, 2010 the Company paid dividends of $2,185 and $4,369 (2009 - $2,903 and $13,206). During the three and nine months ended September 30, 2010 the Company received proceeds for the exercise of stock options of $170 and 216 (2009 - $nil).

As at September 30, 2010, the Company was in compliance with all covenants under its credit facility. At November 2, 2010, the Company had 36,557,991 shares and 3,218,605 options outstanding.

Contractual obligations In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's MD&A for the year ended December 31, 2009. As at September 30, 2010, the Company has a commitment to purchase approximately $4,543 of property and equipment and this amount is expected to be paid or payable by December 31, 2010.

UPDATED 2010 CAPITAL PROGRAM

For 2010, the Board of Directors of the Company has approved an updated capital budget of $36,504. Included in the 2010 capital budget is approximately $7,303 for maintenance capital and $1,200 allocated to the new head office and operations centre located in Calgary, which was purchased in 2008. The maintenance capital expenditures include retro-fits and upgrades to downhole tools. The balance of the 2010 capital program relates mainly to the purchase and integration of resistivity LWD equipment, 9 pulse MWD systems (6 of which are retrievable and "hot-hole" rated) , 4 Electro-Magnetic MWD systems, and 21 high pressure production testing units (including 9 units acquired from a private company). These capital expenditures are expected to be financed by way of cash flow from operations, proceeds on the disposal of wireline and other property and equipment and the Company's credit facility. At December 31, 2010, the Company expects to have 110 MWD systems and 56 production testing units.

2011 CAPITAL PROGRAM

For 2011, the Board of Directors of the Company has approved a capital budget of $24,853 including approximately $2,000 for maintenance capital and $3,300 allocated to the Calgary head office and operations centre. The 2011 capital budget also includes the purchase of 20 MWD systems, an expansion to the overall mud motor, drill collar and gap sub fleet to complement the increased directional drilling job capability and $2,000 in auxiliary production testing equipment. These capital expenditures are expected to be financed by way of cash flow from operations, proceeds on the disposal of wireline and other property and equipment and the Company's credit facility.

DIVIDENDS

It is the intent of the Company to pay quarterly dividends to shareholders. The Board of Directors will review the amount of dividends on a quarterly basis with due consideration to current performance, historical and future trends in the business, the expected sustainability of those trends and enacted tax legislation which will affect future taxes payable as well as required long-term debt repayments, maintenance capital expenditures required to sustain performance and future growth capital expenditures. The Directors have approved a 2010 Q4 dividend in the amount of $0.06 per share which will have a date of record of December 31, 2010 and a payment date of January 17, 2011.

CONTROLS AND PROCEDURES

Management is responsible for establishing and maintaining adequate disclosure controls and internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with GAAP. Internal control over financial reporting may not prevent or detect fraud or misstatements because of limitations inherent in any system of internal control. There were no significant changes in the design or effectiveness of the Company's disclosure controls or internal controls over financial reporting in the third quarter of 2010.

NEW ACCOUNTING POLICIES

In February, 2008, the CICA confirmed that the use of International Financial Reporting Standards ("IFRS") will be required in Canada for publicly accountable profit oriented enterprises for fiscal years beginning on or after January 1, 2011. The Company will be required to report using IFRS beginning January 1, 2011.

The Company's IFRS project plan has four phases: education, analysis, design and implementation and testing. The Company is continuing the process of education for all levels of the organization and has completed the analysis phase during which it identified specific significant differences between Canadian GAAP ("CGAPP") and IFRS. The Company is in the design phase in which it is determining its policies and procedures for IFRS. This phase will be completed and the Company will move into the implementation and testing phase in 2010 Q4.

The Company is in the process of revising and finalizing accounting policy choices and financial statement formats which will be vetted by the Company's external auditors and Audit Committee. During 2010 Q4, the Company anticipates completion of this process and to quantify the impact of any changes.

Based upon work completed to date, the Company has determined that IFRS may have a significant impact on share-based compensation, the deferred credit and the valuation of goodwill.

Under IFRS, IFRS 1 allows for certain optional adjustments upon first time adoption of IFRS. The Company intends on re-valuing its wireline assets as at January 1, 2010 to fair value; the Company has not finalized the impact of this change. In addition, the Company intends to adjust its accumulated other comprehensive loss to $nil as at January 1, 2010. The net result of these adjustments will be offset to retained earnings as at January 1, 2010.

Under CGAAP, the Company has one reporting unit for testing the value of goodwill. Under IFRS, goodwill has to be allocated to cash generating units ("CGU"), which is the lowest level of asset grouping which generates independent cash inflows. Goodwill is tested for impairment at the CGU level. The Company is in the process of finalizing what its CGUs will be under IFRS and once this has been approved, it will perform a test of impairment as at January 1, 2010. As at January 1, 2010, the Company had a goodwill balance of $19,775 of which $13,927 originated from the purchase of its discontinued wireline operations, $4,224 originated from the purchase of its production testing operations and the remaining $1,624 relates to its directional drilling operations. As at January 1, 2010, the Company expects that the value of the goodwill on the discontinued wireline division will be $nil under IFRS with the offset to opening retained earnings.

Under CGAAP, the Company recognized a deferred credit as a result of the conversion of Cathedral Energy Services Income Trust to a corporation pursuant to a Plan of Arrangement under the Act, entered into by various entities including the Trust, Cathedral Energy Services Ltd. and SemBioSys Genetics Inc. As at January 1, 2010, the Company expects that the value of the deferred credit which was $20,514 under CGAAP to be $nil under IFRS, with the offset to opening retained earnings.

The Company is also in process of finalizing treatment of its automotive leases, which are currently classified as operating leases. In addition, the Company anticipates that its policies with respect to financial statement presentation and various other items will change as a result of adopting IFRS. The areas impacted by IFRS discussed above should not be regarded as a comprehensive list of changes that will result from the transition to IFRS. The impact of IFRS on the consolidated financial statements is not quantifiable at this time.

BUSINESS RISKS

The MD&A for the year ended December 31, 2009, which is included in the Company's 2009 Annual Report, includes an overview on business risks associated with the Company and its operating entities. Those business risks remain in effect as at September 30, 2010 as well as the following additional risks related to the Company's process to establish operations in Venezuela: 1) risk associated with the formation of Cathedral's joint venture company which is required prior to commencement of Venezuela operations, some of which is out of the control of Cathedral; and 2) risk associated with the joint venture company being awarded work from the Venezuela state run oil and natural gas corporation.

EBITDAS

EBITDAS (refer to Non-GAAP Measurements) is calculated as follows:

    <<
                                    Three months ended     Nine months ended
                                          September 30          September 30
                                   -------------------   --------------------
                                       2010       2009       2010       2009
    -------------------------------------------------------------------------

    Income from continuing
     operations                    $  7,140   $  3,717   $ 13,021   $  6,863
    Add (deduct):
      Depreciation                    2,894      2,622      7,488      8,523
      Interest - long-term debt         350        297        964        962
      Share-based compensation          675        200      2,020        740
      Unrealized exchange gain         (603)    (1,525)      (284)    (3,178)
      Taxes (recovery)                1,319        275      2,790       (502)

    -------------------------------------------------------------------------
    EBITDAS from continuing
     operations                      11,775      5,586     25,999     13,408

    EBITDAS from discontinued
     operations                         192        138     (1,138)    (2,620)

    -------------------------------------------------------------------------
    EBITDAS                        $ 11,967   $  5,724   $ 24,861   $ 10,788
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    SUMMARY OF QUARTERLY RESULTS

    -------------------------------------------------------------------------
    Three month period ended            Sep        Jun        Mar        Dec
                                       2010       2010       2010       2009
    -------------------------------------------------------------------------
    Revenues(1)                    $ 38,864   $ 23,979   $ 35,676   $ 24,740
    EBITDAS                          11,967      2,415     10,479      5,864
    Net income (loss)                 7,056     (3,440)     6,737      2,236
    Net income (loss) per share
     - basic                           0.19      (0.09)      0.19       0.06
    Net income (loss) per share
     - diluted                         0.19      (0.09)      0.18       0.06
    Dividends declared per share       0.06       0.06       0.06          -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    Three month period ended            Sep        Jun        Mar        Dec
                                       2009       2009       2008       2008
    -------------------------------------------------------------------------
    Revenues(1)                    $ 20,176   $ 10,654   $ 26,529   $ 43,514
    EBITDAS                           5,724     (1,721)     6,785     13,554
    Net income (loss)                 3,125     (1,484)     1,404      9,737
    Net income (loss) per share
     - basic                           0.09      (0.04)      0.04       0.30
    Net income (loss) per share
     - diluted                         0.09      (0.04)      0.04       0.30
    Dividends declared per share       0.04       0.12       0.15       0.21
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Revenue for has been restated to exclude discontinued operations,
        consistent with 2010 Q1 presentation.
    >>

OUTLOOK

With the tremendous amount of activity focusing on horizontal, multi-stage fracturing to complete conventional and unconventional resource plays across North America, Cathedral continues to expand its service lines by way of geographic diversification. The Company has opened an operations/repair facility in Houston, Texas and is currently transferring directional drilling equipment to this location and it is expected to be servicing equipment in this facility in late 2010 Q4. Key staffing positions are currently being filled and work has been initiated in the Haynesville and Eagleford plays.

In the Canadian directional drilling market, we expect to have a strong fourth quarter and bookings for 2011 Q1 has been very robust. Demand is expected to be driven by both oil and liquids-rich natural gas plays. To accommodate the increased activity levels Cathedral continues its program to add new equipment and to train field personnel.

Cathedral is in the process of retro-fitting the production testing units acquired in the recently announced acquisition of assets. We expect to have these units operational during 2010 Q4 and integrating these units into our fleet with 6 added in Canada and 3 in the U.S. Four high pressure production testing units are currently working in the Marcellus region in northeast U.S. for a major oil and natural gas producer and two additional high pressure units are being completed and will be operational in 2010 Q4.

Cathedral will continue to invest in resources - personnel and technology - to expand its offering of technologies to penetrate new markets as well as expand markets in which it operates. The Company continues to focus research and development spending on its MWD platform system to allow the MWD systems to drill deeper with the most efficient technologies and expects to introduce additional enhancements in the near term.

Cathedral along with its Venezuela joint venture partner, PDVSA Servicios Petroleros, S.A., a wholly-owned subsidiary of Petróleos de Venezuela S.A. ("PDVSA"), the state-owned oil and natural gas corporation of the Bolivarian Republic of Venezuela, continues with the process of incorporating the joint venture company, Vencana Servicios Petroleros, S.A. ("Vencana"), and setting up directional drilling operations in Venezuela. Cathedral expects Vencana to be operating during 2011 Q1.

    <<
    CONSOLIDATED BALANCE SHEETS
    Dollars in '000's
    (unaudited)

                                                   September 30  December 31
                                                           2010         2009
    -------------------------------------------------------------------------
    Assets

    Current assets:
      Cash and cash equivalents                     $     1,435  $       491
      Accounts receivable                                37,370       27,727
      Income taxes receivable                             2,603        2,550
      Inventory                                           7,451        5,389
      Prepaid expenses and deposits                       1,780        1,629
      Assets held for sale                                    -          740
    -------------------------------------------------------------------------
                                                         50,639       38,526
    Property and equipment                               97,812       77,425

    Assets held for sale                                  3,776       14,027

    Future income taxes                                  20,664       23,491

    Intangibles                                               -          293

    Goodwill                                             18,448       19,775

    -------------------------------------------------------------------------
                                                    $   191,339  $   173,537
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Shareholders' Equity

    Current liabilities:
      Bank indebtedness                             $    14,273  $     2,181
      Accounts payable and accrued liabilities           18,420       13,686
      Dividends payable                                   2,187            -
      Current portion of long-term debt                      42          208
    -------------------------------------------------------------------------
                                                         34,922       16,075

    Long-term debt                                       34,508       39,526

    Deferred credit                                      18,897       20,514

    -------------------------------------------------------------------------
                                                         88,327       76,115
    -------------------------------------------------------------------------

    Shareholders' equity:
      Share capital                                      69,272       68,995
      Contributed surplus                                 6,349        4,390
      Retained earnings                                  29,801       26,004
      Accumulated other comprehensive loss               (2,410)      (1,967)

    -------------------------------------------------------------------------
                                                        103,012       97,422
    -------------------------------------------------------------------------
                                                    $   191,339  $   173,537
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
    Dollars in 000's except per share amounts
    (unaudited)

                                    Three months ended     Nine months ended
                                          September 30          September 30
                                   -------------------   --------------------
                                       2010       2009       2010       2009
    -------------------------------------------------------------------------
    Revenues                       $ 38,864   $ 20,176   $ 98,519   $ 57,359
    -------------------------------------------------------------------------

    Expenses:
      Operating                      20,605      9,864     52,820     29,043
      General and administrative      7,935      4,540     22,062     15,117
      Depreciation                    2,894      2,622      7,488      8,523
      Interest - long-term debt         350        297        964        962
      Interest - other                  122         51        306        214
      Foreign exchange gain            (778)    (1,404)      (346)    (2,838)
      Share-based compensation          675        200      2,020        740

    -------------------------------------------------------------------------
                                     31,803     16,170     85,314     51,761
    -------------------------------------------------------------------------

                                      7,061      4,006     13,205      5,598

    Gain (loss) on disposal of
     property and equipment           1,398        (14)     2,606        763
    -------------------------------------------------------------------------
    Income before taxes and
     discontinued operations          8,459      3,992     15,811      6,361
    -------------------------------------------------------------------------

    Taxes:
      Current                           244        324        978      5,195
      Future (recovery)               1,075        (49)     1,812     (5,697)
    -------------------------------------------------------------------------
                                      1,319        275      2,790       (502)
    -------------------------------------------------------------------------

    Income from continuing operations 7,140      3,717     13,021      6,863

    Loss from discontinued operations,
     net of tax                         (84)      (592)    (2,668)    (3,818)

    -------------------------------------------------------------------------
    Net income                        7,056      3,125     10,353      3,045

    Retained earnings, beginning of
     period                          24,932     22,010     26,004     31,559

    Dividends                        (2,187)    (1,456)    (6,556)   (10,925)

    -------------------------------------------------------------------------
    Retained earnings, end of
     period                        $ 29,801   $ 23,679   $ 29,801   $ 23,679
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Income from continuing
     operations per share:
      Basic and diluted            $   0.20   $   0.10   $   0.36   $   0.20
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Loss from discontinued
     operations per share:
      Basic and diluted            $  (0.01)  $  (0.01)  $  (0.07)  $  (0.11)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net income per share:
      Basic and diluted            $   0.19   $   0.09   $   0.28   $   0.09
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED
    OTHER COMPREHENSIVE LOSS
    Dollars in 000's
    (unaudited)

                                    Three months ended     Nine months ended
                                          September 30          September 30
                                   -------------------   --------------------
                                       2010       2009       2010       2009
    -------------------------------------------------------------------------

    Net income                     $  7,056   $  3,125   $ 10,353   $  3,045
    Other comprehensive loss:
       Unrealized foreign exchange
        loss on translation of
        self-sustaining foreign
        operations                     (876)    (2,485)      (443)    (4,601)
    -------------------------------------------------------------------------
    Comprehensive income (loss)
     for the period                $  6,180   $    640   $  9,910   $ (1,556)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Accumulated other comprehensive
     income (loss), beginning of
     period                        $ (1,534)  $  1,210   $ (1,967)  $  3,326
      Other comprehensive loss         (876)    (2,485)      (443)    (4,601)

    -------------------------------------------------------------------------
    Accumulated other comprehensive
     loss, end of period           $ (2,410)  $ (1,275)  $ (2,410)  $ (1,275)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    CONSOLIDATED STATEMENTS OF CASH FLOWS
    Dollars in 000's
    (unaudited)

                                    Three months ended     Nine months ended
                                          September 30          September 30
                                   -------------------   --------------------
                                       2010       2009       2010       2009
    -------------------------------------------------------------------------
    Cash provided by (used in):

    Operating activities:
    Income from continuing
     operations                    $  7,140   $  3,717   $ 13,021   $  6,863
    Items not involving cash:
      Depreciation                    2,894      2,622      7,488      8,523
      Future taxes (recovery)         1,075        (49)     1,812     (5,697)
      Unrealized foreign exchange
       gain                            (603)    (1,525)      (284)    (3,178)
      Share-based compensation          675        200      2,020        740
      (Gain) loss on disposal of
       property and equipment        (1,398)        14     (2,606)      (763)
    -------------------------------------------------------------------------
    Cash flow from continuing
     operations                       9,783      4,979     21,451      6,488
    Cash flow from discontinued
     operations                        (186)       225     (1,765)    (1,099)
    Changes in non-cash operating
     working capital                 (7,134)   (10,289)    (5,568)    11,000

    -------------------------------------------------------------------------
                                      2,463     (5,085)    14,118     16,389
    -------------------------------------------------------------------------

    Investing activities:
      Property and equipment
       additions from continuing
       operations                    (8,625)    (1,161)   (24,758)    (6,921)
      Property and equipment
       additions from discontinued
       operations                       (76)      (172)      (171)      (388)
      Proceeds on disposal of
       property and equipment from
       continuing operations          1,986          4      3,732      1,426
      Proceeds on disposal of
       property and equipment held
       for sale from discontinued
       operations                       812        796      5,501      1,000
      Changes in non-cash investing
       working capital               (1,652)      (849)      (227)    (4,737)

    -------------------------------------------------------------------------
                                     (7,555)    (1,382)   (15,923)    (9,620)
    -------------------------------------------------------------------------

    Financing activities:
      Proceeds on shares issued
       for cash, net of issuance
       costs                              -          -          -     13,820
      Dividends paid                 (2,185)    (2,903)    (4,369)   (13,206)
      Repayment of long-term debt       (24)       (48)    (5,184)    (5,154)
      Advances under long-term debt       -          -          -      1,500
      Proceeds on exercise of options   170          -        216          -
      Change in bank indebtedness     6,718      5,705     12,091     (9,701)

    -------------------------------------------------------------------------
                                      4,679      2,754      2,754    (12,741)
    -------------------------------------------------------------------------

    Effect of exchange rate on
     changes in cash and cash
     equivalents                         (9)      (384)        (5)      (383)
    -------------------------------------------------------------------------

    Change in cash and cash
     equivalents                       (422)    (4,097)       944     (6,355)
    Cash and cash equivalents,
     beginning of period              1,857      5,293        491      7,551

    -------------------------------------------------------------------------
    Cash and cash equivalents, end
     of period                     $  1,435   $  1,196   $  1,435   $  1,196
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    >>

Cathedral Energy Services Ltd. (the "Company"/"Cathedral") and its wholly owned subsidiary, Cathedral Energy Services Inc., are engaged in the business of providing selected oilfield services to oil and natural gas companies in western Canada and selected oil and natural gas basins in the United States. The Company is in the process of establishing operations in Venezuela for providing directional drilling services through its wholly owned subsidiaries Directional Plus International Ltd. and Directional Plus de Venezuela, C.A. The Company's operating activities are divided into directional drilling and production testing business units. The Company's shares trade on the TSX under the symbol: CET. For more information, visit www.cathedralenergyservices.com.

%SEDAR: 00000484E

For further information: Mark L. Bentsen, President and Chief Executive Officer or P. Scott MacFarlane, Chief Financial Officer, Cathedral Energy Services Ltd., 1700, 715 - 5th Avenue S.W., Calgary, Alberta, T2P 2X6, Telephone: 403.265.2560, Fax: 403.262.4682, www.cathedralenergyservices.com


Cathedral opens a 36,000 square foot full service operation facility in Oklahoma City, Oklahoma and Estevan, Saskatchewan operations migrate to Emerald Park, Saskatchewan.