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Cathedral Energy Services reports results for the three months ended March 31, 2009

May 14, 2009
4:35pm

    /NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

    CALGARY, May 14 /CNW/ - Cathedral Energy Services Income Trust (the
"Trust"/TSX: CET.UN) is pleased to report its results for the three months
ended March 31, 2009. Dollars are in '000's except for day rates and per Trust
Unit amounts.

    FINANCIAL HIGHLIGHTS

    Dollars in 000's except per Trust Unit amounts

                                                 Three months ended March 31
                                                           2009         2008
    -------------------------------------------------------------------------

    Revenues                                          $  31,368    $  46,253

    Gross margin %(1)                                       45%          49%

    EBITDAS(1)                                        $   6,237    $  15,395
      Per Trust Unit - diluted                        $    0.19    $    0.48

    Income before taxes                               $   1,755    $  11,689

    Net income                                        $   1,404    $   9,917
      Basic per Trust Unit                            $    0.04    $    0.31
      Diluted per Trust Unit                          $    0.04    $    0.31

    Cash distributions declared per Trust Unit        $    0.15    $    0.21

    Distributable cash(1), net of one-time
     2009 Q1 current tax provision of $4,168
     (refer to MD&A)                                  $   2,347    $  13,113

    Adjusted distributable cash(1), excluding one-
     time 2009 Q1 current tax provision of $4,168     $   6,515    $  13,113

    Cash distributions declared(2)                    $   4,887    $   6,669

    Payout ratio(1), net of one-time 2009 Q1
     current tax provision of $4,168                       208%          51%

    Adjusted payout ratio(1), excluding one-time
     2009 Q1 current tax provision of $4,168                75%          51%

    Property and equipment additions                  $   4,137    $   3,960

    Weighted average Trust Units outstanding:
      Basic ('000)                                       32,582       31,707
      Diluted ('000)                                     32,582       32,054
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                       March 31  December 31
                                                           2009         2008
    -------------------------------------------------------------------------

    Working capital                                   $  14,031    $  17,435

    Long-term debt excluding current portion          $  41,677    $  40,233

    Unitholders' equity                               $  89,725    $  91,859
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Refer to MD&A; see "NON-GAAP MEASUREMENTS"
    (2) Excludes foreign taxes paid that have been allocated to Unitholders

    MANAGEMENT'S DISCUSSION & ANALYSIS

    This Management's Discussion & Analysis ("MD&A") for the three months
ended March 31, 2009 should be read in conjunction with the annual audited
consolidated financial statements and notes thereto for the year ended
December 31, 2008, as well as the MD&A in the Trust's 2008 Annual Report. This
MD&A has been prepared as of May 14, 2009. Dollar amounts are in '000's except
for day rates and per Trust Unit amounts.

    FORWARD-LOOKING INFORMATION

    Certain statements in this MD&A including (i) statements that may contain
words such as "anticipate", "could", "expect", "seek", "may" "intend", "will",
"believe", "should", "project", "forecast", "plan" and similar expressions,
including the negatives thereof, (ii) statements that are based on current
expectations and estimates about the markets in which the Trust/Cathedral
operates and (iii) statements of belief, intentions and expectations about
developments, results and events that will or may occur in the future,
constitute "forward-looking statements" and are based on certain assumptions
and analysis made by the Trust/Cathedral. Forward-looking statements in this
MD&A specifically include, but are not limited to, statements with respect to
future capital expenditures, including the amount, nature and timing thereof;
oil and natural gas prices and demand; other development trends within the oil
and natural gas industry; business strategy; expansion and growth of the
Trust/Cathedral's business and operations including the Trust/Cathedral's
market share and position in the oilfield service market; and other such
matters.
    The forward-looking statements contained in this MD&A reflect several
material factors, expectations and assumptions including, without limitation:
(i) oil and natural gas production levels; (ii) commodity prices and interest
rates; (iii) capital expenditure programs and other expenditures by the
Trust/Cathedral and its customers; (iv) supply and demand for oil and natural
gas; (v) expectations regarding the Trust's/Cathedral's ability to raise
capital, generate cash flow and to increase its equipment fleets through
acquisitions and manufacture; (vi) schedules and timing of certain projects
and the Trust's/Cathedral's strategy for growth; (vii) the Trust's/Cathedral's
future operating and financial results; (viii) the Trust's/Cathedral's ability
to retain and hire qualified personnel; and (ix) treatment under governmental
regulatory regimes and tax, environmental and other laws.
    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 that such financial
outlook information contained in this MD&A and certain documents incorporated
by reference into this MD&A should not be used for purposes other than for
which it is disclosed herein.
    Such forward-looking statements are subject to important risks and
uncertainties, which are difficult to predict and that may affect the
Trust/Cathedral's operations, including, but not limited to: the impact of
general economic conditions in Canada, the United States and Internationally;
industry conditions, including the adoption of new environmental, safety and
other laws and regulations and changes in how they are interpreted and
enforced; volatility of oil and natural gas prices; oil and natural gas
product supply and demand; risks inherent in the Trust/Cathedral's ability to
generate sufficient cash flow from operations to meet its current and future
obligations; increased competition; the lack of availability of qualified
personnel or labour unrest; fluctuation in foreign exchange or interest rates;
foreign currency controls; stock market volatility; opportunities available to
or pursued by the Trust/Cathedral and other factors, many of which are beyond
the control of the Trust/Cathedral. The Trust's/Cathedral's actual results,
performance or achievements could differ materially from those expressed in,
or implied by, these forward-looking statements and, accordingly, no assurance
can be given that any of the events anticipated by the forward-looking
statements will transpire or occur, or if any of them do transpire or occur,
what benefits the Trust/Cathedral will derive therefrom. Subject to applicable
law, the Trust/Cathedral disclaims any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
    All forward-looking statements contained in this document are expressly
qualified by this cautionary statement. Further information about the factors
affecting forward-looking statements is available in the Trust/Cathedral's
current Annual Information Form which has been filed with the applicable
Canadian provincial securities commissions and is 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 and/or trusts.

    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, amortization and Unit-based compensation
         expense; this measure is considered an indicator of the Trust'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 (see tabular calculation
         under EBITDAS);

    iv)  "Distributable cash" - defined as cash flow from operating
         activities before changes in non-cash operating working capital less
         required principal repayments on long-term debt and maintenance
         capital expenditures; distributable cash is a key performance
         measurement used by management, analysts and investors to evaluate
         the financial performance of the Trust (see tabular calculation
         under Distributions);

    v)   "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;

    vi)  "Payout ratio" - calculated as cash distributions divided by
         distributable cash, is an indicator of the Trust's ability to fund
         its distributions from the Trust's ongoing operations excluding
         changes in non-cash working capital (see tabular calculation under
         Distributions) (see distributable cash definition above); and

    vii) "Funds from operations" - calculated as cash flow from operating
         activities before changes in non-cash working capital is considered
         an indicator of the Trust's ability to generate funds flow from
         operations but excluding changes in non-cash working capital which
         is financed using the Trust's bank indebtedness/line of credit
         facility.

    OVERVIEW

    The Trust completed the first quarter of 2009 with quarterly revenues of
$31,368 compared to 2008 Q1 at $46,253. The 2009 Q1 revenues were lead by the
Trust's directional drilling division which represented 65% (2008 Q1- 75%) of
2009 Q1 revenues. The decline in drilling in the oil and gas sector due to low
commodity prices and the overall decline in the economy have resulted in a
significant decline in revenues as compared to 2008 Q1, when the Trust
achieved record quarterly revenues. The Trust's production testing and
wireline divisions continue to be negatively affected by the decline in
natural gas drilling in western Canada.
    2009 Q1 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. The Trust's net income for 2009 Q1 was $1,404 (2008 - $9,917)
or $0.04 (2008 - $0.31) per diluted Trust Unit.

    RESULTS OF OPERATIONS

    Revenues and operating expenses

                                    2009 Q1    2008 Q1     Change          %
    -------------------------------------------------------------------------
    Revenues                      $  31,368  $  46,253  $ (14,885)       (32)
    Operating expenses              (17,332)   (23,587)    (6,255)       (27)
    -------------------------------------------------------------------------
    Gross margin - $              $  14,036  $  22,666  $  (8,630)       (38)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Gross margin - %                    45%        49%       (4)%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                           Three months ended March 31, 2009
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                     drilling(1)  Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $  10,793  $   3,969  $   3,725  $  18,487
    United States                     9,556        870      2,455     12,881
    -------------------------------------------------------------------------
                                  $  20,349  $   4,839  $   6,180  $  31,368
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                           Three months ended March 31, 2008
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                     drilling(1)  Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $  22,511  $   6,217  $   4,150  $  32,878
    United States                    12,012      1,363          -     13,375
    -------------------------------------------------------------------------
                                  $  34,523  $   7,580  $   4,150  $  46,253
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Including rental of related equipment

    2009 Q1 revenues were $31,368 which represented a decrease of $14,885 or
32% from 2008 Q1 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 U.S. rates due to the decline 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 U.S. activity days
decreased from 1,505 to 800.
    Expansion to the U.S. resulted in increased revenues for the Trust's
production testing division. The Trust's production testing division
contributed $6,180 in revenues during 2009 Q1 which is a 49% increase over
2008 revenues of $4,150. The wireline division has been affected the most by
the decline in oil and natural gas activity. The wireline division generated
revenues of $4,839 for 2009 Q1 which compares to $7,580 for 2008 which
represents a 36% decrease.
    The gross margin for 2009 Q1 was 45% compared to 49% in 2008 Q1. The
decrease is attributed to a number of factors including quarter-over-quarter
increases in directional field labour rates and increased equipment repairs.
Labour costs as a percentage revenue increased, in spite of decreases in
directional drilling labour rates which went into effect during 2009 Q1, due
to the overall change in revenue mix as wireline and production testing
revenues as a percentage of total revenues has increased. These divisions have
historically had higher labour costs. In the current quarter the U.S.
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 Q1. This did not begin until the spring break up in
Q2 of 2008.

    General and administrative expenses

    General and administrative expenses were $7,765 in 2009 Q1; 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 2009 Q1 and 16% in
2008 Q1. Recognizing the expected lower activity levels, the Trust has taken
several initiatives to improve operating results and further strengthen its
balance sheet. The Trust's 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 2009 Q1 was $3,833 which compares to $2,851 in 2008 Q1.
This increase is due to the increase in capital in the drilling and production
testing divisions as compared with 2008 Q1, due to the expansion of the
equipment fleet in 2008 Q2 to Q4 and in part due to the U.S. 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 2008 Q1
to $372 in 2009 Q1 due to 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 2008 Q1 to $115 in 2009
Q1, relates mainly to interest charges on use by the Trust of its bank
indebtedness/line of credit facility.

    Foreign exchange gain/loss

    The Trust's foreign exchange gain/loss has changed from a $33 gain in
2008 Q1 to a loss of $639 in 2009 Q1 due to the fluctuations in the Canadian
dollar. Upon consolidation the Trust'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 US denominated intercompany balances continue
to be recognized in the statement of income. Included in the 2009 Q1 foreign
currency loss are unrealized losses of $548 related to intercompany balances.

    Unit-based compensation expense

    For 2009 Q1 the Trust had unit-based compensation expense of $277 which
compares to $579 for 2008 Q1. The value of the options is being amortized
against income over the three-year vesting period.

    Gain on disposal of property and equipment

    During 2009 Q1 the Trust had a gain on disposal of property and equipment
of $720, which compares to $226 in 2008 Q1. The Trust'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 Trust and therefore can fluctuate significantly from
quarter-to-quarter.

    Taxes

    For 2009 Q1, the Trust had a tax expense of $351 (effective tax rate of
20%) as compared to $1,772 (effective tax rate of 15.2%) in 2008 Q1. At the
beginning of 2009 Q1 the Trust's U.S. subsidiary sold the majority of its
operating assets to the Trust's Canadian operating entity, Cathedral Energy
Services Limited Partnership, as part of an internal reorganization related to
ownership of operating assets within the Trust. This transaction created a
one-time current tax expense in the amount of $4,168 (current taxable income
was created mainly due to U.S. 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, the Trust's U.S. subsidiary leases the majority of its
operating equipment from Cathedral Energy Services Limited Partnership.
Excluding the one-time tax effect of this inter-company sale of assets the
Trust had a tax recovery of $607 which relates to a change in effective tax
rates.

    LIQUIDITY AND CAPITAL RESOURCES

    The Trust's principal source of liquidity is cash generated from
operations. The Trust also has the ability to fund liquidity requirements
through its credit facility and the issuance of debt and/or equity. At March
31, 2009, the Trust had an operating line of credit with a major Canadian bank
in the amount of $20,000 (December 31, 2008 - $20,000) of which $8,440
(December 31, 2008 - $15,406) was drawn. In addition, the Trust has a
non-reducing revolving term loan facility in the amount of $45,000 (December
31, 2008 - $45,000) of which $41,500 (December 31, 2008 - $40,000) was drawn
as at March 31, 2009. In addition, at March 31, 2009, the Trust had other
long-term debt of $385 (December 31, 2008 - $440).

    Operating activities

    Cash flow from operating activities for the three months ended March 31,
2009 increased from $6,882 in 2008 to $12,304, an increase of $5,422 or 79%.
Funds from operations (see Non-GAAP Measurements) for 2009 were $2,543 which
compares to $13,299 for 2008, a decrease of $10,756. This decrease was caused
mainly by a reduction on earnings due to reduced activity levels as well as a
one-time current tax expense on the transfer of assets discussed above. The
Trust has a working capital position at March 31, 2009 at $14,031 which
compares to $17,435 at December 31, 2008.

    Investing activities

    Cash used in investing activities for the three months ended March 31,
2009 amounted to $5,335 which compares to $3,510 for the same period in 2008.
During 2009 Q1 the Trust invested an additional $4,137 (2008 - $3,960) in
property and equipment with the main additions being for the acquisition of 4
production testing units. The Trust's initial 2009 capital budget (including
$3.6 million deferred from 2008) was for a total of $20.6 million. In light of
the expected lower activity levels for 2009, management has significantly
reduced its capital budget. The revised 2009 capital expenditure program is
$8,800 including approximately $500 of maintenance capital. At March 31, 2009,
the Trust's operating entities had 98 MWD systems, 33 production testing units
and 28 wireline units.

    Financing activities

    Cash used by financing activities for the quarter ended March 31, 2009
amounted to $11,386 which compares to $2,205 in 2008 Q1. During 2009 Q1, the
Trust received advances of long-term debt in the amount of $1,500 (2008 -
$47). Repayments of other long-term debt in 2009 Q1 amounted to $55 (2008 -
$75). Repayments of bank indebtedness for 2009 Q1 were $6,966 (2008 - advance
of $3,340). As at March 31, 2009, the Trust was in compliance with all
covenants under its credit facility. During 2009 Q1 the Trust received cash
inflows of $Nil (2008 - $1,133) on the exercise of Trust Unit options. At May
14, 2009, the Trust had 32,582,022 Trust Units and 2,940,763 Trust Unit
options outstanding.
    Distributions paid to Unitholders for 2009 Q1 totaled to $5,865 (2008 -
$6,650). The quarter-over-quarter decrease is mainly the result of reducing
the Trust's "regular" monthly distribution from $0.07 per Trust Unit where it
had been since September 2006 to $0.04 per Trust Unit commencing in February
2009. Cash distributions paid have been financed from cash flow from
operations and bank indebtedness. Management currently expects cash
distributions for 2009 (on an annualized basis) will also be financed from
cash flow from operations.

    Contractual obligations

    In the normal course of business, the Trust incurs contractual
obligations and those obligations are disclosed in the Trust's MD&A for the
year ended December 31, 2008. As at March 31, 2009, the Trust has a commitment
to purchase approximately $1,128 of property and equipment.

    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 Trust's disclosure
controls or internal controls over financial reporting in the first quarter of
2009.

    NEW ACCOUNTING POLICIES

    Effective January 1, 2009, the Trust adopted the Canadian Institute of
Chartered Accountants ("CICA") section 3064, Goodwill and Intangible Assets
and amendments to Section 1000, Financial Statement Concepts. These standards
have been adopted prospectively. For the three months ended March 31, 2009,
the adoption of these standards did not have an effect on the Trust's results,
financial position or cash flows.

    BUSINESS RISKS

    The MD&A for the year ended December 31, 2008, which is included in the
Trust's 2008 Annual Report, includes an overview on business risks associated
with the Trust and its operating entities. Those business risks remain in
effect as at March 31, 2009.

    EBITDAS

    EBITDAS (refer to Non-GAAP Measurements) is calculated as follows:
    -------------------------------------------------------------------------
                                                          Three months ended
                                                                    March 31
                                                           2009         2008
    -------------------------------------------------------------------------
    EBITDAS as reported                               $   6,237    $  15,395
    Deduct: - depreciation and amortization              (3,833)      (2,851)
            - interest - long-term debt                    (372)        (276)
            - unit-based compensation expense              (277)        (579)
            - provision for taxes                          (351)      (1,772)
    -------------------------------------------------------------------------
    Net income                                        $   1,404    $   9,917
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    DISTRIBUTIONS

    The Administrator of the Trust reviews the level and nature of
distributions (cash, in-kind or a combination of cash and in-kind) on an
on-going basis giving 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. Despite the
seasonality of the Trust's business, it is the Trust's policy to pay
consistent distributions throughout the year. The Trust's operations in
western Canada are subject to seasonality as activity levels in the oilfield
services industry are generally lower during "spring breakup" which normally
commences in late March and continues through to May (mainly in the Q2 of the
fiscal year). The net result of the Trust's policy to pay consistent
distributions throughout the year despite the seasonality of its operations is
that in Q2 cash distributions declared may exceed net income, cash flow from
operating activities and/or distributable cash for the quarter.
    Distributable cash is a supplemental non-GAAP measurement that management
considers a key measure in demonstrating the Trust's ability to generate the
cash necessary to pay distributions, fund future capital investments and the
repayment of long-term debt. Distributable cash as presented is not intended
to represent operating profit for the period nor should it be viewed as an
alternative to operating profit, net income or other measures of financial
performance calculated in accordance with Canadian GAAP. Distributable cash
does not have any standardized meaning within Canadian GAAP and therefore may
not be comparable to similar measures presented by other trusts (refer to
Non-GAAP Measurements).
    The Trust intends to pay cash distributions to Unitholders but the
payment of cash distributions cannot be guaranteed.
    The following is a comparison of cash distributions declared and certain
defined amounts:

    -------------------------------------------------------------------------
                                                                 Fiscal year
                                                        ---------------------
                                               2009 Q1       2008       2007
    -------------------------------------------------------------------------
    Cash flow from operating activities      $  12,304  $  36,143  $  39,729
    Net income for the period                $   1,404  $  30,139  $  24,863
    Distributable cash                       $   2,347  $  39,791  $  38,993
    Cash distributions declared(1)           $   4,887  $  27,094  $  26,405
    Excess of cash flow from operating
     activities over cash distributions
     declared                                $   7,417  $   9,049  $  13,324
    Excess (short-fall) of net income over
     cash distributions declared             $  (3,483) $   3,045  $  (1,542)
    Excess (short-fall) of distributable
     cash over cash distributions declared   $  (2,540) $  12,697  $  12,588
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Excludes foreign taxes paid that have been allocated to Unitholders

    Net income includes significant non-cash charges which for the three
months ended March 31, 2009 were $1,859 and for the years ended December 31,
2008 and 2007 were $12,823 and $16,607, respectively, which do not impact cash
flow. Included in these non-cash charges is a provision for depreciation that
is not a reasonable proxy for the cost of maintaining existing levels of
service (i.e. maintenance capital expenditures). Therefore, in certain periods
cash distributions declared may exceed net income. Management does not
consider the excess of cash distributions declared over net income for the
year ended December 31, 2007 or the three months ended March 31, 2009 to be an
economic return of capital. Instead the excess is considered a function of the
timing of cash flows versus accounting income.
    With respect to the short-fall of distributable cash over cash
distributions declared for 2009 Q1, if the calculation of distributable cash
is adjusted for the one-time current tax provision ($4,168 as discussed under
the Results of Operations - Taxes section of this MD&A and as follows with
respect to comments on Distributable Cash) there would be an excess of
distributable cash over cash distributions declared for 2009 in the amount of
$1,628. Management considers the exclusion of this one-time current tax
provision to be reasonable in comparing distributable cash to cash
distributions declared as this current tax provision is being incurred for the
long-term benefit of Trust as opposed to being limited to 2009 Q1. On an
annualized basis, it is not management's intent to distribute 100% of
distributable cash.
    Distributable cash (refer to Non-GAAP Measurements) is calculated as
follows:

    -------------------------------------------------------------------------
                                                          Three months ended
                                                                    March 31
                                                           2009         2008
    -------------------------------------------------------------------------
    Cash flow from operating activities               $  12,304    $   6,882
    Add (deduct): - changes in non-cash operating
                    working capital(1)                   (9,761)       6,417
    Less:         - required principal repayments
                    on long-term debt                       (55)         (76)
                  - maintenance capital expenditures       (141)        (110)
    -------------------------------------------------------------------------
    Distributable cash                                $   2,347    $  13,113
    Add: one-time 2009 Q1 current tax provision
     (see comments below)                                 4,168            -
    -------------------------------------------------------------------------
    Adjusted distributable cash                       $   6,515    $  13,113
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cash distributions declared                       $   4,887    $   6,669
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Payout ratio, net of one-time 2009 Q1 current
     tax provision of $4,168                               208%          51%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Adjusted payout ratio, excluding one-time 2009
     Q1 current tax provision of $4,168                     75%          51%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Changes in non-cash operating working capital have been added back
        (deducted) as such changes are financed using the Trust's bank
        indebtedness/line of credit facility. In addition, if changes in non-
        cash operating working capital were not excluded from the calculation
        of distributable cash it would introduce cash flow variability and
        affect underlying cash flow from operating activities.

    At the beginning of 2009 Q1 the Trust's U.S. subsidiary sold the majority
of its operating assets to the Trust's Canadian operating entity, Cathedral
Energy Services Limited Partnership, as part of an internal reorganization
related to ownership of operating assets within the Trust. This transaction
created a one-time current tax expense in the amount of $4,168 (this taxable
income was created mainly due to recaptured U.S. tax depreciation). If this
one-time current tax expense is excluded from the calculation of distributable
cash then the adjusted payout ratio for 2009 Q1 was 75%.

    GOVERNANCE

    The Audit Committee of the Board of Trustees has reviewed this MD&A and
the related unaudited interim consolidated financial statements and
recommended they be approved to the Board of Trustees. Following a review by
the full Board, the MD&A and financial statements were approved.

    SUMMARY OF QUARTERLY RESULTS
    -------------------------------------------------------------------------
    Three month
     period      Mar     Dec     Sep     Jun     Mar     Dec     Sep     Jun
     ended      2009    2008    2008    2008    2008    2007    2007    2007
    -------------------------------------------------------------------------
    Revenues $31,368 $50,506 $52,686 $29,483 $46,253 $39,054 $38,355 $24,985
    EBITDAS    6,237  13,932  16,914   4,632  15,395  13,707  13,775   4,837
    Net income
     (loss)    1,404   9,737  10,296     189   9,917  10,365   7,126  (2,415)
    Net income
     (loss) per
     Trust Unit
     - basic    0.04    0.30    0.32    0.01    0.31    0.33    0.23   (0.08)
    Net Income
     (loss) per
     Trust Unit
     - diluted  0.04    0.30    0.32    0.01    0.31    0.33    0.22   (0.08)
    Cash distr-
     ibutions
     declared
     per Trust
     Unit       0.15    0.21    0.21    0.21    0.21    0.21    0.21    0.21
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    OUTLOOK

    Low commodity prices combined with the difficulty for producers to raise
capital by way of debt or equity, and an overall global recession which has
decreased overall demand for oil and natural gas, continues to result in
producers significantly reducing their development and exploration programs.
This has negatively affected oilfield services activities including that of
the Trust. Drilling activity, which is the most significant driver for the
Trusts revenues, is down significantly in Canada and the United States.
    Oil prices have strengthened somewhat recently and management expects
drilling activity in southeast Saskatchewan to increase if oil remains in the
$50 USD per barrel range. The Trust has traditionally been very active in
southeast Saskatchewan and its G3 EM/MWD system has been operating effectively
in this market which is considered not to be an "EM" friendly environment. The
use of the Trust's G3 EM/MWD system has demonstrated significant cost savings
to operators in comparison to the use of the traditional mud pulse MWD
systems. The Trust is actively marketing its G3 EM/MWD system to current and
prospective customers to highlight this competitive advantage.
    Natural gas prices are expected to continue to be depressed in the near
term as a result of an overall decrease in demand for natural gas, natural gas
storage levels being at the upper range of the five-year average and
significantly higher than storage volume at this time last year as well as the
prospect of an increase in liquefied natural gas ("LNG") imports. That said,
the combination of the recent significant decline in natural gas drilling that
is being experienced in both Canada and the United States and significant
production decline rates on wells drilled, will, in due course, support higher
natural gas prices and natural gas drilling activity throughout North America
- the question is "when" will the supply/demand balance be restored.
    In light of the uncertain economic times, the Trust has been proactive
and has taken several initiatives to strengthen its balance sheet and
"right-size" its operations to the expected activity levels: i) announced in
February 2009 a $0.03 reduction in its monthly distribution; ii) reduced the
2009 capital budget from an initial level of $20,600 (including $3,600 million
deferred from 2008) to $8,800; iii) layoffs of and wage rollbacks for field
and office staff; and iv) a reduction in discretionary operating costs and
general and administrative expenditures.
    The Trust's Venezuela directional drilling business is now ready to
commence operations with a 3-4 job capability. The Trust's operations base in
Maturin, Venezuela is fully operational and we expect to commence our first
directional drilling job in 2009.
    Although a challenging environment is expected in the near term, the
Trust's management considers the long-term fundamentals for the supply and
demand for energy to be positive for the oilfield services sector.

    CONSOLIDATED BALANCE SHEETS

    Dollars in '000's                                  March 31  December 31
    (unaudited)                                            2009         2008
    -------------------------------------------------------------------------

    ASSETS

    Current assets:
      Cash and cash equivalents                       $   3,318    $   7,551
      Accounts receivable                                26,591       43,629
      Taxes receivable                                        -          688
      Inventory                                           7,868        8,963
      Prepaid expenses and deposits                       1,340        1,538
    -------------------------------------------------------------------------
                                                         39,117       62,369

    Property and equipment                              101,297      101,287

    Intangibles                                             404          441

    Goodwill                                             19,775       19,775
    -------------------------------------------------------------------------
                                                      $ 160,593    $ 183,872
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND UNITHOLDERS' EQUITY

    Current liabilities:
      Bank indebtedness                               $   8,440    $  15,406
      Accounts payable and accrued liabilities           13,674       27,040
      Distribution payable to Unitholders                 1,303        2,281
      Taxes payable                                       1,461            -
      Current portion of long-term debt                     208          207
    -------------------------------------------------------------------------
                                                         25,086       44,934

    Long-term debt                                       41,677       40,233

    Future income taxes                                   4,105        6,846

    Unitholders' equity:
      Unitholders' capital                               54,311       54,311
      Contributed surplus                                 2,940        2,663
      Retained earnings                                  28,076       31,559
      Accumulated other comprehensive income              4,398        3,326
    -------------------------------------------------------------------------
                                                         89,725       91,859
    -------------------------------------------------------------------------
                                                      $ 160,593    $ 183,872
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

    Dollars in '000's except per
     Trust Unit amounts                          Three months ended March 31
    (unaudited)                                            2009         2008
    -------------------------------------------------------------------------

    Revenues                                          $  31,368    $  46,253

    Expenses:
      Operating                                          17,332       23,587
      General and administrative                          7,765        7,431
      Depreciation and amortization                       3,833        2,851
      Interest - long-term debt                             372          276
      Interest - other                                      115           99
      Foreign exchange loss (gain)                          639          (33)
      Unit-based compensation expense                       277          579
    -------------------------------------------------------------------------
                                                         30,333       34,790
    -------------------------------------------------------------------------
                                                          1,035       11,463

    Gain on disposal of property and equipment              720          226
    -------------------------------------------------------------------------
    Income before taxes                                   1,755       11,689

    Taxes:
      Current                                             3,150        1,542
      Future income taxes                                (2,799)         230
    -------------------------------------------------------------------------
                                                            351        1,772
    -------------------------------------------------------------------------
    Net income                                            1,404        9,917

    Retained earnings, beginning of period               31,559       28,852

    Less: Distributions declared                         (4,887)      (6,669)
    -------------------------------------------------------------------------
    Retained earnings, end of period                  $  28,076    $  32,100
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net income per Trust Unit:
      Basic                                           $    0.04    $    0.31
      Diluted                                         $    0.04    $    0.31
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND ACCUMULATED OTHER
    COMPREHENSIVE INCOME (LOSS)

    Dollars in '000's                            Three months ended March 31
    (unaudited)                                            2009         2008
    -------------------------------------------------------------------------

    Net income                                        $   1,404    $   9,917

    Other comprehensive income:
      Unrealized foreign exchange gain on translation
       of self-sustaining foreign operations              1,072          591
    -------------------------------------------------------------------------
    Comprehensive income                              $   2,476    $  10,508
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Accumulated other comprehensive income,
     beginning of period                              $   3,326    $       -
      Adjustment for change in foreign currency
       translation method                                     -       (1,894)
      Other comprehensive income                          1,072          591
    -------------------------------------------------------------------------
    Accumulated other comprehensive income
     (loss), end of period                            $   4,398    $  (1,303)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF CASH FLOWS

    Dollars in '000's                            Three months ended March 31
    (unaudited)                                            2009         2008
    -------------------------------------------------------------------------

    Cash provided by (used in):

    Operating activities:
    Net income                                        $   1,404    $   9,917
    Items not involving cash:
      Depreciation and amortization                       3,833        2,851
      Future income taxes                                (2,799)         230
      Unrealized foreign exchange (gain) loss               548          (52)
      Unit-based compensation expense                       277          579
      Gain on disposal of property and equipment           (720)        (226)
    -------------------------------------------------------------------------
                                                          2,543       13,299
    Changes in non-cash operating working capital         9,761       (6,417)
    -------------------------------------------------------------------------
                                                         12,304        6,882
    -------------------------------------------------------------------------

    Investing activities:
    Property and equipment additions                     (4,137)      (3,960)
    Proceeds on disposal of property and equipment        1,078          461
    Changes in non-cash investing working capital        (2,276)         (11)
    -------------------------------------------------------------------------
                                                         (5,335)      (3,510)
    -------------------------------------------------------------------------

    Financing activities:
    Advances under long-term debt                         1,500           47
    Repayment of long-term debt                             (55)         (75)
    Distributions paid to Unitholders                    (5,865)      (6,650)
    Proceeds on exercise of Trust Unit options                -        1,133
    Change in bank indebtedness                          (6,966)       3,340
    -------------------------------------------------------------------------
                                                        (11,386)      (2,205)
    -------------------------------------------------------------------------
    Effect of exchange rate on changes in cash
     and cash equivalents                                   184            -
    -------------------------------------------------------------------------
    Change in cash and cash equivalents                  (4,233)       1,167

    Cash and cash equivalents, beginning of period        7,551        1,306
    -------------------------------------------------------------------------
    Cash and cash equivalents, end of period          $   3,318    $   2,473
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Certain statements in this news release including (i) statements that may
contain words such as "anticipate", "could", "expect", "seek", "may" "intend",
"will", "believe", "should", "project", "forecast", "plan" and similar
expressions, including the negatives thereof, (ii) statements that are based
on current expectations and estimates about the markets in which the
Trust/Cathedral operates and (iii) statements of belief, intentions and
expectations about developments, results and events that will or may occur in
the future, constitute "forward-looking statements" and are based on certain
assumptions and analysis made by the Trust/Cathedral. Forward-looking
statements in this news release include, but are not limited to, statements
with respect to future capital expenditures, including the amount, nature and
timing thereof; oil and natural gas prices and demand; other development
trends within the oil and natural gas industry; business strategy; expansion
and growth of the Trust's/Cathedral's business and operations and other such
matters. Such forward-looking statements are subject to important risks and
uncertainties, which are difficult to predict and that may affect the
Trust's/Cathedral's operations, including, but are not limited to: the impact
of general economic conditions; industry conditions; government and regulatory
developments; oil and natural gas product supply and demand; competition; and
the Trust's/Cathedral's ability to attract and retain qualified personnel. The
Trust's/Cathedral's actual results, performance or achievements could differ
materially from those expressed in, or implied by, these forward-looking
statements and, accordingly, no assurance can be given that any of the events
anticipated by the forward-looking statements will transpire or occur, or if
any of them do transpire or occur, what benefits the Trust/Cathedral will
derive therefrom. Subject to applicable law, the Trust disclaims any intention
or obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
    All forward-looking statements contained in this document are expressly
qualified by this cautionary statement. Further information about the factors
affecting forward-looking statements is available in the Trust's current
Annual Information Form and Annual Report which have been filed with Canadian
provincial securities commissions and are available on www.sedar.com.

    %SEDAR: 00018316E
For further information: Requests for further information should be
directed to: 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.