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Cathedral Energy Services reports results for 2008 Q4 and the year ended December 31, 2008

Mar 5, 2009
3:35pm

    /NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

    CALGARY, March 5 /CNW/ - Cathedral Energy Services Income Trust (the
"Trust" / TSX: CET.UN) is pleased to report its results for 2008 Q4 and the
year-end December 31, 2008. Dollars are in '000's except for day rates and per
Trust Unit amounts.

    FINANCIAL HIGHLIGHTS
                                    Three months ended           Years ended
                                           December 31           December 31
                                  --------------------- ---------------------
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------

    Revenues                      $  50,506  $  39,054  $ 178,928  $ 145,106

    EBITDAS(1)                    $  13,932  $  13,707  $  50,873  $  46,731
      Per Trust Unit - diluted    $    0.43  $    0.43  $    1.57  $    1.47

    Income before taxes           $   9,086  $   9,772  $  34,594  $  31,990

    Net income                    $   9,737  $  10,365  $  30,139  $  24,863
      Per Trust Unit - basic      $    0.30  $    0.33  $    0.94  $    0.79
      Per Trust Unit - diluted    $    0.30  $    0.33  $    0.93  $    0.78

    Cash distributions declared
     per Trust Unit               $    0.21  $    0.21  $    0.84  $    0.84

    Distributable cash (1)        $  10,795  $  12,043  $  39,791  $  38,993

    Cash distributions (2)        $   6,842  $   6,649  $  27,094  $  26,405

    Payout ratio (1)                    63%        55%        68%        68%

    Property and equipment
     additions                    $  21,054  $   5,205  $  47,618  $  19,857

    Weighted average Trust Units
     outstanding:
      Basic ('000)                   32,582     30,652     32,215     31,402
      Diluted ('000)                 32,582     31,836     32,463     31,781
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                         December   December
                                                          31 2008    31 2007
    -------------------------------------------------------------------------

    Working capital                                     $  17,435  $  16,947

    Long-term debt and capital lease obligations
     excluding current portion                          $  40,233  $  17,441

    Unitholders' equity                                 $  91,859  $  79,250
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) see "NON-GAAP MEASUREMENTS"
    (2) Excludes foreign taxes paid that have been allocated to Unitholders

    FORWARD-LOOKING INFORMATION

    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 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 news release 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 news release 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 news release and certain documents
incorporated by reference into this news release 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 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'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 news release 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
         and capital lease obligations, taxes, depreciation, amortization and
         non-cash 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 capital lease
         obligations 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

    Despite a significant decrease in oilfield services activity during the
fourth quarter of 2008, the Trust was able to achieve record annual revenues
in 2008. On a year-over-year basis, revenues increased $33,822 or 23.3% to
$178,928 from $145,106 in 2007. Much of this increase was due to the
directional drilling business in the U.S. EBITDAS for the year ended December
31, 2008 was $50,873 while the comparative figure for 2007 was $46,731, a
combined increase of $4,142 or 8.9%. The disproportionate increase in EBITDAS
(8.9%) versus the increase in revenues (23.3%) was due mainly to the increase
in operating expenses which has also caused the decline in gross margin
percentage. For the year ended December 31, 2008, net income was $31,139
($0.93 per diluted Trust Unit) compared to $24,863 ($0.78 per diluted Trust
Unit) for 2007. Considering the decline in market activity in the second half
of 2008, management is pleased with the operating results for the year.


    RESULTS OF OPERATIONS - 2008 COMPARED TO 2007

    Revenues and operating expenses
                                       2008       2007     Change          %
    -------------------------------------------------------------------------
    Revenues                      $ 178,928  $ 145,106  $ 33,822          23
    Operating expenses              (98,614)   (73,482)   25,132          34
    Gross margin                  $  80,314  $  71,624  $  8,690          12
    -------------------------------------------------------------------------
    Gross margin                      44.9%      49.4%     (4.5%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                Year ended December 31, 2008
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                     drilling(1)  Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $  71,886  $ 18,356   $  13,348  $ 103,590
    United States                    64,113     7,452       3,773     75,338
    -------------------------------------------------------------------------
                                  $ 135,999  $ 25,808   $  17,121  $ 178,928
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                Year ended December 31, 2007
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                     drilling(1)  Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $  69,854  $  20,892  $  12,051  $ 102,797
    United States                    41,519        790          -     42,309
    -------------------------------------------------------------------------
                                  $ 111,373  $  21,682  $  12,051  $ 145,106
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1)  Including rental of related equipment

    For 2008 the Trust generated record annual revenues of $178,928
representing an increase of 23.3% over 2007 revenues. The increase was mainly
a result of: i) a 1.9% increase in the average day rate for directional
drilling services to $9,022 per day (2007 - $8,857) and ii) a 20.3% increase
in directional drilling activity days to 14,766 activity days (2007 - 12,274
days).
    Canadian directional drilling revenues increased 2.9% to $71,886 in 2008
from $69,854 in 2007. The Trust's 2008 drilling activity days increased to
7,843 days from 7,270 days in 2007, an increase of 7.9%. At the end of 2008
Q3, the drilling days for the Canadian division had increased by 14.7% but due
to a slowdown in oil and gas activities in 2008 Q4 the annual increase for
2008 was reduced to 7.9%. The average Canadian day rate has decreased by 4.2%.
The Canadian directional drilling division started the year with 55
Measurement-While-Drilling ("MWD") systems and ended the year with 59 MWD
systems.
    In the U.S., the Rocky Mountain region is the Trust's main area of
operations and it experienced significant activity growth in 2008. U.S.
directional drilling revenues increased by 54.4% to $64,113 from $41,519. The
Trust's activity days in the U.S. increased from 5,004 days in 2007 to 6,923
days in 2008, an increase of 38.3%. The average U.S. day rate increased 11.9%
in part due to the strengthening of the U.S. dollar in comparison to Canadian
dollar. Due to increased demand in the U.S. market, the number of MWD systems
was increased from 23 at the end of 2007 to 35 at the end of 2008.
    Advance Wireline and Xtreme Wireline combined to generate revenues of
$25,808 for 2008 compared to $21,682 for 2007, a 19.0% increase. The Canadian
division began the year with 25 wireline units, had 1 unit return to service
after major repairs and transferred an additional 3 units to the U.S. to end
the year at 23 wireline units. In Canada, the revenues declined by 12.1% to
$18,356 in 2008 from $20,892 in 2007 due to the transfer of units to the U.S.
combined with a decline in activity levels.
    Late in 2007 Q2, one wireline unit was transferred from the Canadian
operations to form the U.S. division of Advance Wireline but revenue
generating operations did not commence until 2007 Q3. The U.S. division ended
2007 with 2 wireline units and ended 2008 with 5 wireline units. As a result
of the 2008 expansion and operations for an entire year, the U.S. wireline
division generated $7,452 in revenues for 2008; an increase of $6,662 from
2007 of $790. In Q1 of 2009 another wireline unit was transferred to the U.S.
operations from the Canadian fleet.
    The Trust's production testing division, Tier One, contributed $17,121 in
revenues during 2008 representing a 42.1% increase from 2007 revenues of
$12,051. The division added 2 units in Canada to end the year at 21 units,
which contributed to the 10.7% increase in Canadian revenues to $13,348 in
2008 from 2007 of $12,051. One additional production testing unit will be
added to the Canadian fleet in 2009 Q1. The production testing division in
Canada was adversely affected by the decline in natural gas drilling in 2008.
The Trust began production testing operations in the U.S. during 2008 Q3 with
1 production testing unit expanding to 8 units at December 31, 2008; 5
additional units will be added to the U.S. fleet in the first half of 2009.
The U.S. division had revenues of $3,773 in 2008.
    The gross margin for 2008 was 44.9%, which compares to 49.4% in 2007. The
decrease is attributed to a number of factors, but mainly is the result of an
increase in the labour costs in all divisions. There was a significant
increase in labour costs that began in Q3 of 2007 and continued into 2008 due
to the high demand for labour in both Canada and the U.S. for oil and gas
field workers. This has caused a 2.9% decline in the gross margin. Another
factor contributing to the decline is an increase in the cost of motor and
other equipment repairs in the drilling division.

    General and administrative expenses

                                       2008       2007     Change          %
    -------------------------------------------------------------------------
    General and administrative
     expenses                     $  31,063  $  25,774  $   5,289         21
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    General and administrative expenses increased from $25,774 in 2007 to
$31,063 in 2008, an increase of $5,289. The increase was mainly related to the
expansion of operations. As a percentage of revenues, general and
administrative expenses were 17.4% in 2008 and 17.8% in 2007. Approximately
45% of the overall increase in general and administrative expenses relates to
the start-up of the U.S. production testing division, operating the U.S.
Wireline division for a full year, and the establishment of operations in
Venezuela. The remaining increases are due to the expansion of operations in
the year as evidenced by the increase in revenues.

    Depreciation and amortization

                                       2008       2007     Change          %
    -------------------------------------------------------------------------
    Depreciation and amortization $  13,416  $  12,054  $   1,362         11
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    This increase is related to the Trust's investment in property and
equipment over the past 12 months including 20 MWD systems, mud motors and
drill collars to complement the increase in MWD systems and the purchase of 7
production testing units. As a percentage of revenues, depreciation and
amortization amounted to 7.5% for 2008 and 8.3% for 2007. Despite the increase
in the Trust's depreciable asset base over the past 12 months, depreciation on
a year-to-year basis did not increase as much as otherwise anticipated due to
the change in the accounting method for foreign currency translation of the
Trust's U.S. operations (refer to Change in Foreign Currency Translation
section).

    Interest

                                       2008       2007     Change          %
    -------------------------------------------------------------------------
    Interest - long-term debt
     and capital lease
     obligations                  $   1,158  $   1,084  $      74          7
    Interest - other              $     422  $     404  $      18          4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The main contributing factor to the increase in interest related to
long-term debt and capital lease obligations is an increase in the average
level of debt outstanding on a year-over-year basis, net of declines in the
prime interest rate during the year.

    Foreign exchange loss

                                       2008       2007     Change          %
    -------------------------------------------------------------------------
    Foreign exchange loss         $      94  $     492  $    (398)       (81)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Effective January 1, 2008, the Trust changed the classification of its
U.S. operations to self-sustaining (as opposed to integrated) resulting in the
financial statements being translated using the current rate method as opposed
to the temporal method (refer to Change in Foreign Currency Translation
section).

    Unit-based compensation expense

                                       2008       2007     Change          %
    -------------------------------------------------------------------------
    Unit-based compensation
     expense                      $   1,705  $   1,603  $     102          6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Trust Unit options granted are valued using the Black-Scholes option
pricing model and such value is being amortized against income over their
three-year vesting period.

    Gain on disposal of property and equipment

                                       2008       2007     Change          %
    -------------------------------------------------------------------------
    Gain on disposal of property
     and equipment                $   2,138  $   1,777  $     361         20
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The gain on disposal of property and equipment can vary significantly
from year-to-year as almost all of the disposals relate to downhole equipment
lost-in-hole. Cathedral recovers lost-in-hole equipment costs including
previously expensed depreciation on the related assets.

    Taxes

                                       2008       2007     Change          %
    -------------------------------------------------------------------------
    Taxes                         $   4,455  $   7,127  $  (2,672)       (37)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For 2008, the Trust has a tax expense of $4,455 (effective tax rate of
12.9%) which compares to $7,127 (effective tax rate of 22.3%) in 2007. The
2007 tax provision included a cumulative non-cash adjustment of $2,754
(expense) related to the substantive enactment of the previously announced
changes to the taxation of income and royalty trusts, other than real estate
investment trusts. Removing the 2007 adjustment noted above the effective tax
rate for 2007 was 13.7%. In comparing the adjusted 2007 effective tax rate
(13.7%) to the 2008 effective tax rate (12.9%), the decrease is mainly
attributable to the net result of the continuing growth in the U.S. operations
which are taxed at a higher rate and a reduction to future income tax
liability for changes in effected tax rates.

    Other Comprehensive Income

                                       2008       2007     Change          %
    -------------------------------------------------------------------------
    Unrealized foreign exchange
     gain on translation of
     self-sustaining foreign
     operations                   $   3,326  $       -  $   3,326        n/a
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Other comprehensive income ("OCI") is comprised entirely of the
unrealized foreign currency translation gain of the Trust's U.S.
self-sustaining subsidiary and reflects the changing value of the Canadian
dollar compared to the U.S. dollar.

    LIQUIDITY AND CAPITAL RESOURCES

    The Trust's principal source of liquidity is cash generated from
operations and its credit facility. The Trust also has the ability to fund
liquidity requirements through the issuance of debt and/or equity. At December
31, 2008, the Trust had an operating line of credit with a major Canadian bank
in the amount of $20,000 (2007 - $12,500) of which $15,406 (2007 - $6,030) was
drawn. The Trust has a revolving term loan facility in the amount of $45,000
(2007 - $25,000) of which $40,000 (2007 - $17,000) was drawn as at December
31, 2008. In addition, at December 31, 2008, the Trust had obligations under
capital leases in the amount of $222 (2007 - $451) and other long-term debt of
$218 (2007 - $283).

    Operating activities

    Cash flow from operating activities decreased from $39,729 in 2007 to
$36,143, a decrease of $3,586 or 9.0%. Funds from operations (see Non-GAAP
Measurements) for 2008 were $40,824 which compares to $39,693 for 2007; a
marginal increase of $1,131. The Trust has a strong working capital position
at December 31, 2008 at $17,435 which compares to $16,947 at the end of 2007.

    Investing activities

    Cash used in investing activities for the year ended December 31, 2008
amounted to $40,134 compared to $16,607 in 2007. During 2008 the Trust
invested an additional $47,618 (2007 - $19,857) in property and equipment. For
2008 the significant property and equipment additions included purchase of
land and building for a new Calgary facility, 20 MWD systems, purchase of 10
production testing units and an expansion of the overall mud motor and drill
collar fleet to complement the increased directional drilling job capability
as well as to reduce equipment rentals. The capital asset additions were
funded by a combination of the Trust's cash flow from operations, advances
under long-term debt, proceeds from disposal of property and equipment and
proceeds on exercise of Trust Unit options. Fluctuations in non-cash working
capital related to investing activities are a function of when proceeds on
disposal of property and equipment are received and when payments for property
and equipment purchases are made.
    Proceeds on disposal of property and equipment amounted to $3,761 (2007 -
$3,575) and is mainly related to recovery of downhole equipment costs that
were lost-in-hole in 2008 as well as previously expensed depreciation.
    During 2008, the Trust enhanced its Electro-Magnetic/MWD system
("EM/MWD") by improving formation impedance matching and concurrently
increasing the data signal encoding, detection and filtration.  The result has
allowed the EM/MWD system to operate effectively in the southeast Saskatchewan
market where competitors have not been able to deploy their EM/MWD systems. 
In conventional markets these improvements have allowed the EM/MWD system to
operate at depths greater than the Generation 2 ("G2") modifications made
during 2007.
    The following is a summary of major equipment owned by Cathedral:

    -------------------------------------------------------------------------
                                                           As at December 31
                                                             2008       2007
    -------------------------------------------------------------------------
    Directional drilling equipment -
      MWD systems                                              98         78
      Drilling mud motors                                     496        349
    Production testing units                                   29         19
    Wireline units                                             28         27
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For 2009, the Board of Directors of the Administrator of the Trust has
approved a capital budget of $11,100 (reduced from $17,000 budget announced in
November 2008) including approximately $500 for maintenance capital. The 2009
capital budget includes $3,600 of capital deferred from Q4 2008 which relates
primarily to expansion of the mud motor and drill collar fleet plus progress
payments on an additional production testing units to be delivered in 2009.
The balance of the capital budget is for the remaining cost on 6 production
testing units, upgrades to the Trust's EM/MWD systems to third generation
units ("G3") and for renovations to the building located in Calgary that was
acquired in Q4 2008. These capital expenditures are expected to be financed by
way of cash flow from operations and the Trust's credit facility.

    Financing activities

    Cash provided by financing activities for the year ended December 31,
2008 amounted to $9,618 which compares to cash used by financing activities
$23,370 in 2007, a change of $32,988. During 2008, the Trust received advances
of long-term debt in the amount of $23,047 (2007 - $2,228) of which $23,000
(2007 - $2,000) related to an advance on the Trust's revolving term loan
facility. The additional long-term debt incurred was used to finance 2008
capital additions. Repayments of long-term debt and capital lease obligations
in 2008 amounted to $341 (2007 - $330). As at December 31, 2008, the Trust was
in compliance with all covenants under its credit facility. During 2008 the
Trust received cash inflows of $4,904 (2007 - $3,065) on the exercise of Trust
Unit options.
    Distributions for 2008 amounted to $27,432 (2007 - $26,405).
Distributions in 2008 include $338 of foreign taxes paid that has been
allocated to Unitholders. For 2007 and 2008, the Trust's monthly distributions
were $0.07 per Trust Unit (annualized to $0.84 per Trust Unit) and were paid
in the form of cash. Effective February 2009, the Trust reduced its monthly
cash distributions to $0.04 per Trust Unit.
    Distributions paid to Unitholders for 2008 amounted to $27,368 (2007 -
$27,903). The decrease in distributions paid is due to an increase in units of
outstanding for 2008, net of a reduction in 2008 of $1.549 paid on January 15,
2007 relating to a "special" $0.05 per Trust Unit distribution declared in
December 2006. Cash distributions paid have been financed from funds from
operations and management currently expects future cash distributions will
also be financed by way of funds from operations.

    Contractual obligations

    In the normal course of business, the Trust's operating entities incur
contractual obligations. The following is a summary of the Trust's contractual
obligations as at December 31, 2008 for the following items:

    -------------------------------------------------------------------------
                                                                      There-
                       Total    2009    2010    2011    2012    2013   after
    -------------------------------------------------------------------------
    Property and
     equipment
     additions       $ 4,793 $ 4,793 $     - $     - $     - $     - $     -
    Operating lease
     obligations      11,031   3,027   2,200   1,462   1,189   1,045   2,108
    Long-term debt
     and capital
     lease
     obligations(1)   40,440     207  10,202  20,031  10,000       -       -
    -------------------------------------------------------------------------
                     $56,264 $ 8,027 $12,402 $21,493 $11,189 $ 1,045 $ 2,108
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Minimum principal amounts to be paid under long-term debt assumes the
        Trust elects prior to the maturity date of the revolving term loan to
        repay the loan over 36 months with interest only payable for the
        first 12 months

    The 2009 contractual obligations are expected to be financed by way of
cash flow from operations and the Trust's credit facility.

    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 (subject to adjustments to
distribution levels). 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 2nd quarter 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 and capital lease obligations. 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 distributions and certain defined
amounts:

    -------------------------------------------------------------------------
                                                     Years ended December 31
                                                     -----------------------
                                    2008 Q4       2008       2007       2006
    -------------------------------------------------------------------------

    Cash flow from operating
     activities                   $  12,092  $  36,143  $  39,729  $  39,929
    -------------------------------------------------------------------------

    Net income for the period     $   9,737  $  30,139  $  24,863  $  35,348
    -------------------------------------------------------------------------

    Distributable cash            $  10,795  $  39,791  $  38,993  $  45,972
    -------------------------------------------------------------------------

    Cash distributions(1)         $   6,842  $  27,094  $  26,405  $  24,681
    -------------------------------------------------------------------------

    Excess of cash flow from
     operating activities over
     cash distributions           $   5,250  $   9,049  $  13,324  $  15,248
    -------------------------------------------------------------------------

    Excess (short-fall) of net
     income over cash
     distributions                $   2,895  $   3,045  $  (1,542) $  10,667
    -------------------------------------------------------------------------

    Excess of distributable cash
     over cash distributions      $   3,953  $  12,697  $  12,588  $  21,291
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Excludes foreign taxes paid that have been allocated to Unitholders

    Net income exceeded cash distributions by $2,895 for the three months
ended December 31, 2008 and by $3,045 for the year ended December 31, 2008.
Net income includes significant non-cash charges which for the year ended
December 31, 2008 were $12,823 (2007-$16,607) that 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 may exceed net income. Management did not consider the excess of
cash distributions over net income for the year ended December 31, 2007 to be
an economic return of capital. Instead the excess was considered a function of
the timing of cash flows versus accounting income.
    Currently cash distributions are less than distributable cash as the
Trustees, on the recommendation of management of the Administrator, have
decided to retain a portion of distributable cash to finance capital
expenditures and debt repayment. It is not management's intent to distribute
100% of distributable cash.
    Effective February 2009, the Trust reduced its monthly cash distributions
by $0.03 per Trust Unit to $0.04 per Trust Unit. In light of the current and
forecast market conditions, the Administrator of the Trust's operating
entities determined that a reduction was a prudent measure to manage
liquidity, further strengthen the Trust's strong balance sheet and better
position itself to take advantage of opportunistic transactions which may
present themselves.

    Distributable cash (refer to Non-GAAP Measurements) is calculated as
    follows:
    -------------------------------------------------------------------------
                                                      Years ended December 31
                                               2008 Q4       2008       2007
    -------------------------------------------------------------------------

    Cash flow from operating activities      $  12,092  $  36,143  $  39,729
    Add (deduct): - changes in non-cash
     operating working capital(1)               (1,168)     4,681        (36)
    Less: - required principal repayments on
            long-term debt and capital lease
            obligations                           (109)      (341)      (313)
          - maintenance capital expenditures       (20)      (692)      (387)
    -------------------------------------------------------------------------
    Distributable cash                       $  10,795  $  39,791  $  38,993
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Cash distributions(2)                    $   6,842  $  27,094  $  26,405
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Payout ratio                                   63%        68%        68%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (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
    (2) Excludes foreign taxes paid that have been allocated to Unitholders

    EBITDAS

    EBITDAS (refer to Non-GAAP Measurements) is calculated as follows:
    -------------------------------------------------------------------------
                                                      Years ended December 31
                                               2008 Q4       2008       2007
    -------------------------------------------------------------------------

    EBITDAS as reported                      $  13,932  $  50,873  $  46,731
    Add (deduct): - depreciation and
                    amortization                (4,135)   (13,416)   (12,054)
                  - interest - long-term
                    debt and capital lease
                    obligations                   (373)    (1,158)    (1,084)
                  - unit-based compensation
                    expense                       (338)    (1,705)    (1,603)
                  - recovery of (provision
                    for) taxes                     651     (4,455)    (7,127)

    -------------------------------------------------------------------------
    Net income                               $   9,737  $  30,139  $  24,863
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    FOURTH QUARTER RESULTS

                                                                     2008 Q4
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                     drilling(1)  Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $  16,551  $   4,267  $   4,347  $  25,165
    United States                    19,668      2,725      2,948     25,341
    -------------------------------------------------------------------------
                                  $  36,219  $   6,992  $   7,295  $  50,506
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                                     2007 Q4
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                     drilling(1)  Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $  19,359  $   4,738  $   3,370  $  27,467
    United States                    11,192        395          -     11,587
    -------------------------------------------------------------------------
                                  $  30,551  $   5,133  $   3,370  $  39,054
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Including rental of related equipment

    Revenues in Q4 have increased to $50,506 in 2008 from $39,054 in 2007, an
increase of $11,452 or 29.3%.
    Directional drilling related revenues increased $5,668 from $30,551 in
2007 Q4 to $36,219 in 2008 Q4 due to a 3.0% increase in activity days (2008 Q4
- 3,575 vs. 2007 Q4 - 3,470) and a 15.6% increase in the average day rate
(2008 Q4 - $9,939 vs. 2007 Q4 - $8,596). Canadian revenues were down 14.5%
from $19,359 in 2007 Q4 to $16,551 in 2008 Q4. This was the result of a 10.0%
decline in drilling days falling to 1,801 in 2008 Q4 from 2,003 in 2007 Q4 and
a 4.4% decline in the Canadian average day rate. In the U.S., revenues have
increased 75.7% to $19,668 in 2008 Q4 from $11,192 in 2007 Q4. U.S. drilling
days increased to 1,774 in 2008 Q4 from 1,467 in 2007 Q4, an increase of
20.9%. The average day rate for the U.S. increased 45.7%. A significant
portion of the increase in the U.S. average day rate is due to the
strengthening of the U.S. dollar in comparison to the Canadian dollar.
    The wireline division's combined revenues increased from $5,133 in 2007
Q4 to $6,992 in 2008 Q4. The Canadian wireline division's revenues fell 9.9%
to $4,267 in 2008 Q4 from $4,738 in 2007 Q4; this is a result of transferring
3 units from Canada to the U.S. as well as a decrease in activity levels. The
U.S. wireline revenues are up to $2,725 in 2008 Q4 from $395 in 2007 Q4 as the
U.S. Wireline division commenced operations during 2007 Q4 and only had 2
wireline units in 2007 Q4 compared to its 5 units in 2008 Q4.
    With the start of the U.S. production testing division in 2008 Q3,
revenues for the quarter increased to $7,295 from $3,370 for just the Canadian
division in 2007 Q4; an increase of 116.5%. The Canadian division's revenues
have increased 29.0% to $4,347 in 2008 Q4 from $3,370 in 2007 Q4. In 2008 Q4,
there were 2 more production testing units in the Canadian fleet than in 2007
Q4.
    The consolidated gross margin declined 7.6% to 41.9% for 2008 Q4 from
49.5% in 2007 Q4. The decrease in quarter-over-quarter gross margin was
primarily due to increased labour charges in all divisions due to market
pressures and an increase in the repair costs for the drilling division.
    General and administrative charges increased 30.0% from $6,227 in 2007 Q4
to $8,098 in 2008 Q4. As a percentage of revenues, general and administrative
expenses were 16.0% in 2008 Q4 compared to 15.9% in 2007 Q4. The increases
were primarily due to the increases in the U.S. production testing and
wireline divisions, the costs related to international expansion and increases
due to the higher level of activity in 2008 Q4.
    For 2008 Q4, the Trust recorded a tax recovery of $651 compared to the
2007 Q4 recovery of $593.
    Net income for 2008 Q4 was $9,737 ($0.30 per diluted Trust Unit) which
compares to $10,365 ($0.33 per diluted Trust Unit) 2007 Q4.

    SUMMARY OF QUARTERLY RESULTS
    -------------------------------------------------------------------------
                           2008                            2007
             ------------------------------- --------------------------------
                  Q1      Q2       Q3     Q4      Q1      Q2      Q3      Q4
    -------------------------------------------------------------------------

    Revenues $46,253 $29,483 $52,686 $50,506 $42,712 $24,985 $38,355 $39,054

    EBITDAS   15,395   4,632  16,914  13,932  14,412   4,837  13,775  13,707

    Net
     income
     (loss)    9,917     189  10,296   9,737   9,787  (2,415)  7,126  10,365

    Net income
     (loss) per
     Trust Unit
      Basic     0.31    0.01    0.32    0.30    0.32   (0.08)   0.23    0.33
      Diluted   0.31    0.01    0.32    0.30    0.31   (0.08)   0.22    0.33
    -------------------------------------------------------------------------
    ------------------------------------------------------------------------

    A significant portion of Cathedral's operations are carried on in western
Canada where activity levels in the oilfield services industry are subject to
a degree of seasonality. Operating activities in western Canada are generally
lower during "spring breakup" which normally commences in late March and
continues through to May. Operating activities generally increase in the fall
and peak in the winter months from December till late March. Activity levels
in the Rocky Mountain and Williston Basin regions of the U.S. are not subject
to the seasonality to the extent that it occurs in the western Canada region.

    OUTLOOK

    The contraction in the North American oilfield services activity that
commenced in 2008 Q4 has continued into 2009. For oilfield services, the first
quarter of each calendar year is typically the busiest quarter in western
Canada and, although a pull back in activity levels was expected, the activity
levels currently being experienced are significantly lower than what was
originally projected. As we come out of spring break-up in western Canada
there is a degree of uncertainty as to expected activity levels during the
second half of 2009. Low commodity prices combined with the inability for
producers to raise capital by way of debt or equity, and an overall global
recession, has resulted in producers significantly reducing their development
and exploration programs. As a result, the Trust's activity levels may be
negatively affected.
    In light of the uncertain economic times, the Trust has been proactive
and in February 2009 announced a $0.03 reduction in its monthly distribution
bringing the current distribution level to $0.04 per Trust Unit. In
recognizing the expected lower activity levels, the Trust has taken several
initiatives to improve operating results and further strengthen its balance
sheet. The initial 2009 capital budget of $17.0 million together with the $3.6
million deferred from 2008 for a total of $20.6 million has been reduced by
$9.5 million to $11.1 million. As well, the Trust's operating entities have
undertaken a detailed review of all operating costs and general and
administrative expenditures starting in December 2008, and have initiated cost
reductions to enhance profitability.
    Despite a pull back in U.S. activity, 5 production testing units are to
be delivered in 2009 Q1/Q2 and are expected to be put in service upon
delivery. As well, another wireline unit was transferred from the Canadian
fleet to the U.S. market. In early 2009, the Trust's U.S. directional drilling
business has expanded its services to the Texas region and is again drilling
directional wells in Michigan. During 2009 the U.S. directional drilling
division expects to expand into additional U.S. markets.
    We continue to roll out our 3rd generation ("G3") EM/MWD system which has
been very successful in the southeast Saskatchewan market, which is not an
"EM" friendly environment. The deployment of our G3 EM/MWD system in this
market has allowed drilling time to be significantly reduced and thereby
benefiting our customers by reducing drilling costs.
    The Trust continues to pursue providing directional drilling services in
Venezuela. An operations base is being set up and the equipment to provide a
3-4 job capability is presently in Venezuela.
    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 series sector.

    CONSOLIDATED BALANCE SHEETS

    December 31, 2008 and 2007
    Dollars in '000's
    -------------------------------------------------------------------------
                                                             2008       2007
    -------------------------------------------------------------------------

    Assets

      Current assets:
        Cash and cash equivalents                       $   7,551  $   1,306
        Accounts receivable                                43,629     37,359
        Taxes recoverable                                     688          -
        Inventory                                           8,963      3,584
        Prepaid expenses and deposits                       1,538        781
        ---------------------------------------------------------------------
                                                           62,369     43,030


    Property and equipment                                101,287     67,639

    Intangibles, net of accumulated amortization of
     $489 (2007 - $342)                                       441        588

    Goodwill                                               19,775     19,775

    -------------------------------------------------------------------------
                                                        $ 183,872  $ 131,032
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Unitholders' Equity

    Current liabilities:
        Bank indebtedness                               $  15,406  $   6,030
        Accounts payable and accrued liabilities           27,040     17,203
        Distributions payable to Unitholders                2,281      2,216
        Taxes payable                                           -        341
        Current portion of capital lease obligations          110        194
        Current portion of long-term debt                      97         99
        ---------------------------------------------------------------------
                                                           44,934     26,083

    Capital lease obligations                                 112        257

    Long-term debt                                         40,121     17,184

    Future income taxes                                     6,846      8,258


    Unitholders' equity:
        Unitholders' capital                               54,311     48,193
        Contributed surplus                                 2,663      2,205
        Retained earnings                                  31,559     28,852
        Accumulated other comprehensive income              3,326          -
        ---------------------------------------------------------------------
                                                           91,859     79,250

    -------------------------------------------------------------------------
                                                        $ 183,872  $ 131,032
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

    Dollars in 000's except per Trust Unit amounts

                                    Three months ended           Years ended
                                           December 31           December 31
                                  --------------------- ---------------------
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------

    Revenues                      $  50,506  $  39,054  $ 178,928  $ 145,106
    Expenses :
      Operating                      29,349     19,712     98,614     73,482
      General and administrative      8,098      6,227     31,063     25,774
      Depreciation and
       amortization                   4,135      3,245     13,416     12,054
      Interest - long-term debt
       and capital lease
       obligations                      373        292      1,158      1,084
      Interest - other                  132        122        422        404
      Foreign exchange loss (gain)       74        (94)        94        492
      Unit-based compensation
       expense                          338        398      1,705      1,603
    -------------------------------------------------------------------------
                                     42,499     29,902    146,472    114,893
    -------------------------------------------------------------------------
                                      8,007      9,152     32,456     30,213

    Gain on disposal of property
     and equipment                    1,079        620      2,138      1,777
    -------------------------------------------------------------------------
    Income before taxes               9,086      9,772     34,594     31,990

    Taxes:
      Current                         1,217        506      6,348      3,982
      Future (reduction)             (1,868)    (1,099)    (1,893)     3,145
    -------------------------------------------------------------------------
                                       (651)      (593)     4,455      7,127
    -------------------------------------------------------------------------

    Net income for the period         9,737     10,365     30,139     24,863

    Retained earnings, beginning
     of period                       29,002     25,136     28,852     30,394

    Less: Distributions              (7,180)    (6,649)   (27,432)   (26,405)

    -------------------------------------------------------------------------
    Retained earnings, end of
     period                       $  31,559  $  28,852  $  31,559  $  28,852
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net income per Trust Unit:
      Basic                       $    0.30  $    0.33  $    0.94  $    0.79
      Diluted                     $    0.30  $    0.33  $    0.93  $    0.78
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND ACCUMULATED OTHER
    COMPREHENSIVE INCOME

    Dollars in 000's
                                    Three months ended           Years ended
                                           December 31           December 31
                                  --------------------- ---------------------
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------


    Net income for the period     $   9,737  $  10,365  $  30,139  $  24,863
    Other comprehensive income:
      Unrealized foreign exchange
       gain on translation of
       self-sustaining foreign
       operations                     1,933          -      3,326          -
    -------------------------------------------------------------------------
    Comprehensive income for the
     period                       $  11,670  $  10,365  $  33,465  $  24,863
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Accumulated other
     comprehensive loss,
     beginning of period          $    (501) $       -  $       -  $       -
      Adjustment for change in
       foreign currency
       translation method (note 2)        -          -     (1,894)         -
      Other comprehensive income      3,827          -      5,220          -
    -------------------------------------------------------------------------
    Accumulated other
     comprehensive income, end
     of period                    $   3,326  $       -  $   3,326  $       -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF CASH FLOWS

    Dollars in 000's
                                    Three months ended           Years ended
                                           December 31           December 31
                                  --------------------- ---------------------
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------

    Cash provided by (used in):

    Operating activities:
    Net income for the period     $   9,737  $  10,365  $  30,139  $  24,863
    Items not involving cash:
      Depreciation and
       amortization                   4,135      3,245     13,416     12,054
      Future taxes (reduction)       (1,868)    (1,099)    (1,893)     3,145
      Unrealized foreign exchange
       gain                            (339)         -       (405)      (195)
      Unit-based compensation
       expense                          338        398      1,705      1,603
      Gain on disposal of
       property and equipment        (1,079)      (620)    (2,138)    (1,777)
    -------------------------------------------------------------------------
                                     10,924     12,289     40,824     39,693
    Changes in non-cash operating
     working capital                  1,168        212     (4,681)        36
    -------------------------------------------------------------------------
                                     12,092     12,501     36,143     39,729
    -------------------------------------------------------------------------

    Investing activities:
    Property and equipment
     additions                      (21,054)    (5,205)   (47,618)   (19,857)
    Proceeds on disposal of
     property and equipment           1,912      1,475      3,761      3,575
    Changes in non-cash investing
     working capital                 (4,567)     2,377      3,723       (325)
    -------------------------------------------------------------------------
                                    (23,709)    (1,353)   (40,134)   (16,607)
    -------------------------------------------------------------------------

    Financing activities:
    Advances under long-term debt    13,000         55     23,047      2,228
    Repayment of long-term debt         (31)       (22)      (113)      (116)
    Repayment of capital lease
     obligations                        (78)       (48)      (228)      (214)
    Distributions paid to
     Unitholders                     (7,180)    (6,646)   (27,368)   (27,903)
    Proceeds on exercise of Trust
     Unit options                         -        149      4,904      3,065
    Change in bank indebtedness       8,283     (3,975)     9,376       (430)
    -------------------------------------------------------------------------
                                     13,994    (10,487)     9,618    (23,370)
    -------------------------------------------------------------------------

    Effect of exchange rate on
     changes in cash and cash
     equivalents                        618          -        618          -
    -------------------------------------------------------------------------

    Change in cash and cash
     equivalents                      2,995        661      6,245       (248)

    Cash and cash equivalents,
     beginning of period              4,556        645      1,306      1,554
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period                $   7,551  $   1,306  $   7,551  $   1,306
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    %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.