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Cathedral Energy Services reports results for the three and nine months ended September 30, 2008

Nov 5, 2008
3:15pm

    /NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

    CALGARY, Nov. 5 /CNW/ - Cathedral Energy Services Income Trust (the
"Trust"/TSX: CET.UN) is pleased to report its results for the three and nine
months ended September 30, 2008. Dollars are in '000's except for day rates
and per Trust Unit amounts.

    FINANCIAL HIGHLIGHTS
    $ in 000's except               Three months ended     Nine months ended
     per Trust Unit amounts               September 30          September 30
                                  --------------------- ---------------------
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    Revenues                      $  52,686  $  38,355  $ 128,422  $ 106,052

    EBITDAS(1)                    $  16,914  $  13,775  $  36,941  $  33,024
      Per Trust Unit - diluted    $    0.52  $    0.43  $    1.14  $    1.04

    EBITDAS(1) as a % of revenue        32%        36%        29%        31%

    Income before taxes           $  13,022  $  10,073  $  25,508  $  22,218

    Net income                    $  10,296  $   7,126  $  20,402  $  14,498
      Per Trust Unit - basic      $    0.32  $    0.23  $    0.64  $    0.46
      Per Trust Unit - diluted    $    0.32  $    0.22  $    0.63  $    0.46

    Cash distributions declared
     per Trust Unit               $    0.21  $    0.21  $    0.63  $    0.63

    Distributable cash(1)         $  13,844  $  10,747  $  28,996  $  26,950

    Cash distributions declared   $   6,813  $   6,626  $  20,252  $  19,756

    Payout ratio(1)                     49%        62%        70%        73%

    Property and equipment
     additions                    $  15,129  $   4,364  $  26,564  $  14,652

    Weighted average Trust Units
     outstanding:
      Basic ('000)                   32,384     31,515     32,091     31,318
      Diluted ('000)                 32,522     31,734     32,318     31,735


                                                        September   December
                                                          30 2008    31 2007
    -------------------------------------------------------------------------

    Working capital                                     $  17,444  $  16,947
    Long-term debt and capital lease obligations
     excluding current portion                          $  27,308  $  17,441
    Unitholders' equity                                 $  85,145  $  79,250
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Non-GAAP measure; see "NON-GAAP FINANCIAL MEASUREMENTS" within
        Management's Discussion & Analysis.

    MANAGEMENT'S DISCUSSION & ANALYSIS

    This Management's Discussion & Analysis ("MD&A") for the three and nine
months ended September 30, 2008 should be read in conjunction with the annual
audited consolidated financial statements and notes thereto for the year ended
December 31, 2007, as well as the MD&A in the Trust's 2007 Annual Report, and
with the unaudited interim consolidated financial statements for the three and
nine months ended September 30, 2008. This MD&A has been prepared as of
November 5, 2008. 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 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 including the Trust/Cathedral's
market share and position in the oilfield service market; 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 not limited to: the impact of
general economic conditions in Canada and the United States; 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's/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 labor unrest; fluctuation in foreign exchange or interest rates;
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
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 2007 Annual Report which has been filed with
Canadian provincial securities commissions and are available on www.sedar.com.

    NON-GAAP FINANCIAL 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;

    ii)  "EBITDAS" - defined as earnings before interest on long-term debt
         and capital lease obligations, 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);

    iii) "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);

    iv)  "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;

    v)   "Payout ratio" - calculated as cash distributions declared 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 and distributable cash definition above); and

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

    OVERVIEW

    As result of steady improvement in the Canadian operating environment
combined with further expansion in the U.S., the Trust generated Q3 2008
revenues of $52,686 and year-to-date revenues of $128,422, representing the
highest level of Q3 revenues in the Trust's history. Within the oilfield
service sector, the directional drilling sub-sector has been a very active
area with a growing number of wells being drilled directionally/horizontally.
In resource plays such as the Bakken (southeast Saskatchewan) and Montney
(northeast B.C.), operators are using the combination of horizontally drilled
wells and multi-stage fracturing to increase reservoir recoveries and it is
expected that such completion techniques will continue to expand the number of
horizontal wells drilled. The 2008 Q3 revenues were led by the Trust's
directional drilling division which represented 77.6% (2007 Q3 - 75.8%) of
2008 Q3 total revenues. The Trust's U.S. drilling division grew significantly
over the 2007 Q3 period, generating period revenues 79.8% higher than in 2007
and on a year-to-date basis increasing revenues by 46.5% over 2007. Both the
Trust's production testing and wireline divisions improved period and
year-to-date revenues as result the commencement and expansion of U.S.
operations. This increase was also supported by the increasing momentum within
the natural gas drilling activity in Western Canada. 2008 Q3 EBITDAS was
$16,914 ($0.52 per diluted Trust Unit) which represents a $3,139 or 22.8%
increase from $13,775 ($0.43 per diluted Trust Unit) in 2007, year-to-date
2008 EBITDAS reached new levels totaling $36,941 compared to 33,024 in 2007.
For the three and nine month period ended September 30, 2008 net income was
$10,296 ($0.32 per diluted Trust Unit) and $20,402 ($0.63 per diluted trust
unit) respectively, which compares to $7,126 ($0.22 per diluted Trust Unit)
and $14,498 ($0.46 per diluted Trust Unit) respectively in 2007.

    RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2008

                                       Three months ended September 30, 2008
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                     drilling(1)  Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $  22,992  $   5,069  $   3,814  $  31,875
    United States                    17,917      2,068        826     20,811
    -------------------------------------------------------------------------
                                  $  40,909  $   7,137  $   4,640  $  52,686
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                       Three months ended September 30, 2007
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                     drilling(1)  Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $  19,112  $   6,009  $   2,875  $  27,996
    United States                     9,964        395          -     10,359
    -------------------------------------------------------------------------
                                  $  29,076  $   6,404  $   2,875  $  38,355
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) including rental of related equipment

    The strengthening Canadian operating environment combined with the
Trust's continued growth in the U.S. markets, resulted in record revenues of
$52,686 for the quarter. Directional drilling activity days increased 34.1%
from 3,287 in 2007 Q3 to 4,409 in 2008 Q3. The average day rate received for
providing directional drilling services increased 5.0% on a
quarter-over-quarter basis to $9,098 (2007 - $8,667). The increase in the
directional drilling average day rate is the net result of Canadian day rate
decreases due to continued market pressures offset by significantly increased
days and corresponding day rates in the U.S. market, where U.S. industry
activity levels hit a multi-year high in late August. While directional
drilling activity days in Canada increased 20.5%, the U.S. activity increased
57.5% due to additional equipment, increased activity levels within the
existing client base and was further supplemented by the expansion of the U.S.
client base. For 2008 Q3 U.S. activity days represented 43.4% of total
activity compared to 36.9% of total activity during the same period in 2007.
On a quarter-over-quarter basis revenues from the production testing division
increased 61.4% due to the addition of 6 new testing units and as natural gas
drilling regained momentum over the summer months. As previously announced the
Trust expanded its production testing business to the U.S. Rocky Mountain
region, establishing a base office in Grand Junction, Colorado, while
operating primarily in Wyoming. In early 2008 Q2 one production testing unit
was transferred to the U.S. operations and it commenced generating revenues in
late July 2008. Six additional testing units came on line in late September
2008. The Trust's wireline division had a quarter-over-quarter increase in
revenues of 11.4% with the increase being due to the continued expansion of
the U.S. wireline division in 2008 Q3. In early 2008 the Trust established a
second U.S. operations base for its wireline division in Dickinson, North
Dakota with one wireline unit. During 2008 Q3 a second wireline unit was
transferred from the Canadian fleet to the Dickinson operations base.

    Gross margin - The gross margin for 2008 Q3 was 46.5% which compares to
51.5% in 2007 Q3. The decrease is primarily attributed increased directional
field labour rates and increased equipment rental charges in the U.S. due to
the increase in the quarter-over-quarter activity levels.

    General and administrative expenses - General and administrative expenses
increased from $6,533 in 2007 Q3 to $7,943 in 2008 Q3 - an increase of $1,410.
The increase was the net result of i) increased personnel; ii) office/shop
rental costs; iii) increase in activity levels for the U.S. directional
drilling division; iv) increased costs associated with the establishment of
additional U.S. operating bases and v) decreased professional fees, during Q3
2007 approximately $300 in professional fees related to an aborted corporate
acquisition was incurred. As a percentage of revenues, general and
administrative expenses were 15.1% in 2008 Q3 and 17.0% in 2007 Q3.

    Depreciation and amortization - Depreciation and amortization for 2008 Q3
was $3,411 which compares to $3,110 in 2007 Q3. Despite a significant amount
of capital expenditures on the Trust's depreciable asset base over the past
12 months, depreciation on a quarter-over-quarter did not increase
significantly due to the change in accounting method for foreign currency
translation of the Trust's U.S. operations (refer to note 2 to the
consolidated financial statements for the period ended September 30, 2008). As
a percentage of revenues, depreciation amounted to 6.5% for 2008 and 8.1% for
2007.

    Interest expense - Interest expense related to long-term debt and capital
leases decreased from $269 in 2007 Q3 to $266 in 2008 Q3 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 decreased marginally on a quarter-over-quarter basis
from $120 in 2007 Q3 to $115 in 2008 Q3, 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 $302 loss in 2007 Q3 to a $21 loss in 2008 Q3. 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 changes in accounting policies section).

    Unit-based compensation expense - For 2008 Q3 the Trust had unit-based
compensation expense of $215 which compares to $323 for 2007 Q3. The value of
the options is being amortized against income over the three-year vesting
period.

    Gain on disposal of property and equipment - During 2008 Q3 the Trust had
a gain on disposal of property and equipment of $519, which compares to a gain
of $973 in 2007 Q3. 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 2008 Q3, the Trust had a tax expense of $2,726 (effective tax
rate of 20.9%) which compares to $2,947 (effective tax rate of 29.3%) for 2007
Q3. The decline in the effective tax rate is due to a higher portion of the
Trust's pre-tax income being allocated to unitholders combined with a
reduction in Canadian statutory tax rates.

    RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2008

                                        Nine months ended September 30, 2008
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                     drilling(1)  Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $  55,335  $  14,089  $   9,001  $  78,425
    United States                    44,444      4,727        826     49,997
    -------------------------------------------------------------------------
                                  $  99,779  $  18,816  $   9,827  $ 128,422
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                        Nine months ended September 30, 2007
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                     drilling(1)  Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $  50,495  $  16,154  $   8,681  $  75,330
    United States                    30,327        395          -     30,722
    -------------------------------------------------------------------------
                                  $  80,822  $  16,549  $   8,681  $ 106,052
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) including rental of related equipment

    2008 Q3 year-to-date revenues were $128,422 which represented an increase
of $22,370 or 21.1% over 2007 Q3 year-to-date revenues of $106,052. A modest
year-to-date improvement in Canadian activity levels was supported by
significant growth and expansion in the U.S. operations.
    The directional drilling division revenues (including rentals and
inspection revenues) have increased from $80,822 in 2007 to $99,779 in 2008.
This increase is the net result of: i) an increase in activity days from 8,804
in 2007 to 11,191 in 2008; and ii) a decrease in the average day rate from
$8,959 in 2007 to $8,729 in 2008. On a year-to-date basis Canadian activity
days increased from 5,267 to 6,042 while the U.S. activity days increased from
3,537 to 5,149 a 45.6% improvement. The U.S. Q3 year-to-date directional
revenues increased 46.5% on a year-over-year basis.
    Expansion to the U.S. combined with the modest increase in natural gas
drilling expenditures in the western Canada market resulted in increased
revenues for the Trust's production testing division while the wireline
division's Canadian revenues were reduced due to the transfer of units to the
U.S. The Trust's production testing division contributed $9,827 in revenues
during 2008 Q3 year-to-date which is a 13.2% increase over 2007 revenues of
$8,681. The wireline division generated revenues of $18,816 for 2008 Q3
year-to-date which compares to $16,549 for 2007 which represents a 13.7%
increase; this increase was the result of the expansion of wireline operations
to the U.S. commencing in 2007 Q3.

    Gross margin - The gross margin for 2008 was 46.1%, which compares to
49.3% in 2007. The decrease is attributed to number of factors including: i) a
decrease in the average day rate in providing directional drilling services;
ii) increased directional field labour rates and iii) equipment rental and
repair charges due to the increase in the year over year activity levels in
the U.S.

    General and administrative expenses - General and administrative expenses
increased from $19,547 in 2007 to $22,965 in 2008 - an increase of $3,418. The
increase was the net result of i) increased personnel; ii) increases in
office/shop rental costs; iii) increase in activity levels for the U.S.
directional drilling division; iv) increased costs associated with the
establishment of additional U.S. operating bases and v) decreased professional
fees, during Q3 2007 approximately $300 in professional fees related to an
aborted corporate acquisition was incurred. As a percentage of revenues,
general and administrative expenses were 17.9% in 2008 and 18.4% in 2007.

    Depreciation and amortization - Depreciation and amortization for 2008
was $9,281 compared to $8,809 in 2007. The $472 increase is related to the
Trust's investment in property and equipment over the past 12 months. Despite
a significant amount of capital expenditures on the Trust's depreciable asset
base over the past 12 months depreciation on a quarter-over-quarter did not
increase significantly due to the change in accounting method for foreign
currency translation of the Trust's U.S. operations (refer to note 2 to the
consolidated financial statements for the period ended June 30, 2008). As a
percentage of revenues, depreciation and amortization amounted to 7.2% for
2008 and 8.3 % for 2007.

    Interest expense - Interest on long-term debt and capital lease
obligations has decreased from $792 in 2007 to $785 in 2008 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 on a year-over-year basis from
$282 in 2007 Q3 to $290 in 2008 Q3, relates mainly to interest charges
incurred on use by the Trust of its bank indebtedness/line of credit facility.

    Foreign exchange gain/loss - The Trust's foreign exchange loss has
decreased from $586 in 2007 to a loss of $20 in 2008. 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 changes in accounting policies section).

    Unit-based compensation expense - Unit-based compensation expense for
2008 was $1,367 which compares to $1,205 in 2007. 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 - During 2008 Q3 YTD the Trust
had a gain on disposal of property and equipment of $1,059 which compares to
$1,157 in 2007. These 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 and
year-to-year basis.

    Taxes - For 2008, the Trust had a tax expense of $5,106 (effective tax
rate of 20.0%) which compares to $7,720 (effective tax rate of 34.8%) in 2007.
The 2007 tax provision includes a cumulative non-cash adjustment of $3,318
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 18.7%. The adjusted effective tax rate has increased mainly due to
the continuing growth in the U.S. operations which are taxed at a higher rate
as well as some expenses not being deductible for tax purposes.

    OTHER COMPREHENSIVE INCOME

    Other comprehensive income ("OCI") for the three and nine month period
ended September 30, 2008 amounted to $959 and $1,393, respectively. The
year-to-date gain is entirely comprised of an unrealized foreign currency
translation gain, and reflects the changing value of the Canadian dollar
compared to the U.S. dollar and the impact on the translation of the U.S.
subsidiary.

    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
September 30, 2008, the Trust had an operating line of credit with a major
Canadian bank in the amount of $12,500 (December 31, 2007 - $12,500) of which
$7,123 (December 31, 2007 - $6,030) was drawn. During the quarter, the Trust
increased the authorized amount on its bank revolving term loan to $30,000
from the previously approved $25,000; drawings on this facility as at
September 30, 2008 totaled $27,000 (2007 - $17,000). In addition, at
September 30, 2008 the Trust had obligations under capital leases in the
amount of $301 (December 31, 2007 - $451) and other long-term debt of $248
(December 31, 2007 - $283).
    On October 31, 2008 the Trust renegotiated its credit facility. The
revised credit facility provides for a $20,000 (previously $12,500) operating
loan facility plus a revolving-term loan facility with an authorized amount of
$45,000 (previously $30,000). The operating loan bears interest at the bank's
prime plus 0.25% per annum and the revolving term facility bears interest at
the bank's prime plus 0.75% per annum. The credit facility matures June 30,
2009. Prior to maturity the borrower may convert the revolving term loan to a
non-revolving term loan repayable monthly over 36 months with interest only
for the first 12 months. The credit facility is secured by a general security
agreement over all present and future personal property with a first charge
over certain real estate assets and is subject to certain covenants regarding
the payment of dividends, cash distributions and the maintenance of certain
financial ratios.

    Operating activities - Cash flow used in operating activities for the
three months ended September 30, 2008 totaled $427 compared to $3,156 cash
flow provided by operating activities during the same period in 2007. Cash
flow from operating activities for the nine months ended September 30, 2008
was $24,051 (2007- $27,228). The Trust has a strong working capital position
at September 30, 2008 at $17,444 which compares to $16,947 at December 31,
2007.

    Investing activities - Cash used in investing activities for the three
and nine months ended September 30, 2008 amounted to $5,161 and $16,425,
respectively, which compares to $6,908 and $15,254 for the same period in
2007. During 2008 Q3 the Trust invested an additional $15,129 (2007 - $4,364)
in property and equipment for a total Q3 year-to-date investment of $26,564
(2007 - $14,652). The significant additions included expansion of the overall
mud motor and drill collar fleet, MWD components which will be used in the
2008 build out of 20 EM-MWD systems, of which 8 were operational to
September 30, 2008, final progress payments on the construction of a mud motor
facility in Nisku, Alberta and progress payments on the construction of new
production testing units. At September 30, 2008, the Trust's operating
entities had 86 MWD systems, 25 production testing units and 28 wireline
units. The Trust's 2008 capital budget has been increased by $6,600 to
$39,900; this increase is related to the purchase of land and building in
Calgary. In due course, we will be consolidating our Calgary operating
facilities. The 2008 capital budget includes maintenance capital in the amount
of $746. The Trust expects its 2008 capital budget to be financed by way of a
combination of cash flow from operations and bank debt.

    Financing activities - For the three months ended September 30, 2008
financing activities provided $5,994 of cash flow which compares to $3,616 for
the three months ended September 30, 2007. Cash used in financing activities
for the nine months ended September 30, 2008 amounted to $4,376 (2007 -
$12,883) in 2007. Distributions paid to Unitholders for 2008 Q3 amounted to
$6,797 (2007 - $6,616) bringing year-to-date distributions paid for the nine
months ended September 30, 2008 to $20,188 (2007 - $21,258). The increase in
distributions paid on a quarter-over-quarter basis is the result of an
increase in the number of Trust Units outstanding while the year-to-date
decrease is the net effect of the increases number of shares outstanding
offset by the payment of a "special" $0.05 per Trust Unit cash distribution
declared in December 2006 ($1,549) and payable January 15, 2007 - there was no
such "special" cash distribution paid in 2008. The Trust's "regular" monthly
distribution has been at $0.07 per Trust Unit since September 2006. Cash
distributions paid have been financed from cash flow from operations and
management currently expects future cash distributions will also be financed
from cash flow from operations. For the nine months ended September 30, 2008
financing cash inflows resulted from: i) $4,904 (2007 - $2,916) cash received
on the exercise of Trust Unit options, ii) an $10,047 increase in new
long-term debt (2007 - $2,173) and iii) a $1,093 increase in bank indebtedness
(2007 - $3,545). Offsetting these inflows were cash outflows of $232 (2007 -
$259) for the repayment of long-term debt and capital lease obligations. At
November 5, 2008, the Trust had 32,582,022 Trust Units and 3,134,764 Trust
Unit options outstanding.

    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, 2007. As at September 30, 2008
the Trust's commitment to purchase property and equipment and operating
supplies is approximately $23,405. The commitments are expected to be financed
from a combination of cash flow from operations and bank debt.

    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 third quarter of
2008.

    CHANGE IN FOREIGN CURRENCY TRANSLATION

    Prior to January 1, 2008, the Trust's U.S. operations were classified as
integrated operations and were translated using the temporal method with all
translation gains (losses) included in the determination of net income for the
current period. Effective January 1, 2008, the Trust changed the
classification of its U.S. operations to self-sustaining resulting in the
financial statements being translated using the current rate method as opposed
to the temporal method. Under the current rate method of translation, revenues
and expenses of the subsidiary are translated at the rates in effect at the
time of the transactions while assets and liabilities are translated at the
current exchange rate in effect at the balance sheet date. Upon consolidation
of the U.S. operations, gains and losses due to fluctuations in the foreign
currency exchange rates are deferred on the balance sheet as a separate
component of Other Comprehensive Income ("OCI"). Accumulated other
comprehensive income (loss) forms part of Unitholders' equity. This change in
foreign currency translation has been applied prospectively and resulted in a
foreign exchange loss of $1,894 being deferred and recorded as OCI as at
January 1, 2008.

    NEW ACCOUNTING POLICIES

    Effective January 1, 2008, The Trust adopted the Canadian Institute of
Chartered Accountants ("CICA") section 3031, "Inventories", section 1535,
"Capital Disclosures", and section 3861, "Financial Instruments - Disclosure
and Presentation". These standards have been adopted prospectively. For the
nine months ended September 30, 2008, the adoption of these standards did not
have an effect on the Trust's results, financial position or cash flows but
additional disclosures have been provided in the notes to the interim
financial statements.
    In February 2008, The Canadian Accounting Standards Board confirmed that
the use of International Financial Reporting Standards ("IFRS") will be
required in Canada for publicly accountable profit oriented enterprises for
fiscal years beginning on or after January 1, 2011. The Trust will be required
to report using IFRS beginning January 1, 2011. The Trust has begun the
process of evaluating the impact of the change to IFRS.
    During the three months ended September 30, 2008 the Trust issued Phantom
Options and therefore adopted a new accounting policy with respect to these
options. Awards under the Phantom Option plan are granted in the form of stock
appreciation rights ("SARs"). Such awards are payable in cash, and
compensation expense is recognized as the SARs change in market value based on
the fair market value of the Trust's units at the end of each reporting
period.

    BUSINESS RISKS

    The MD&A for the year ended December 31, 2007, which is included in the
Trust's 2007 Annual Report, includes an overview on business risks associated
with the Trust and its operating entities Those business risks remain in
effect as at September 30, 2008 as well as the following additional risks:

    Risks of foreign operations

    The Trust is currently pursuing providing oilfield services in Venezuela.
Working outside of Canada gives rise to the risk of dealing with business and
political systems that are different than the Trust is accustomed to in
Canada. The Trust expects to hire employees and consultants who have
experience working in the international arena and it is committed to
recruiting qualified resident nationals on the staff of its international
operations. In addition, the Trust is committed to continuing expansion of its
North American market to mitigate this risk. These potential risks include:
expropriation or nationalization; civil insurrection; labour unrest; strikes
and other political risks; fluctuation in foreign currency and exchange
control; increases in duties and taxes; and changes in laws and policies
governing operations of foreign based companies. Those business risks remain
in effect as at September 30, 2008. At September 30, 2008, the Trust has a net
investment in its Venezuela subsidiary of $1,700.

    Foreign currency risk

    In addition to foreign currency risk associated with U.S. dollar, the
Trust is now exposed to foreign currency fluctuations in relation to
Venezuelan Bolivar. The Trust's foreign currency policy is to monitor foreign
current risk exposure in its areas of operations and mitigate that risk where
possible by matching foreign currency denominated expense with revenues
denominated in foreign currencies. The Trust strives to maintain limited
amounts of cash and cash equivalents denominated in foreign currency on hand
and attempts to further limit its exposure to foreign currency through
collecting and paying foreign currency denominated balance in a timely
fashion.

    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 financial 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 Financial Measurements).
    The following is a comparison of cash distributions declared and certain
defined amounts:

                                                                 Fiscal year
                                                  2008  ---------------------
                                    2008 Q3     Q3 YTD       2007       2006
    -------------------------------------------------------------------------

    Cash flow from operating
     activities                   $    (427) $  24,051  $  39,729  $  39,929
    -------------------------------------------------------------------------
    Net income for the period     $  10,296  $  20,402  $  24,863  $  35,348
    -------------------------------------------------------------------------
    Distributable cash            $  13,844  $  28,996  $  38,993  $  45,972
    -------------------------------------------------------------------------
    Cash distributions declared   $   6,813  $  20,252  $  26,405  $  24,681
    -------------------------------------------------------------------------
    Excess (shortfall) of cash
     flow from operating
     activities over cash
     distributions declared       $  (7,240) $   3,799  $  13,324  $  15,248
    -------------------------------------------------------------------------
    Excess (short-fall) of net
     income over cash
     distributions declared       $   3,483  $     150  $  (1,542) $  10,667
    -------------------------------------------------------------------------
    Excess of distributable
     cash over cash
     distributions declared 	   $   7,031  $   8,744  $  12,588  $  21,291
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net income includes significant non-cash charges, which for the three
months ended September 30, 2008 were $4,203, for the nine months ended
September 30, 2008 were $10,557 and for the years ended December 31, 2007 and
2006 were $16,607 and $13,429, respectively, 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 declared may exceed net income. The Trustees review
distributable cash over a cumulative annualized period rather than a specific
quarter. On an annualized basis it is not management's intent to distribute
100% of distributable cash.
    Distributable cash for the three and nine months ended September 30, 2008
and 2007 is calculated as follows:

                                    Three months ended     Nine months ended
                                          September 30          September 30
                                  --------------------- ---------------------
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    Cash flow from operating
     activities                   $    (427) $   3,156  $  24,051  $  27,228

    Add:   - changes in non-cash
              operating working
              capital(1)             14,407      7,858      5,849        175
    Less:  - required principal
              repayments on
              long-term debt and
              capital lease
              obligations               (78)       (67)      (232)      (242)
           - maintenance capital
              expenditures              (58)      (200)      (672)      (211)
    -------------------------------------------------------------------------
    Distributable cash            $  13,844  $  10,747  $  28,996  $  26,950
    -------------------------------------------------------------------------
    Cash distributions declared   $   6,813  $   6,626  $  20,252  $  19,756
    -------------------------------------------------------------------------
    Payout ratio                        49%        62%        70%        73%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (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.


    EBITDAS:

    EBITDAS is calculated as follows:

                                    Three months ended     Nine months ended
                                          September 30          September 30
                                  --------------------- ---------------------
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------

    EBITDAS as reported           $  16,914  $  13,775  $  36,941  $  33,024

    Deduct:  - depreciation and
                amortization          3,411      3,110      9,281      8,809
             - interest - long-term
                debt and capital
                lease obligations       266        269        785        792
             - unit-based
                compensation
                expense                 215        323      1,367      1,205
             - provision for taxes    2,726      2,947      5,106      7,720
    -------------------------------------------------------------------------
    Net income for the period     $  10,296  $   7,126  $  20,402  $  14,498
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    RELATED PARTY TRANSACTIONS

    A Trustee of the Trust and Director of Cathedral Energy Services Ltd., is
a partner in a law firm and, through that law firm, is involved in providing
and managing the legal services provided to the Trust at market rates. The
total amount paid for these legal services for the nine months ended
September 30, 2008 was $21 (2007 - $31), respectively.

    SUMMARY OF QUARTERLY RESULTS

    -------------------------------------------------------------------------
    Three
     month
     period      Sep     Jun     Mar     Dec     Sep     Jun     Mar     Dec
     ended      2008    2008    2008    2007    2007    2007    2007    2006
    -------------------------------------------------------------------------
    Revenues $52,686 $29,483 $46,253 $39,054 $38,355 $24,985 $42,712 $35,327

    EBITDAS   16,914   4,632  15,395  13,707  13,775   4,837  14,412  13,046

    Net income
     (loss)   10,296     189   9,917  10,365   7,126  (2,415)  9,787   8,127

    Net income
     (loss)
     per Trust
     Unit -
     basic      0.32    0.01    0.31    0.33    0.23   (0.08)   0.32    0.26

    Net Income
     (loss) per
     Trust Unit
     - diluted  0.32    0.01    0.31    0.33    0.22   (0.08)   0.31    0.26

    Cash
     distri-
     butions
     declared
     per Trust
     Unit       0.21    0.21    0.21    0.21    0.21    0.21    0.21    0.26
    -------------------------------------------------------------------------

    OUTLOOK

    In the near term there will be a degree of uncertainty and volatility in
the overall market place due to the current global capital and debt issues as
well as the overall state of the world's economies. The price of oil has
recently dropped significantly and the effect on producers has been somewhat
buffered by the strengthening of the U.S. dollar. As a result, in the near
term the Trust's activity levels may be affected negatively. That said, the
Trust's management considers the long-term fundamentals for the supply and
demand for energy to be positive for the oilfield services sector.
    The Trust continues its 2008 build out of 20 EM-MWD systems of which 8
were completed by the end of 2008 Q3; the remaining 12 will be operational by
the end of 2008. To date in 2008, we have added 9 EM-MWD systems to the U.S.
operations and due to demand we expect to add 4 more to the U.S. market before
the end of 2008. At the end of 2008 we expect to have 37 EM-MWD systems
operating in the U.S. We continue to see significant advances in the
capabilities of our EM-MWD, in particular in the area of signal detection
which allows us to drill deeper and into areas where EM has not been
successful before.
    In October 2008 another electric line wireline unit was transferred to
the U.S. fleet. The Trust now has 3 wireline units based in Dickinson, North
Dakota and 2 wireline units based in Casper, Wyoming. We will continue to
monitor customer demand as to the need for additional wireline units in the
U.S.
    A seventh production testing unit was delivered to the U.S. operations in
October 2008 and due to customer demand 4 additional production testing units
have been ordered for the U.S. market and delivery is scheduled for late 2009
Q1. In the Canadian market, we had originally expected to receive 5 production
testing units by the end of October 2008 and now deliveries are expected in
November and December 2008.
    The Trust continues to actively pursue opportunities to offer an expanded
range of services to its customers, increase its market share, enter new
geographic territories and make strategic acquisitions. Cathedral is pursuing
directional drilling business opportunities in South America. A bid has been
submitted, the bid evaluation process continues and we will in due course be
advised as to the outcome of the bidding process.

    CONSOLIDATED BALANCE SHEETS
    Dollars in 000's                                    September   December
    (unaudited)                                           30 2008    31 2007
    -------------------------------------------------------------------------

    ASSETS

    Current assets:
      Cash and cash equivalents                         $   4,556  $   1,306
      Accounts receivable                                  47,331     37,359
      Taxes recoverable                                     1,260          -
      Inventory                                             6,700      3,584
      Prepaid expenses and deposits                         1,400        781
    -------------------------------------------------------------------------
                                                           61,247     43,030

    Property and equipment                                 83,109     67,639

    Intangibles                                               478        588

    Goodwill                                               19,775     19,775
    -------------------------------------------------------------------------
                                                        $ 164,609  $ 131,032
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND UNITHOLDERS' EQUITY

    Current liabilities:
      Bank Indebtedness                                 $   7,123  $   6,030
      Accounts payable and accrued liabilities             34,158     17,203
      Distribution payable to Unitholders                   2,281      2,216
      Taxes payable                                             -        341
      Current portion of capital lease obligations            141        194
      Current portion of long-term debt                       100         99
    -------------------------------------------------------------------------
                                                           43,803     26,083

    Capital lease obligations                                 160        257

    Long-term debt                                         27,148     17,184

    Future income taxes                                     8,353      8,258

    Unitholders' equity:
      Unitholders' capital                                 54,311     48,193
      Contributed surplus                                   2,333      2,205
      Retained earnings                                    29,002     28,852
      Accumulated other comprehensive loss                   (501)         -
    -------------------------------------------------------------------------
                                                           85,145     79,250
    -------------------------------------------------------------------------
                                                        $ 164,609  $ 131,032
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
    Dollars in 000's except per Trust Unit amounts
    (unaudited)
                                    Three months ended     Nine months ended
                                          September 30          September 30
                                  --------------------- ---------------------
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------

    Revenues                      $  52,686  $  38,355  $ 128,422  $ 106,052
    Expenses :
      Operating                      28,212     18,598     69,265     53,770
      General and administrative      7,943      6,533     22,965     19,547
      Depreciation and amortization   3,411      3,110      9,281      8,809
      Interest - long-term debt and
       capital lease obligations        266        269        785        792
      Interest - other                  115        120        290        282
      Foreign exchange loss              21        302         20        586
      Unit-based compensation
       expense                          215        323      1,367      1,205
    -------------------------------------------------------------------------
                                     40,183     29,255    103,973     84,991
    -------------------------------------------------------------------------
                                     12,503      9,100     24,449     21,061
    Gain on disposal of property
     and equipment                      519        973      1,059      1,157
    -------------------------------------------------------------------------
    Income before taxes              13,022     10,073     25,508     22,218

    Taxes:
      Current                         2,122      1,426      5,131      3,476
      Future (reduction)                604      1,521        (25)     4,244
    -------------------------------------------------------------------------
                                      2,726      2,947      5,106      7,720
    -------------------------------------------------------------------------
    Net income for the period        10,296      7,126     20,402     14,498

    Retained earnings, beginning
     of period                       25,519     24,636     28,852     30,394

    Less: distributions declared     (6,813)    (6,626)   (20,252)   (19,756)
    -------------------------------------------------------------------------
    Retained earnings, end of
     period                       $  29,002  $  25,136  $  29,002  $  25,136
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net income per Trust Unit:
      Basic                       $    0.32  $    0.23  $    0.64  $    0.46
      Diluted                     $    0.32  $    0.22  $    0.63  $    0.46
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND ACCUMULATED OTHER
    COMPREHENSIVE LOSS
    Dollars in 000's
    (unaudited)
                                    Three months ended     Nine months ended
                                          September 30          September 30
                                  --------------------- ---------------------
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------

    Net income for the period     $  10,296  $       -  $  20,402  $       -

    Other comprehensive income:
      Unrealized foreign exchange
       gain on translation of
       self-sustaining foreign
       operations                       959          -      1,393          -
    -------------------------------------------------------------------------
    Comprehensive income for
     the period                   $  11,255  $       -  $  21,795  $       -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Accumulated other
     comprehensive income (loss),
     beginning of period          $  (1,460) $       -  $       -  $       -
      Adjustment for change in
       foreign currency
       translation method                 -          -     (1,894)         -
      Other comprehensive income        959          -      1,393          -
    -------------------------------------------------------------------------
    Accumulated other
     comprehensive loss, end of
     period                       $    (501) $       -  $    (501) $       -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF CASH FLOWS
    Dollars in 000's
    (unaudited)
                                    Three months ended     Nine months ended
                                          September 30          September 30
                                  --------------------- ---------------------
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------

    Cash provided by (used in):

    Operating activities:
    Net income for the period     $  10,296  $   7,126  $  20,402  $  14,498
    Items not involving cash:
      Depreciation and
       amortization                   3,411      3,110      9,281      8,809
      Future taxes (reduction)          604      1,521        (25)     4,244
      Unrealized foreign exchange
       gain (loss)                      (27)       (93)       (66)      (196)
      Unit-based compensation
       expense                          215        323      1,367      1,205
      Gain on disposal of property
       and equipment                   (519)      (973)    (1,059)    (1,157)
    -------------------------------------------------------------------------
                                     13,980     11,014     29,900     27,403
    Changes in non-cash operating
     working capital                (14,407)    (7,858)    (5,849)      (175)
    -------------------------------------------------------------------------
                                       (427)     3,156     24,051     27,228
    -------------------------------------------------------------------------
    Investing activities:
    Property and equipment
     additions                      (15,129)    (4,364)   (26,564)   (14,652)
    Proceeds on disposal of
     property and equipment           1,047      1,586      1,849      2,100
    Change in other assets                -        110          -          -
    Changes in non-cash investing
     working capital                  8,921     (4,240)     8,290     (2,702)
    -------------------------------------------------------------------------
                                     (5,161)    (6,908)   (16,425)   (15,254)
    -------------------------------------------------------------------------
    Financing activities:
    Distributions paid to
     Unitholders                     (6,797)    (6,616)   (20,188)   (21,258)
    Advances under long-term debt    10,000      2,000     10,047      2,173
    Repayment of long-term debt         (31)       (20)       (82)       (93)
    Repayment of capital lease
     obligations                        (47)       (47)      (150)      (166)
    Proceeds on exercise of Trust
     Unit options                       776        524      4,904      2,916
    Increase in bank indebtedness     2,093      7,775      1,093      3,545
    -------------------------------------------------------------------------
                                      5,994      3,616     (4,376)   (12,883)
    -------------------------------------------------------------------------
    Change in cash and cash
     equivalents                        406       (136)     3,250       (909)

    Cash and cash equivalents,
     beginning of period              4,150        781      1,306      1,554
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period                $   4,556  $     645  $   4,556  $     645
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Cathedral Energy Services Income Trust is a limited purpose trust which
owns the securities of Cathedral Energy Services Ltd. and Cathedral Energy
Services Limited Partnership (collectively "Cathedral") represents the right
to receive cash flow available for distribution from Cathedral. Cathedral is
engaged in the business of providing selected oilfield services to oil and
natural gas companies in Western Canada and the Rocky Mountain and Williston
Basin regions of the United States and currently provides drilling services
and related equipment rentals, production testing services and wireline
services. Cathedral markets its services under six brand names: Directional
Plus and The Directional Company which provide directional drilling services;
CAT Downhole Tools which provides downhole equipment including drilling jars,
shock subs and high performance drilling motors on a rental basis; Tier One
Oil Services which provides oil and natural gas production testing services;
Advance Wireline which provides cased hole logging and perforating, complete
slickline services and casing integrity inspection logging; and Xtreme
Wireline which provides slickline services. Cathedral strives to provide its
clients with value added technologies and solutions to meet their drilling and
production testing requirements. Its mandate is to supply "Best in Class, Best
in Service" equipment and personnel to its clients. The trust units trade on
the TSX under the symbol: CET.UN. For more information, visit
www.cathedralenergyservices.com.

    %SEDAR: 00018316E
For further information: Mark L. Bentsen, President and Chief Executive
Officer or P. Scott MacFarlane, Chief Financial Officer, Cathedral Energy
Services Ltd., 1700, 715 - 5th Avenue S.W., Calgary, Alberta, T2P 2X6,
Telephone: (403) 265-2560, Fax: (403) 262-4682,
www.cathedralenergyservices.com

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