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Cathedral Energy Services reports results for the three and nine months ended September 30, 2007

Nov 12, 2007
3:16pm

    /NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

    CALGARY, Nov. 12 /CNW/ - Cathedral Energy Services Income Trust (TSX:
CET.UN) is pleased to report its results for the three and nine months ended
September 30, 2007.

    FINANCIAL HIGHLIGHTS
    $ in 000's except per
     Trust Unit amounts             Three months ended     Nine months ended
                                       September 30           September 30
                                    -------------------    ------------------
                                       2007       2006       2007       2006
    -------------------------------------------------------------------------
    Revenues                      $  38,355  $  38,041  $ 106,052  $ 102,927
    EBITDA(1)                     $  13,775  $  16,010  $  33,024  $  39,747
      Per Trust Unit - diluted    $    0.43  $    0.51  $    1.04  $    1.26
    Income before taxes           $  10,073  $  12,671  $  22,218  $  30,106
    Net Income                    $   7,126  $  11,396  $  14,498  $  27,221
      Per Trust Unit - basic      $    0.23  $    0.37  $    0.46  $    0.89
      Per Trust Unit - diluted    $    0.22  $    0.36  $    0.46  $    0.86
    Cash distributions declared
     per Trust Unit               $    0.21  $    0.20  $    0.63  $   0.545
    Distributable Cash(2)         $  10,747  $  14,211  $  26,950  $  34,683
    Cash distributions declared   $   6,626  $   6,150  $  19,756  $  16,655
    Payout ratio(3)                     62%        43%        73%        48%
    Property and equipment
     additions and corporate
     acquisitions:
      Paid or payable in cash     $   4,364  $   6,950  $  14,652  $  21,988
      Paid or payable in Trust
       Units                              -          -          -      1,500
                                  ---------  ---------  ---------  ---------
                                  $   4,364  $   6,950  $  14,652  $  23,488
                                  ---------  ---------  ---------  ---------
    Weighted average Trust Units
     outstanding:
      Basic ('000)                   31,515     30,730     31,318     30,493
      Diluted ('000)                 31,734     31,478     31,735     31,580
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                        September   December
                                                         30, 2007   31, 2006
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Working capital                                     $  14,941  $  15,051
    Long-term debt and capital lease obligations
     excluding current portion                          $  17,471  $  15,552
    Unitholders' equity                                 $  75,012  $  76,223
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) EBITDA is defined as earnings before interest on long-term debt and
        capital lease obligations, taxes, non-cash compensation expense and
        depreciation and amortization and is provided to assist investors in
        determining the ability of the Trust to generate cash from
        operations. EBITDA does not have any standardized meaning within
        Canadian Generally Accepted Accounting Principles and therefore may
        not be comparable to similar measures presented by other companies
        and/or trusts.

    (2) Distributable Cash is defined as cash flow from operating activities
        before changes in non-cash working capital less required principal
        repayments on long-term debt and capital lease obligations and
        Maintenance Capital Expenditures. Distributable Cash does not have
        any standardized meaning within Canadian Generally Accepted
        Accounting Policies ("GAAP") and therefore may not be comparable to
        similar measures presented by other trusts. Distributable Cash is a
        main performance measurement used by management, analysts and
        investors to evaluate the performance of the Trust.

    (3) Cash distributions declared as a percentage of Distributable Cash.

    MANAGEMENT'S DISCUSSION & ANALYSIS

    This Management's Discussion & Analysis ("MD&A") for the three and nine
months ended September 30, 2007 should be read in conjunction with the annual
audited consolidated financial statements and notes thereto for the year ended
December 31, 2006, as well as the MD&A in the Trust's 2006 Annual Report, and
with the unaudited interim consolidated financial statements and notes thereto
for the three months and nine months ended September 30, 2007. This MD&A has
been prepared as of November 12, 2007. 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 and other such matters. Such
forward-looking statements are subject to important risks and uncertainties,
which are difficult to predict and that may affect the Trust's/Cathedral's
operations, including, but are not limited to: the impact of general economic
conditions; industry conditions; government and regulatory developments; oil
and natural gas product supply and demand; competition; and the
Trust's/Cathedral's ability to attract and retain qualified personnel. The
Trust's/Cathedral's actual results, performance or achievements could differ
materially from those expressed in, or implied by, these forward-looking
statements and, accordingly, no assurance can be given that any of the events
anticipated by the forward-looking statements will transpire or occur, or if
any of them do transpire or occur, what benefits the Trust/Cathedral will
derive therefrom. Subject to applicable law, the Trust disclaims any intention
or obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
    All forward-looking statements contained in this document are expressly
qualified by this cautionary statement. Further information about the factors
affecting forward-looking statements is available in the Trust's current
Annual Information Form and Annual Report which have been filed with Canadian
provincial securities commissions and are available on www.sedar.com.

    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. These measures are provided to assist investors
in determining the Trust's performance including its ability to generate cash
from operations and to provide additional information regarding the use of its
cash resources. The specific measures being referred to include the following
i) "EBITDA" - defined as earnings before interest on long-term debt and
capital lease obligations, taxes, non-cash compensation expense and
depreciation and amortization; ii) "Distributable Cash" - defined as cash flow
from operating activities before changes in non-cash working capital less
required principal repayments on long-term debt and capital lease obligations
and Maintenance Capital Expenditures; iii) "Gross Margin" - calculated as
revenues less operating expenses; 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 and vi) "Funds From Operations" -
calculated as cash flow from operating activities before changes in non-cash
working capital.

    OVERVIEW

    Despite a significant decline in drilling activity in western Canada, the
Trust was able to increase revenues on a Q3 year-to-date basis from $102,927
in 2006 to $106,052 in 2007 - 3.0% increase. The major items contributing to
these results have been the strong performance of the U.S. operations,
exposure to drilling for oil, particularly in southeastern Saskatchewan, and
the provision of specialty directional drilling services that has resulted in
an increase in the average day rate obtained for such services. For Q3,
revenues increased $314 or 0.8% from $38,041 in 2006 to $38,355 in 2007.
EBITDA for the nine months ended September 30, 2007 was $33,024 which compares
to $39,747 in 2006 - 16.9% decrease. The Trust's net income for the nine
months ended September 30, 2007 was $14,498 ($0.46 per diluted Trust Unit)
which compares to $27,221 ($0.86 per diluted Trust Unit) in 2006. The 2007
year-to-date tax provision includes a non-cash $3,560 ($0.11 per diluted Trust
Unit) provision for future income taxes related to the tax legislation
included in Bill C-52, the Budget Implementation Act, 2007 (the "Bill"), that
was substantively enacted in 2007 Q2 which results in the taxation of existing
income and royalty trusts, other than real estate investment trusts, at
effective rates similar to Canadian corporations.

    RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

    Revenues

    In 2007 Q3, revenues increased over Q2 as operations resumed following
spring breakup but remained impacted by lower Canadian drilling activity as a
result of concerns related to natural gas commodity prices. Continued strength
in the directional drilling portion of the Trust's operations resulted in an
increase in consolidated revenues from 2006 Q3 of $38,041 to $38,355 in 2007
Q3.
    The directional drilling portion of the Trust's operations contributed
revenues of $28,485 in 2007 Q3 which compares to $25,674 in Q3 2006 - an
increase of 10.9%. Activity increased 8.7% from 3,024 days to 3,287 days, and
the average day rate received for providing directional drilling services
increased 2.1% to $8,667 (2006 - $8,492). The largest portion of the increase
in the average day rate is related to a shift towards providing premium
services such as underbalanced and Steam-Assisted Gravity Drainage ("SAGD")
drilling services as opposed to an increase in the overall base day rate. In
the Canadian market the Trust's 2007 Q3 activity levels decreased by 7.9%
which was significantly less than the overall decline in drilling activity in
the Canadian market. Despite the decline in natural gas drilling in western
Canada, the Trust was able to minimize the market decline from prior year
activity levels due to the continuing strength of the Trust's client base and
involvement in multi-well programs. The Rocky Mountain region of the United
States is the Trust's main area of operations in the U.S. and it remains a
very active area. The Trust's U.S. operations have now been expanded to
provide directional drilling services in North Dakota and Michigan. The
Trust's revenues from the U.S. were $10,359 in 2007 Q3, a $3,590 (53.0%)
increase from 2006 revenues of $6,769. Due to demand in the U.S. market, 5
Measurement-While-Drilling ("MWD") systems were transferred to the U.S. at the
end of 2007 Q1 and the Trust now has 23 MWD systems in the U.S. market. The
Trust's geographic diversification, by way of providing directional drilling
services in southeast Saskatchewan and U.S., has been a significant factor in
its ability to organically grow its revenues within the directional drilling
division.
    The continued decline in natural gas drilling expenditures in the western
Canada market resulted in lower revenues for both of the Trust's production
testing and wireline divisions. The Trust's production testing division, Tier
One, contributed $2,875 in revenues during 2007 Q3 which is a 35.5% decline
from 2006 Q3 revenues. Advance Wireline and Xtreme Wireline combined to
generate revenues of $6,404 for 2007 Q3 compared to $7,067 for 2006 Q3, a 9.4%
decrease. Late in 2007 Q2, one wireline unit was transferred from the Canadian
operations to the newly formed U.S. division of Advance Wireline but revenue
generating operations did not commence until 2007 Q3. A second wireline unit
was transferred to the US in 2007 Q3.

    Gross Margin

    The Gross Margin for 2007 Q3 was 51.5% which compares to 55.2% in 2006
Q3. The decrease is attributed to a number of factors including: i) shift to
providing more horizontal drilling services (versus directional) which provide
a lower Gross Margin than from directional drilling; ii) increases in
directional field labour rates; iii) increase in wireline field labour costs
as a percentage of revenues due to the fixed nature of a portion of these
labour charges; and iv) offsetting the previous items was an increase in the
average day rate for directional drilling services.

    General and administrative expenses

    General and administrative expenses increased from $5,607 in 2006 Q3 to
$6,533 in 2007 Q3 - an increase of $926 (16.5%). The increase was primarily
related to increased personnel, office/shop rental costs, increased
directional drilling activity in the U.S., costs related to the set-up of the
U.S. wireline division and approximately $300 of professional fees incurred in
2007 Q3 related to an aborted corporate acquisition. As a percentage of
revenues, general and administrative expenses were 17.0% in 2007 Q3 and 14.7%
in 2006.

    Depreciation and amortization

    Depreciation for 2007 Q3 was $3,110 which compares to $2,849 in 2006 Q3.
This increase is related to expansion of the Trust's depreciable asset base
over the past 12 months. As a percentage of revenues, depreciation amounted to
8.1% for 2007 and 7.5% for 2006.

    Interest expense

    Interest expense related to long-term debt and capital leases increased
from $236 in 2006 Q3 to $269 in Q3 2007 due to the combined effect of: i) an
increase in the average level of debt outstanding; and ii) a marginal increase
in the effective interest rate on the related debt. Other interest expense has
decreased on a quarter-over-quarter basis due to decreased utilization of the
Trust's operating line of credit.

    Foreign exchange

    The Trust's foreign exchange gain/loss increased from a gain of $1 in
2006 Q3 to a $302 loss in 2007 Q3. The increased foreign exchange loss is due
to: i) the U.S. dollar weakening against the Canadian dollar to a larger
extent in 2007 Q3 versus 2006 Q3; and ii) an overall increase in the Trust's
U.S. operations which has resulted in an increase in the Trust's net monetary
assets that are denominated in U.S. dollars.

    Non-cash compensation expense

    For 2007 Q3 the Trust had non-cash compensation expense of $323 which
compares to $254 for the comparable quarter in 2006. The value of Trust Unit
options is being amortized against income over their three-year vesting
period.

    Gain on disposal of property and equipment

    During 2007 Q3 the Trust had a gain on disposal of property and equipment
of $973, which compares to $760 in 2006 Q3. 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.

    Taxes

    For 2007, the Trust had a tax expense of $2,947 (effective tax rate of
29.3%) which compares to $1,275 (effective tax rate of 10.1%) in 2006. The
2007 Q3 tax provision includes a $316 adjustment to the 2007 Q2 tax adjustment
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 Q3 adjustment noted above the effective tax rate for
2007 Q3 is 26.1%. The adjusted effective tax rate has increased from 10.1% in
2006 to 26.1% in 2007 due to the continuing growth in the U.S. operations
which are taxed at a higher rate.

    RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

    Revenues

    2007 Q3 year-to-date revenues were $106,052 which represented an increase
of $3,125 or 3.0% over 2006 Q3 year-to-date revenues of $102,927. Ongoing
activity reductions in the Canadian markets were offset by continued growth
and expansion in the U.S. operations. The U.S. Q3 year-to-date revenues
increased from $22,131 in 2006 to $30,722 in 2007, a 38.8% increase.
    The directional drilling division revenues have increased from $69,621 in
2006 to $78,872 in 2007. This increase is the result of: i) a 5.7% increase in
activity days from 8,334 in 2006 to 8,804 in 2007; and ii) a 7.2% increase in
the average day rate from $8,354 in 2006 to $8,959 in 2007. The decrease in
Canadian activity days from 5,686 to 5,267 was more than offset by the growth
in U.S. activity days from 2,648 to 3,537.
    The continued decline in natural gas drilling expenditures in the western
Canada market resulted in lower revenues for both of the Trust's production
testing and wireline divisions. The Trust's production testing division, Tier
One, contributed $8,681 in revenues during 2007 Q3 year-to-date which is a
26.7% decline from 2006 revenues of $11,838. Advance Wireline and Xtreme
Wireline combined to generate revenues of $16,549 for 2007 Q3 year-to-date
which compares to $19,486 for 2006 which represents a 15.1% decline.

    Gross Margin

    The Gross Margin for 2007 was 49.3%, which compares to 53.3% in 2006. The
decrease is attributed to a number of factors including: i) shift to providing
more horizontal drilling services (versus directional) which provide a lower
Gross Margin than from directional drilling; ii) increases in directional
field labour rates; iii) increase in wireline field labour costs as a
percentage of revenues due to the nature of a portion of these labour charges;
and iv) offsetting the previous items was an increase in the average day rate
for directional drilling services.

    General and administrative expenses

    General and administrative expenses increased from $16,180 in 2006 to
$19,547 in 2007 - an increase of $3,367. The increase was mainly related to
the Trust's directional/horizontal drilling business and the contributing
factors to that increase were the result of increased personnel and
office/shop rental costs as well as an overall increase in directional
drilling activity level in the Rocky Mountain region of the U.S. Other items
contributing to the overall increase were costs related to the set-up of the
U.S. wireline division in 2007 and approximately $300 of professional fees
incurred in 2007 Q3 related to an aborted corporate acquisition. As a
percentage of revenues, general and administrative expenses were 18.4% in 2007
and 15.7% in 2006.

    Depreciation and amortization

    Depreciation and amortization for 2007 was $8,809 compared to $7,755 in
2006. The $1,054 increase is related to the Trust's investment in property and
equipment over the past 12 months. As a percentage of revenues, depreciation
and amortization amounted to 8.3% for 2007 and 7.5% for 2006.

    Interest expense

    Interest on long-term debt has increased from $672 in 2006 to $792 in
2007. The major factor contributing to this increase is an increase in the
average level of debt outstanding. Other interest expense has decreased mainly
due to a decline in the utilization of the Trust's operating line of credit.

    Foreign exchange

    The Trust's foreign exchange loss has increased from $57 in 2006 to $586
in 2007. The increased foreign exchange loss is due to: i) the U.S. dollar
weakening against the Canadian dollar to a larger extent in 2007 Q3
year-to-date versus 2006 Q3 year-to-date; and ii) an overall increase in the
Trust's U.S. operations which has resulted in an increase in the Trust's net
monetary assets that are denominated in U.S. dollars.

    Non-cash compensation expense

    Non-cash compensation expense for 2007 was $1,205 which compares to
$1,214 in 2006. 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

    For the nine months ended September 30, 2007 the Trust had a gain on
disposal of property and equipment of $1,157 which compares to $1,470 in 2006.
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 2007, the Trust had a tax expense of $7,720 (effective tax rate of
34.8%) which compares to $2,885 (effective tax rate of 9.6%) in 2006. The 2007
tax provision includes a cumulative non-cash adjustment of $3,560 ($0.11 per
diluted Trust Unit) 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 Q3 year-to-date is 18.7%. Included in the 2006 Q3
year-to-date provision is a reduction in the overall tax provision of $517
related to enacted income tax rate decreases. If this income tax rate
adjustment is eliminated the effective tax rate for 2006 Q3 year-to-date is
11.3%. The adjusted effective tax rate has increased from 11.3% in 2006 to
18.7% in 2007 due to the continuing growth in the U.S. operations which are
taxed at a higher rate.

    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, 2007, the Trust had an operating line of credit with a major
Canadian bank in the amount of $12,500 (December 31, 2006 - $12,500) of which
$10,005 (December 31, 2006 - $6,460) was drawn. In addition, the Trust has a
non-reducing revolving term loan facility in the amount of $25,000
(December 31, 2006 - $25,000) of which $17,000 (December 31, 2006 - $15,000)
was drawn as at September 30, 2007. In addition, at September 30, 2007 the
Trust had obligations under capital leases in the amount of $499 (December 31,
2006 - $664) and other long-term debt of $250 (December 31, 2006 - $171). The
Trust's balance sheet remains strong with a current ratio (current assets to
current liabilities) of 1.52:1 and a trailing four quarters EBITDA to
long-term debt/capital lease obligations of 2.63:1. As at September 30, 2007
the Trust was in compliance with the financial covenants included in its
credit facility agreement.

    Operating activities

    Cash flow from operating activities for the three and nine months ended
September 30, 2007 was $3,156 (2006 - $4,144) and $27,228 (2006 - $25,926)
respectively. The Trust has a strong working capital position at September 30,
2007 at $14,941 which compares to $15,051 at December 31, 2006.

    Investing activities

    Cash used in investing activities for the three and nine months ended
September 30, 2007 amounted to $6,908 and $15,254, respectively which compares
to $6,062 and $20,903 for the same period in 2006. During 2007 Q3 the Trust
invested an additional $4,364 (2006 - $6,950) for a total Q3 year-to-date
$14,652 (2006 - $21,988) in property and equipment. For 2007 Q3 the
significant property and equipment additions included progress payments on
construction of a new repair facility in Nisku, Alberta, expansion of the mud
motor and drilling collar fleet, progress payments on upgrade of low pressure
production testing units to higher pressure units and the purchase of
auxiliary wireline equipment. At September 30, 2007, the Trust's operating
entities had 73 MWD systems, 19 production testing units and 27 wireline
units. With the exception of the $2,000 draw on non-reducing revolving term
loan facility which was used to finance the construction of the Nisku repair
facility, and the $173 of 0% financing of automotive equipment additions, all
of the 2007 Q3 year-to-date additions to property and equipment have been
financed from cash flow from operations. 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.

    Financing activities

    For the three months ended September 30, 2007 financing activities
provided $3,616 of cash flow which compares to $548 for the three months ended
September 30, 2006. Cash used in financing activities for the nine months
ended September 30, 2007 amounted to $12,883 (2006 - $6,299). Distributions
paid to Unitholders for 2007 Q3 amounted to $6,616 (2006 - $5,990) bringing
year-to-date distributions for the nine months ended September 30, 2007 to
$21,258 (2006 - $16,004). The increase in distributions paid are related to a
combination of: i) increases in the per Trust Unit "regular" distribution
level; ii) the payment of a "special" $0.05 per Trust Unit cash distribution
declared in December 2006 ($1,549) and payable January 15, 2007; and iii) an
increase in the number of Trust Units outstanding. Since January 2006 the
Trust has increased its per Trust Unit distribution level from $0.05 per Trust
Unit to $0.07 per Trust Unit for September 2007 (increased to $0.07 level in
September 2006) - a 40% increase. 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. For the
nine months ended September 30, 2007 financing cash inflows resulted from: i)
$2,916 (2006 - $2,715) cash received on the exercise of Trust Unit options,
ii) a $2,173 (2006 - $3,000) increase in new long-term debt, and iii) increase
in bank indebtedness $3,545 (2006 - $4,460). Offsetting these inflows were
cash outflows of $259 (2006 - $470) for the repayment of long-term debt and
capital lease obligations. At November 12, 2007, the Trust had 31,654,917
Trust Units and 2,761,406 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, 2006. As at September 30, 2007 the Trust's commitment
to purchase property and equipment is approximately $5,981. The Trust expects
to draw upon approximately $1,000 of its non-reducing revolving term loan
facility in 2007 Q4 to finance a portion of the commitment related to the
construction of a new repair facility in Nisku, Alberta. The remaining
commitments are expected to be financed from cash flows from operations.

    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 Q3 2007.

    CHANGES IN ACCOUNTING POLICIES

    Effective January 1, 2007, The Trust adopted the Canadian Institute of
Chartered Accountants ("CICA") section 3855, "Financial Instruments -
Recognition and Measurement", section 3865, "Hedges", and section 1530,
"Comprehensive Income". These standards have been adopted prospectively. For
the nine months ended September 30, 2007, the adoption of these standards did
not have an effect on the Trust's consolidated financial statements. A general
summary of these accounting standards was included in the Trust's 2006 annual
MD&A.

    BUSINESS RISKS

    The MD&A for the year ended December 31, 2006, which is included in the
Trust's 2006 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, 2007.

    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 and the expected sustainability of those trends
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 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.
    The Trust intends to pay cash distributions to unitholders but the
payment of cash distributions cannot be guaranteed.

    The following is a comparison of cash distributions declared and certain
defined amounts:

                                                               Fiscal year
                                                  2007  ---------------------
                                    2007 Q3     Q3 YTD       2006       2005
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cash flow from operating
     activities                   $   3,156  $  27,228  $  39,929  $  21,609
    -------------------------------------------------------------------------
    Net income for the period     $   7,126  $  14,498  $  35,348  $  21,807
    -------------------------------------------------------------------------
    Distributable Cash            $  10,747  $  26,950  $  45,972  $  27,551
    -------------------------------------------------------------------------
    Cash distributions declared   $   6,626  $  19,756  $  24,681  $  11,162
    -------------------------------------------------------------------------
    Excess (short-fall) of cash
     flow from operating
     activities over cash
     distributions declared       $  (3,470) $   7,472  $  15,248  $  10,447
    -------------------------------------------------------------------------
    Excess (short-fall) of net
     income over cash
     distributions declared       $     500  $  (5,258) $  10,667  $  10,645
    -------------------------------------------------------------------------
    Excess of Distributable Cash
     over cash distributions
     declared                     $   4,121  $   7,194  $  21,291  $  16,389
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Due to the seasonality of the Trust's business it normally has a cash
inflow from working capital related to operating activities during Q2 and when
activities levels increase after spring breakup there is a cash outflow
related to working capital from operating activities during Q3. Changes in
non-cash operating working capital are financed by the Trust using its bank
indebtedness/line of credit facility. Due to the seasonality of the Trust's
western Canadian business it is management's belief that quarter-to-quarter
comparisons of cash flow from operating activities to cash distributions
declared cannot be looked at in isolation and therefore year-to-date
comparisons and/or trailing four quarters comparisons need to be considered.
Management looks beyond quarter-to-quarter fluctuations in working capital
when providing recommendations to the board of trustees regarding monthly
distributions. As a result, management believes that adjusting for changes in
non-cash operating working capital when calculating Distributable Cash is
appropriate. For the nine months ended September 30, 2007 and the
September 30, 2007 trialing four quarters cash flow from operating activities
exceeded cash distributions declared.
    Net income includes significant non-cash changes which for the three
months ended September 30, 2007 were $4,861 and for the nine months ended
September 30, 2007 were $14,062 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 net income
may exceed cash distributions declared. Management does not consider the
excess of cash distributions declared over net income for the nine months
ended September 30, 2007 to be an economic return of capital. Instead the
excess is considered a function of the timing of cash flows versus accounting
income.
    Currently cash distributions declared 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.

    Distributable Cash for the three and nine months ended September 30, 2007
and 2006 is calculated as follows:

                                    Three months ended     Nine months ended
                                        September 30          September 30
                                    -------------------    ------------------
                                       2007       2006       2007       2006
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cash flow from operating
     activities                   $   3,156  $   4,144  $  27,228  $  25,926
    Add: - changes in non-cash
            operating working
            capital                   7,858     10,177        175      9,363
    Less: - required principal
             repayments on
             long-term debt and
             capital lease
             obligations                (67)       (62)      (242)      (399)
          - Maintenance Capital
             Expenditures              (200)       (48)      (211)      (207)
    -------------------------------------------------------------------------
    Distributable Cash           $   10,747  $  14,211  $  26,950  $  34,683
    -------------------------------------------------------------------------
    Cash distributions declared  $    6,626  $   6,150  $  19,756  $  16,655
    -------------------------------------------------------------------------
    Payout ratio                        62%        43%        73%        48%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As a result of the Trust's equipment being relatively new and the
extensive maintenance program for its equipment (such repairs and maintenance
cost are expensed in operating expenses), Maintenance Capital Expenditures are
currently minimal. Current Maintenance Capital Expenditure levels may not be
indicative of future Maintenance Capital Expenditure levels.

    EBITDA:

    EBITDA is calculated as follows:

                                    Three months ended     Nine months ended
                                        September 30          September 30
                                    -------------------    ------------------
                                       2007       2006       2007       2006
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    EBITDA as reported            $  13,775  $  16,010  $  33,024  $  39,747
    Deduct: - depreciation and
               amortization           3,110      2,849      8,809      7,755
            - interest - long-
               term debt and
               capital lease
               obligations              269        236        792        672
            - non-cash
               compensation
               expense                  323        254      1,205      1,214
            - provision for
               taxes                  2,947      1,275      7,720      2,885
    -------------------------------------------------------------------------
    Net income for the period     $   7,126  $  11,396  $  14,498  $  27,221
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    GOVERNANCE

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

    OUTLOOK

    The Trust has benefited significantly from its geographic
diversification. The U.S. and southeast Saskatchewan markets have both
remained very active for directional drilling. In the U.S. directional
drilling operations continue to grow and further growth is expected. Recently
the Trust commenced providing directional drilling services in the state of
Michigan. The company will continue to add to its service lines into this
region. The southeast Saskatchewan market is oil based and activity levels in
this area have remained strong due to the strength in the price of oil.
Industry analysts continue to forecast strong oil prices into 2008.
    One major area of uncertainty in the market place is related to the price
of natural gas. The price of natural gas is affecting the cash flows of the
operators that Cathedral works for. To date it has affected Canadian operators
more than those in the U.S. The turn around in natural gas pricing will
hopefully be answered with a strong winter heating season and the resulting
draws of natural gas from storage.
    The Government of Alberta's recent announcement related to changes in the
royalty regime will also have an impact on the drilling and service industry
in Alberta. The magnitude of the potential impact will depend on the final
form of the enacted rules and its impact on our customers, and therefore, at
this point in time, we can not reasonably estimate the effect on our
operations.
    Operationally the trust continues to grow. The directional drilling
businesses of the Trust will add 5 Electro-Magnetic ("EM") MWD systems in 2007
Q4 and they will be the Trust's new 2nd generation system. The 2nd generation
EM-MWD system will include bi-directional (talk down) communication. The new
generation will allow surface control of the tool to change data rates, power
levels and data formats. The result will be increased efficiency and power
management, which by default, will allow greater depth capability.
    The Trust's wireline and production testing divisions have been affected
by the decline in drilling activity in western Canada and a rebound in their
revenue generation ability will be tied to natural gas prices. The Trust now
operates two wireline units in the U.S. and further units will be added based
upon market demand. On the production testing side of the Trust's business, in
2007 Q4 we will complete our upgrade of low pressure testing units with high
pressure units and we will continue to expand into the high-end testing market
including critical sour service work.
    The Trust expects to exit 2007 with 78 MWD systems, 27 wireline units and
19 production testing units.
    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.

    SUMMARY OF QUARTERLY RESULTS
    -------------------------------------------------------------------------
    Three month period ended
    ($ in 000's
     except per
     Trust Unit   Sep     Jun     Mar     Dec     Sep     Jun     Mar     Dec
     amounts)    2007    2007    2007    2006    2006    2006    2006    2005
    -------------------------------------------------------------------------
    Revenues  $38,355 $24,985 $42,712 $35,327 $38,041 $26,204 $38,682 $32,101
    EBITDA     13,775   4,837  14,412  13,046  16,010   8,370  15,367  12,090
    Net income
     (loss)     7,126  (2,415)  9,787   8,127  11,396   4,963  10,862   7,762
    Net income
     (loss) per
     Trust Unit
     - basic     0.23   (0.08)   0.32    0.26    0.37    0.16    0.36    0.26
    Net Income
     (loss) per
     Trust Unit
     - diluted   0.22   (0.08)   0.31    0.26    0.36    0.16    0.35    0.25
    Cash
     distributions
     declared
     per Trust
     Unit        0.21    0.21    0.21    0.26    0.20   0.185    0.16  0.1375
    -------------------------------------------------------------------------



    CONSOLIDATED BALANCE SHEETS
    $ in 000's                                     September 30  December 31
                                                           2007         2006
                                                     (unaudited)
    -------------------------------------------------------------------------
    ASSETS

    Current assets:
      Cash and cash equivalents                       $     645    $   1,554
      Accounts receivable                                38,639       37,693
      Inventory                                           3,542        3,050
      Prepaid expenses and deposits                       1,003          892
    -------------------------------------------------------------------------
                                                         43,829       43,189
    Property and equipment                               66,498       61,488
    Intangibles                                             626          736
    Goodwill                                             19,775       19,775
    Other assets                                              -           33
    -------------------------------------------------------------------------
                                                      $ 130,728    $ 125,221
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND UNITHOLDERS' EQUITY

    Current liabilities:
      Bank Indebtedness                               $  10,005    $   6,460
      Accounts payable and accrued liabilities           15,374       16,446
      Distribution payable to Unitholders                 2,214        3,717
      Taxes payable                                       1,017        1,232
      Current portion of capital lease obligations          198          212
      Current portion of long-term debt                      80           71
    -------------------------------------------------------------------------
                                                         28,888       28,138
    Capital lease obligations                               301          452
    Long-term debt                                       17,170       15,100
    Future income taxes                                   9,357        5,308
    -------------------------------------------------------------------------
                                                         55,716       48,998
    -------------------------------------------------------------------------
    Unitholders' equity:
      Unitholders' capital                               48,005       44,667
      Contributed surplus                                 1,871        1,162
      Retained earnings                                  25,136       30,394
    -------------------------------------------------------------------------
                                                         75,012       76,223
    -------------------------------------------------------------------------
                                                      $ 130,728    $ 125,221
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
    $ in 000's except per Trust Unit amounts
    (unaudited)
                                    Three months ended     Nine months ended
                                          September 30          September 30
                                    -------------------    ------------------
                                       2007       2006       2007       2006
    -------------------------------------------------------------------------

    Revenues                      $  38,355  $  38,041  $ 106,052  $ 102,927
    Expenses :
      Operating                      18,598     17,035     53,770     48,055
      General and administrative      6,533      5,607     19,547     16,180
      Depreciation and amortization   3,110      2,849      8,809      7,755
      Interest - long-term debt and
       capital lease obligations        269        236        792        672
      Interest - other                  120        150        282        358
      Foreign exchange loss (gain)      302         (1)       586         57
      Non-cash compensation expense     323        254      1,205      1,214
    -------------------------------------------------------------------------
                                     29,255     26,130     84,991     74,291
    -------------------------------------------------------------------------
                                      9,100     11,911     21,061     28,636
    Gain on disposal of property
     and equipment                      973        760      1,157      1,470
    -------------------------------------------------------------------------
    Income before taxes              10,073     12,671     22,218     30,106
    Taxes:
      Current                         1,426        702      3,476      2,283
      Future                          1,521        573      4,244        602
    -------------------------------------------------------------------------
                                      2,947      1,275      7,720      2,885
    -------------------------------------------------------------------------
    Net income for the period         7,126     11,396     14,498     27,221
    Retained earnings, beginning
     of period                       24,636     27,085     30,394     21,765
    Less: Distributions declared     (6,626)    (6,150)   (19,756)   (16,655)
    -------------------------------------------------------------------------
    Retained earnings, end of
     period                       $  25,136  $  32,331  $  25,136  $  32,331
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net income per Trust Unit:
      Basic                       $    0.23  $    0.37  $    0.46  $    0.89
      Diluted                     $    0.22  $    0.36  $    0.46  $    0.86
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF CASH FLOWS
    $ in 000's
    (unaudited)
                                    Three months ended     Nine months ended
                                          September 30          September 30
                                    -------------------    ------------------
                                       2007       2006       2007       2006
    -------------------------------------------------------------------------
    Cash provided by (used in):

    Operating activities:
    Net income for the period     $   7,126  $  11,396  $  14,498  $  27,221
    Items not involving cash:
      Depreciation and amortization   3,110      2,849      8,809      7,755
      Future taxes                    1,521        573      4,244        602
      Unrealized foreign exchange
       gain                             (93)         9       (196)       (33)
      Non-cash compensation expense     323        254      1,205      1,214
      Gain on disposal of property
       and equipment                   (973)      (760)    (1,157)    (1,470)
    -------------------------------------------------------------------------
                                     11,014     14,321     27,403     35,289
    Changes in non-cash operating
     working capital                 (7,858)   (10,177)      (175)    (9,363)
    -------------------------------------------------------------------------
                                      3,156      4,144     27,228     25,926
    -------------------------------------------------------------------------
    Investing activities:
    Property and equipment
     additions                       (4,364)    (6,950)   (14,652)   (21,988)
    Proceeds on disposal of
     property and equipment           1,586      1,153      2,100      2,372
    Change in other assets              110          -          -          -
    Changes in non-cash investing
     working capital                 (4,240)      (265)    (2,702)    (1,287)
    -------------------------------------------------------------------------
                                     (6,908)    (6,062)   (15,254)   (20,903)
    -------------------------------------------------------------------------

    Financing activities:
    Distributions paid to
     Unitholders                     (6,616)    (5,990)   (21,258)   (16,004)
    Advances under long-term debt     2,000      3,000      2,173      3,000
    Repayment of long-term debt         (20)       (55)       (93)      (237)
    Repayment of capital lease
     obligations                        (47)       (78)      (166)      (233)
    Proceeds on exercise of Trust
     Unit options                       524        321      2,916      2,715
    Increase in bank indebtedness     7,775      3,350      3,545      4,460
    -------------------------------------------------------------------------
                                      3,616        548    (12,883)    (6,299)
    -------------------------------------------------------------------------

    Change in cash and cash
     equivalents                       (136)    (1,370)      (909)    (1,276)

    Cash and cash equivalents,
     beginning of period                781      2,185      1,554      2,091
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period                $     645  $     815  $     645  $     815
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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

    %SEDAR: 00018316E
For further information: 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.