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Cathedral Energy Services Income Trust reports record results for 2006 Q4 and the year ended December 31, 2006

Mar 7, 2007
3:30pm

    /NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

    CALGARY, March 7 /CNW/ - Cathedral Energy Services Income Trust (the
"Trust" / TSX: CET.UN) is pleased to report its record results for 2006 Q4 and
the year-end December 31, 2006. Dollars are in '000's except for day rates and
per Trust Unit amounts.

    FINANCIAL HIGHLIGHTS

                                 Three months ended           Year ended
                                     December 31             December 31
                               ----------------------  ----------------------
                                    2006        2005        2006        2005
    -------------------------------------------------------------------------

    Revenues                   $  35,327   $  32,101   $ 138,254   $  86,002

    EBITDA(1)                  $  13,046   $  12,090   $  52,793   $  31,580
      Per Trust Unit -
       diluted                 $    0.42   $    0.39   $    1.68   $    1.10

    Income before taxes        $   9,573   $   9,335   $  39,679   $  24,817

    Net income                 $   8,127   $   7,762   $  35,348   $  21,807
      Per Trust Unit -
       basic                   $    0.26   $    0.26   $    1.16   $    0.76
      Per Trust Unit -
       diluted                 $    0.26   $    0.25   $    1.12   $    0.76

    Cash distributions
     declared per Trust Unit   $    0.26   $  0.1375   $   0.805   $   0.385

    Distributable income(2)    $  11,283   $  11,055   $  45,972   $  27,551

    Cash distributions
     declared                  $   8,026   $   4,116   $  24,681   $  11,162

    Payout ratio(3)                71%(4)         37%      54%(4)         41%

    Property and equipment
     additions and corporate
     acquisitions:
      Paid or payable in cash  $   4,448   $   8,112   $  26,436   $  31,244
      Paid or payable in Trust
       Units                         320       1,769       1,820      13,712
                               ---------   ---------   ---------   ---------
                               $   4,768   $   9,881   $  28,256   $  44,956
                               ---------   ---------   ---------   ---------

    Weighted average Trust
     Units outstanding:
      Basic ('000)                30,831      29,863      30,578      28,711
      Diluted ('000)              31,316      30,896      31,423      28,712
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                     December 31 December 31
                                                            2006        2005
    -------------------------------------------------------------------------
    Working capital                                    $  15,051   $  10,571

    Long-term debt and capital
     lease obligations excluding
     current portion                                   $  15,552   $  12,797

    Unitholders' equity                                $  76,223   $  59,615
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (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 income is 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
        income does not have any standardized meaning within Canadian
        Generally Accepted Accounting Policies and therefore may not be
        comparable to similar measures presented by other trusts.
        Distributable income is a main performance measurement used by
        management and investors to evaluate the performance of the Trust.

    (3) Cash distributions declared as a percentage of distributable income.

    (4) Payout ratio is 57% for 2006 Q4 and 50% for the year ended
        December 31, 2006 if the December 2006 "special" cash distribution of
        $0.05 per Trust Unit is excluded.

    FORWARD-LOOKING INFORMATION

    Certain statements in this news release including (i) statements that may
contain words such as "anticipate", "could", "expect", "seek", "may" "intend",
"will", "believe", "should", "project", "forecast", "plan" and similar
expressions, including the negatives thereof, (ii) statements that are based
on current expectations and estimates about the markets in which the
Trust/Cathedral operates and (iii) statements of belief, intentions and
expectations about developments, results and events that will or may occur in
the future, constitute "forward-looking statements" and are based on certain
assumptions and analysis made by the Trust/Cathedral. Forward-looking
statements in this news release 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 Annual Report which, in due course, will be filed
with Canadian provincial securities commissions and will be available on
www.sedar.com.

    NON-GAAP FINANCIAL MEASUREMENTS

    This news release refers to certain financial measurements that do not
have any standardized meaning within Canadian Generally Accepted Accounting
Principles ("GAAP") and therefore may not be comparable to similar measures
provided by other companies and/or trusts. These measures are provided to
assist investors in determining the Trust's 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 income" - 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; 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; and v) "payout ratio" - calculated as cash
distributions declared divided by distributable income.

    OVERVIEW

    Cathedral Energy Services Income Trust is pleased to report record
results for both the fourth quarter of 2006 and the year-ended December 31,
2006. Revenues for Q4 increased $3,226 or 10% to $35,327 from $32,101 in the
comparative period in 2005. On a year-over-year basis, revenues increased
$52,252 or 61% to $138,254 from $86,002 in 2005. 2006 Q4 EBITDA was $13,046
which compares to $12,090 in 2005. EBITDA for the year ended December 31, 2006
was $52,793 ($1.68 per diluted Trust Unit) while the comparative figure for
2005 was $31,580 ($1.10 per diluted Trust Unit).
    Net income for the three months ended December 31, 2006 was $8,127 ($0.26
per diluted Trust Unit) which compares to $7,762 ($0.25 per diluted Trust
Unit) in the same quarter of 2005. For the year ended December 31, 2006, net
income was $35,348 ($1.12 per diluted Trust Unit) which compares to $21,807
($0.76 per diluted Trust Unit) for 2005.
    2006 represents the first full year of contribution from the 2005
business acquisitions: i) Tier One Oil Services Ltd. ("Tier One") effective
May 6, 2005; ii) Advance Wireline Services Ltd. ("Advance Wireline") effective
September 8, 2005; and iii) Xtreme Wireline effective December 22, 2005.

    RESULTS OF OPERATIONS - 2006 COMPARED TO 2005

    Revenues and operating
     expenses                       2006        2005      Change           %
    -------------------------------------------------------------------------
    Revenues                   $ 138,254   $  86,002   $  52,252          61
    Operating expenses           (64,886)    (42,313)     22,573          53
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Gross margin - $           $  73,368   $  43,689   $  29,679          68
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Gross margin - %                53.1%       50.8%        2.3%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Trust generated record annual revenues of $138,254 which represented
an increase of 61% over 2005 revenues. The increase was mainly a result of: i)
a 30% increase in directional drilling activity days to 11,046 activity days
(2005 - 8,472 days); ii) a 6.7% increase in the average day rate for
directional drilling services to $8,470 per day (2005 - $7,935); and iii) the
full year inclusion of revenues from the 2005 acquisitions of Tier One Oil
Services (May 6, 2005), Advance Wireline (September 8, 2005) and Xtreme
Wireline (December 22, 2005).
    Day rate increases related to providing directional drilling services
that were put in place in the later portion of 2005 and early 2006 were
partially offset by a shift to providing more directional (versus horizontal)
drilling services. Day rates for directional drilling are lower than that for
horizontal drilling. The increased activity days are the result of increased
demand from customers in both operating regions. During 2006, the Trust added
14 (2005 - 14) Measurement-While-Drilling ("MWD") systems to bring the overall
fleet to 68 at December 31, 2006. The Rocky Mountain region of the U.S.
remains a very active area and the Trust's revenues from this region increased
$10,590 or 54% on a year-over-year basis. Due to increased demand, in 2006
5 MWD systems and related directional drilling equipment were added to the
U.S. fleet. At December 31, 2006, the U.S. fleet of MWD systems was 18. As
conditions warrant, additional MWD systems will be added to the U.S. fleet to
meet demand.
    The 2005 acquisitions of Tier One Oil Services, Advance Wireline and
Xtreme Wireline contributed $26,994 or 52% of the $52,252 increase in
revenues.
    The increase in gross margin percentage is the net result of: i) a higher
average day rate received in providing directional drilling services; ii) a
higher gross margin from providing directional drilling services as there was
a higher ratio of directional drilling services provided as opposed to
horizontal drilling services (directional, as opposed to horizontal, drilling
generates higher gross margins) as well lower repair costs to directional
drilling equipment; and iii) offset by an increased contribution by the
wireline and production testing divisions which have gross margins that are
lower than that obtained from providing directional drilling services.

    General and administrative expenses

                                    2006        2005      Change           %
    -------------------------------------------------------------------------
    General and administrative
     expenses                  $  22,066   $  14,125   $   7,941          56
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The 2005 acquisitions of Tier One, Advance Wireline and Xtreme Wireline
contributed to 53% of the year-over-year increase in general and
administrative expenses. The balance of the increase is related the
directional drilling business which experienced an increased level of business
activity both in Canada and the United States as well as increased personnel,
insurance and office/shop rental costs. As a percentage of revenues, general
and administrative expenses were 16.0% in 2006 and 16.4% in 2005.

    Depreciation and amortization

                                    2006        2005      Change           %
    -------------------------------------------------------------------------
    Depreciation and
     amortization              $  10,692   $   5,686   $   5,006          88
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    This increase is related to the combination of: i) the Trust's investment
in property and equipment over the past 12 months; and ii) the inclusion of
depreciation and amortization on property and equipment and intangibles
acquired as a result of the 2005 acquisitions of Tier One, Advance Wireline
and Xtreme Wireline for a full year in 2006. Included in depreciation and
amortization for 2006 is $148 (2005 - $46) related to the amortization of
intangibles acquired through the Advance Wireline acquisition. As a percentage
of revenues, depreciation and amortization amounted to 7.7% for 2006 and 6.6%
for 2005.

    Interest

                                    2006        2005      Change           %
    -------------------------------------------------------------------------
    Interest - long-term
     debt and capital lease
     obligations               $     936   $     235   $     701         298
    Interest - other           $     482   $      71   $     411         579
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The main contributing factors to the increase in interest related to
long-term debt and capital lease obligations is: i) increase in the effective
interest rate related to the Trust's revolving, non-reducing term loan
facility; and ii) the amount of debt outstanding on a year-over-year basis.
Until the September 8, 2005 acquisition of Advance Wireline the Trust had
minimal long-term debt and no capital lease obligations. As part of the
Advance Wireline acquisition the Trust incurred $12 million of debt related to
its revolving, non-reducing term loan facility plus the assumptions of $885
(net of repayments on closing) of long-term debt and capital lease
obligations. In addition, the Trust assumed $574 of capital lease obligations
related to the acquisition of Xtreme Wireline. In Q3 2006 the Trust accessed
an additional $3,000 of its available revolving non-reducing term loan
facility - proceeds of which were used to finance the Trust's acquisition of
land and buildings.
    The $411 increase in other interest expense is related to the Trust's
increased utilization of its operating line of credit.

    Foreign exchange (gain) loss

                                    2006        2005      Change           %
    -------------------------------------------------------------------------
    Foreign exchange (gain)
     loss                      $     (27)  $      25   $     (52)       (208)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Trust derives revenues from the U.S. which are denominated in the
local currency. This causes a degree of foreign currency exchange rate risk
which the Trust attempts to mitigate by matching local purchases in the same
currency. Furthermore, the Trust's Canadian operations are subject to foreign
currency exchange rate risk in that some purchases for parts, supplies and
components in the manufacture of equipment are denominated in U.S. dollars.
Foreign exchange rates did not fluctuate significantly during 2006 and as a
result the Trust's foreign exchange gain/loss was minimal.

    Non-cash compensation expense

                                    2006        2005      Change           %
    -------------------------------------------------------------------------
    Non-cash compensation
     expense                   $   1,486   $     842   $     644          76
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The overall increase in the value of non-cash compensation expense is due
to: i) the significant appreciation in the market price for the underlying
Trust Units which in turn has increased substantially the value attributed to
the Trust Unit options granted during the period using the Black-Scholes
option pricing model; and ii) the overall increase in the number of options
granted. The value of the options is being amortized against income over the
three-year vesting period.

    Gain on disposal of property and equipment

                                    2006        2005      Change           %
    -------------------------------------------------------------------------
    Gain on disposal of
     property and equipment    $   1,946   $   2,112   $    (166)         (8)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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

    Taxes

                                    2006        2005      Change           %
    -------------------------------------------------------------------------
    Taxes                      $   4,331   $   3,010   $   1,321          44
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The effective tax rate for 2006 was 10.9% while the comparative figure
for 2005 was 12.1%. The 2005 tax provision includes the benefit of a reduction
in future income taxes related to the June 16, 2005 internal reorganization.
Also in relation to 2005, a portion of the Trust's income from its Canadian
operating entities for the period June 15, 2005 (effective date of the
reorganization) to December 31, 2005 is not subject to corporate income taxes
within the corporate structure as this income flows through to Unitholders and
is taxed in their hands. Accordingly, there is no tax provision within the
Trust's financial statements for that portion of the income which is allocated
to the unitholders. For 2006, the period for which a portion of the Trust's
income from its Canadian operating entities is not subject to corporate income
taxes within the corporate structure was the full year as opposed to the
approximate 6 1/2 months in 2005. Also contributing to the decreased effective
tax rate is a higher portion of the Trust's pre-tax income being allocated to
Unitholders (as opposed to be taxed within the Trust's legal entities) as well
as a reduction in Canadian enacted tax rates in 2006 Q2. Most of the tax
provision for fiscal 2006 relates to taxation of profits from the Trust's U.S.
operations.

    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
December 31, 2006, the Trust had an operating line of credit with a major
Canadian bank in the amount of $12,500 (2005 - $9,000) of which $6,460 (2005 -
$5,310) was drawn. In addition, the Trust has a non-reducing revolving term
loan facility in the amount of $25,000 (2005 - $12,000) of which $15,000 (2005
- $12,000) was drawn as at December 31, 2006. In addition, at December 31,
2006, the Trust had obligations under capital leases in the amount of $664
(2005 - $969) and other long-term debt of $171 (2005 - $383).

    Operating activities

    Cash provided by operating activities before changes in non-cash
operating working capital in 2006 increased from $27,942 in 2005 to $46,831 -
an increase of $18,889 or 68%. This increase is a direct reflection of the
strong operating results of the Trust for 2006 which includes the contribution
of the 2005 acquisitions for a full year. As a result of the increased level
of operations in 2006 over 2005, the Trust invested an additional $6,902 (2005
- $6,333) in non-cash working capital related to operations in 2006. The Trust
has a strong working capital position at December 31, 2006 at $15,051 which
compares to $10,571 at the end of 2005.

    Investing activities

    Cash used in investing activities for the year ended December 31, 2006
amounted to $24,366 which compares to $26,294 in 2005. Excluding the changes
in non-cash working capital related to investing activities, cash used in
investing activities decreased by $3,999 from $27,158 in 2005 to $23,159 in
2006. In 2006, The Trust's operating entities acquired $26,436 (2005 -
$18,583) of property and equipment. The 2006 property and equipment additions
included: 14 MWD systems as well as additions to the mud motor and drill
collar fleet to complement the increase in directional drilling job capacity;
replacement of lost-in-hole directional drilling equipment, 3 production
testing units; 7 wireline units and various specialty wireline logging tools
and auxiliary wireline equipment; purchase of operating facilities in
Whitecourt, Alberta and Vegreville, Alberta; leasehold improvements related to
the relocation of the Calgary head office; and progress payments on equipment
to be delivered in 2007.
    Proceeds on disposal of property and equipment amounted to $3,277 (2005 -
$4,086) and is mainly related to recovery of downhole equipment costs that
were lost-in-hole in 2006 as well as previously expensed depreciation.
Included in 2005 investing activities is the use of funds in the amount of
$12,661 related to the acquisition of Tier One, Advance Wireline and Xtreme
Wireline (figure excludes the value of Trust Units issued as part of the
acquisitions in the amount of $13,712). The Advance Wireline acquisition
structure includes additional contingent consideration of up to a maximum of
$3,000, payable in Trust Units with an assigned value based upon an average
trading price immediately prior to the issuance of the related Trust Units,
and will be paid over a 2-year period based upon the financial results of
Advance Wireline for the periods ended on the first and second anniversary of
the closing date. In December 2006, the Trust issued 187,032 Trust Units with
a total assigned value of $1,820 to satisfy the year 1 portion of the
contingent consideration. 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.
    The Trust is currently working on the 2nd generation of its
Electro-Magnetic MWD ("EM-MWD") tool and expects to field test the tool in the
first half of 2007. Once commercial the current systems will be retrofitted to
the 2nd generation standard at minimal cost. The 2nd generation EM-MWD tool
enhancements will allow the tool to be operated at deeper levels and reduce
related operating costs.
    The following is a summary of major equipment owned by Cathedral:

                                                           As at December 31
    -------------------------------------------------------------------------
                                                            2006        2005
    -------------------------------------------------------------------------
    Directional drilling -
      MWD                                                     68          54
      Drilling mud motors                                    299         236

    Production testing units                                  19          16

    Wireline units                                            21          14
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For 2007, the Board of Directors of the Administrator of the Trust have
approved a capital budget of $11,600. The 2007 capex program will add: 2 MWD
systems as well as additions to the mud motor and drill collar fleet to
complement the increase in directional drilling job capacity; auxiliary
production testing equipment; 8 wireline units as well as auxiliary wireline
equipment and 4 explosive loading magazines which are related to the wireline
operations. These capital expenditures are expected to be financed by way of
cash flow from operations.

    Financing activities

    Cash provided by (used in) financing activities for the year ended
December 31, 2006 amounted to $(16,100) which compares to $3,625 (provided by)
in 2005 - a change of $19,725. During 2006, the Trust received advances of
long-term debt in the amount of $3,109 of which $3,000 related to an advance
on the Trust's non-reducing revolving term loan facility. Repayments of
long-term debt and capital lease obligations in 2006 amounted to $626 (2005 -
$617). As at December 31, 2006, the Trust was in compliance with all covenants
under its credit facility.
    The capital asset additions in 2006 were financed by way of a combination
of cash flow from operations, working capital, proceeds from the disposal of
property and equipment, proceeds on exercise of Trust Unit options and the
$3,000 advanced on the Trust's non-reducing revolving term loan facility.
    Distributions declared for 2006 amounted to $26,719 (2005 - $14,810) and
included cash distributions of $24,681 (2005 - $11,162) and a non-cash in-kind
distribution of $2,038 (2005 - $3,648). The increase in distributions declared
is mainly due to: i) three increases in the per Trust Unit distribution in
2006 (started January 2006 at $0.05; increased March 2006 to $0.06; increased
June 2006 to $0.065; increased September 2006 to $0.07 and for December 2006
declared an additional special cash distribution of $0.05 per Trust Unit); and
ii) the increased number of Trust Units outstanding as a result of options
exercised, Trust Units issued as part of 2005 business acquisitions and Trust
Units issued in satisfaction of the contingent consideration related to the
Advance Wireline acquisition. Pursuant to the Trust's Declaration of Trust,
the Trust is required to allocate all of its taxable income to Unitholders and
in order to allocate all of its taxable income to Unitholders a non-cash
in-kind distribution in the form of additional Trust Units was allocated to
Unitholders of record on December 31, 2006 and 2005. The December 31, 2006,
non-cash in-kind distribution was $0.06582 (2005 - $0.12139) per Trust Unit
for a total of $2,038 (2005 - $3,648). The Declaration of Trust also requires
there is an immediate consolidation of the Trust Units issued such that each
Unitholder has the same number of Trust Units after the consolidation as they
had prior to the non-cash in-kind distribution. Based upon a year-end Trust
Unit price of $9.96 (2005 - $11.90) per Trust Unit the in-kind distribution
represented the issuance of 204,667 (2005 - 306,534) Trust Units which were
immediately consolidated.
    Distributions paid to Unitholders for 2006 amounted to $22,467 (2005 -
$10,281). The increase in distributions paid is directly related to the level
of distributions declared which have increased significantly and the fact cash
distribution are paid on or about the 15th of the month following the month
they are declared as payable.
    The following is a summary of distributions declared in 2006 and 2005.

                                    2006        2005      Change           %
    -------------------------------------------------------------------------
    Declared
      Cash                     $  24,681   $  11,162   $  13,519         121
      In-kind                      2,038       3,648      (1,609)        (44)
    -------------------------------------------------------------------------
      Total                    $  26,719   $  14,810   $  11,910          80
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Declared per Trust Unit:
      Cash                     $ 0.80500   $ 0.38500   $ 0.42000         109
      In-kind                    0.06582     0.12139     0.05557         (46)
    -------------------------------------------------------------------------
      Total                    $ 0.87082   $ 0.50639   $ 0.36443          72
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at March 7, 2007, the Trust had 31,049,279 Trust Units and 2,791,244
options to purchase Trust Units outstanding.

    Contractual obligations

    In the normal course of business, the Trust's operating entities incur
contractual obligations. The following is a summary of the Trust's contractual
obligations as at December 31, 2006 for the following items:


                                         Total      2007      2008      2009
    -------------------------------------------------------------------------
    Capital asset additions           $  4,159  $  4,159  $      -  $      -
    Operating lease obligations          9,738     2,546     2,278     1,651
    Long-term debt and capital lease
     obligations(1)                     15,835       283     2,745     5,160
    -------------------------------------------------------------------------
                                      $ 29,732  $  6,988  $  5,023  $  6,811
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                             There-
                                          2010      2011     after
    ---------------------------------------------------------------
    Capital asset additions           $      -  $      -  $      -
    Operating lease obligations          1,288       505     1,470
    Long-term debt and capital lease
     obligations(1)                      5,147     2,500         -
    ---------------------------------------------------------------
                                      $  6,435  $  3,005  $  1,470
    ---------------------------------------------------------------
    ---------------------------------------------------------------

    (1) - Minimum principal amounts to be paid under long-term debt assumes
          the Trust elects prior to the maturity date of the revolving term
          loan to repay the loan over 36 months.

    The 2007 contractual obligations are expected to be financed by way of
cash flow from operations.


    DISTRIBUTABLE INCOME


    Distributable income is calculated as follows:                Year ended
                                                                 December 31
                                                      -----------------------
                                                            2006        2005
    -------------------------------------------------------------------------
    Cash flow from operating activities                $  39,929   $  21,609
    Add:  - changes in non-cash operating
             working capital(1)                            6,902       6,333
    Less: - required principal repayments on long-term
             debt and capital lease obligations             (549)       (177)
          - maintenance capital expenditures                (310)       (214)
    -------------------------------------------------------------------------
    Distributable income                               $  45,972   $  27,551
    -------------------------------------------------------------------------

    Cash distributions declared                        $  24,681   $  11,162
    -------------------------------------------------------------------------
    Payout ratio                                              54%         41%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Changes in non-cash operating working capital have been added back as
        such changes are financed using the Trust's bank indebtedness/line of
        credit facility. In addition, if changes in non-cash operating
        capital were excluded it would introduce cash flow variability and
        affect underlying cash flow from operating activities.

    Cathedral'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. It is the Trust's policy to pay consistent distributions throughout
the year despite the seasonality of a portion of Cathedral's business.
    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), expenditures for maintenance capital
are currently minimal. Current maintenance capital expenditure levels may not
be indicative of future maintenance capital expenditure levels.
    The Administrator of the Trust (Cathedral Energy Services Ltd.) reviews
the level and nature of distributions 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. Currently cash
distributions declared are less than distributable income as the Trustees, on
the recommendation of management of the Administrator, have decided to retain
a portion of distributable income to finance capital expenditures and debt
repayment. It is not management's intent to distribute 100% of distributable
income. Distributable income is not a standardized measure under Canadian GAAP
and distributable income cannot be assured. The Trust's calculation of
distributable income may differ from similarly titled measures used by other
trusts. Distributable income is a main performance measurement used by
management and investors to evaluate the performance of the Trust.

    FOURTH QUARTER RESULTS

    The Trust completed 2006 Q4 with revenues of $35,327 which is an increase
of $3,226 or 10% over the 2005 Q4 revenues of $32,101. In 2006 Q4, the Trust
had 2,713 (2005 - 2,664) activity days related to providing horizontal and
directional drilling services with an average day rate of $8,825 (2005 -
$7,963). The 2005 acquisitions of Tier One, Advance Wireline and Xtreme
Wireline accounted for $821 or 25% of the quarter-over-quarter increase in
revenues. In comparing Q4 of 2006 to 2005, in 2005 the Trust's operating
entities did not shut down for an extended December holiday season as was
experienced in December 2006. Quarter-over-quarter EBITDA increased $956 or 8%
from $12,090 in 2005 to $13,046 in 2006. Included in 2006 Q4 results is a gain
on disposal of property and equipment of $476 (2005 - $873) related mainly to
directional drilling equipment lost-in-hole.
    Net income for 2006 Q4 was $8,127 ($0.26 per diluted Trust Unit) which
compares to $7,762 ($0.25 per diluted Trust Unit) in 2005 Q4. The effective
tax rate decreased from 16.9% in 2005 Q4 to 15.1% in 2006 Q4 - the decrease is
attributed to an increased portion of the tax burden has been shifted to
unitholders as opposed to the Trust and its operating entities.
    The payout ratio for Q4 of 2006 was 71% (2005 Q4 - 37%) while the ratio
for the year ended December 31, 2006 was 54% (2005 - 41%). The payout ratio
for Q4 of 2006 includes the $0.05 per Trust Unit "special" cash distribution
declared in December 2006. If this "special" cash distribution was excluded
from the payout ratio calculation then the ratio for Q4 of 2006 would have
been 57%.
    The majority of Cathedral's operations are carried on in Western Canada
where activity levels in the oilfield services industry are subject to a
degree of seasonality. Operating activities in Western Canada are generally
lower during "spring breakup" which normally commences in late March and
continues through to May. Operating activities generally increase in the fall
and peak in the winter months from December till late March. Activity levels
in the Rocky Mountain region of the U.S. are not subject to the seasonality to
the extent that it occurs in the Western Canada region.

    OUTLOOK

    The Petroleum Services Association of Canada ("PSAC") is forecasting a
10% decline in the number of wells drilled across Canada in 2007 from 23,441
in 2006 to 21,000 in 2007 and a shift in the type of wells being drilled -
more oil drilling and a decline in gas drilling. This overall reduction is due
to the concerns over weather and natural gas storage levels which have
contributed to the decline in natural gas commodity prices. Overall drilling
in the U.S. regions in which the Trust operates continues at a high level. On
the oil side, commodity prices remain strong by historical standards despite
the pull back from the highs in the USD$70 range. Industry experts are
forecasting strong oil and natural gas prices for 2007 and into 2008 but not
at the record prices that were attained for oil in 2006 and natural gas in
2005.
    Demand for the Trust's directional drilling services continues to be
strong in the both the Canadian and U.S. markets. With regard to the Canadian
directional drilling market, in late 2006 the Trust's Directional Plus
division has been assigned to a number of on-going projects which represented
incremental work from previous activity levels from those customers. The Rocky
Mountain region of the U.S. continues to be a growth area for the Trust and,
subject to customer demand, additional directional drilling equipment will be
added to the U.S. fleet. Activity levels in the southeast Saskatchewan which
is oil based and where the Trust's The Directional Company division has a
significant market share remains strong. PSAC's forecast calls for the number
of wells drilled in the Saskatchewan market to be flat on a year-over-year
basis. As a result of the wireline unit additions during 2006 and early 2007,
we anticipate an overall increase in activity levels for the wireline
division, despite the reduction in the number of wells drilled in Canada. Of
all the Trust's divisions, the production testing division activity level is
affected the most by the drilling activity for natural gas wells. Despite that
fact, we are expecting this division to maintain its activity levels for 2007
that it attained in 2006.
    The Trust's board of trustees has approved a $11,600 capital expenditure
budget for 2007 with the major items being the addition of 2 MWD systems as
well as additions to the mud motor and drill collar fleet to complement the
increase in directional drilling job capacity; auxiliary production testing
equipment; 8 wireline units as well as auxiliary wireline equipment and
4 explosive loading magazines which are related to the wireline operations.
    The Trust will continue to pursue opportunities offering an expanded
range of services to its customers, increased market share, entry into new
geographic territories, and strategic acquisitions.

    CONSOLIDATED BALANCE SHEETS
    $ in 000's

    As at December 31, 2006 and 2005
    (unaudited)                                             2006        2005
    -------------------------------------------------------------------------
    ASSETS
    Current assets:
      Cash and cash equivalents                        $   1,554   $   2,091
      Accounts receivable                                 37,693      31,070
      Other receivables                                        -         612
      Inventory                                            3,050       2,712
      Prepaid expenses and deposits                          892         525
      -----------------------------------------------------------------------
                                                          43,189      37,010

    Property and equipment                                61,488      46,927

    Intangibles                                              736         884

    Goodwill                                              19,775      17,955

    Other asset                                               33         132
    -------------------------------------------------------------------------
                                                       $ 125,221   $ 102,908
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND UNITHOLDERS' EQUITY
    Current liabilities:
      Bank indebtedness                                $   6,460   $   5,310
      Accounts payable and accrued liabilities            16,446      17,788
      Distribution payable to Unitholders                  3,717       1,503
      Taxes payable                                        1,232       1,283
      Current portion of capital lease obligations           212         304
      Current portion of long-term debt                       71         251
    -------------------------------------------------------------------------
                                                          28,138      26,439

    Capital lease obligations                                452         665

    Long-term debt                                        15,100      12,132

    Future income taxes                                    5,308       4,057
    -------------------------------------------------------------------------

                                                          48,998      43,293
    -------------------------------------------------------------------------

    Unitholders' equity:
      Unitholders' capital                                44,667      37,094
      Contributed surplus                                  1,162         756
      Retained earnings                                   30,394      21,765
    -------------------------------------------------------------------------
                                                          76,223      59,615
    -------------------------------------------------------------------------
                                                       $ 125,221   $ 102,908
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
    $ in 000's except per Trust Unit amounts
    (unaudited)
                                 Three months ended          Year ended
                                    December 31             December 31
                              ----------------------- -----------------------
                                    2006        2005        2006        2005
    -------------------------------------------------------------------------

    Revenues                   $  35,327   $  32,101   $ 138,254   $  86,002

    Expenses :
      Operating                   16,831      16,301      64,886      42,313
      General and
       administrative              5,886       4,530      22,066      14,125
      Depreciation and
       amortization                2,937       2,208      10,692       5,686
      Interest - long-term
       debt and capital
       lease obligations             264         178         936         235
      Interest - other               124          40         482          71
      Foreign exchange
       (gain) loss                   (84)         13         (27)         25
      Non-cash compensation          272         369       1,486         842
    -------------------------------------------------------------------------
                                  26,230      23,639     100,521      63,297
    -------------------------------------------------------------------------
                                   9,097       8,462      37,733      22,705

    Gain on disposal of
     property and equipment          476         873       1,946       2,112
    -------------------------------------------------------------------------

    Income before taxes            9,573       9,335      39,679      24,817

    Taxes:
      Current                        810        (284)      3,093       1,267
      Future (reduction)             636       1,857       1,238       1,743
    -------------------------------------------------------------------------
                                   1,446       1,573       4,331       3,010
    -------------------------------------------------------------------------

    Net income for the period      8,127       7,762      35,348      21,807

    Retained earnings,
     beginning of period          32,331      21,766      21,765      14,768
    Less: Distributions
     declared                    (10,064)     (7,763)    (26,719)    (14,810)
    -------------------------------------------------------------------------
    Retained earnings,
     end of period             $  30,394   $  21,765   $  30,394   $  21,765
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net income per Trust Unit:
      Basic                    $    0.26   $    0.26   $    1.16   $    0.76
      Diluted                  $    0.26   $    0.25   $    1.12   $    0.76
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF CASH FLOWS
    $ in 000's
    (unaudited)
                                 Three months ended          Year ended
                                    December 31             December 31
                              ----------------------- -----------------------
                                    2006        2005        2006        2005
    -------------------------------------------------------------------------
    Cash provided by (used in):

    Operating activities:
    Net income for the period  $   8,127   $   7,762   $  35,348   $  21,807
    Items not involving cash:
      Depreciation and
       amortization                2,937       2,208      10,692       5,686
      Future income taxes
       (reduction)                   636       1,857       1,238       1,743
      Unrealized foreign
       exchange (gain) loss           46         (10)         13         (24)
      Non-cash compensation          272         369       1,486         842
      Gain on disposal of
       property and equipment       (476)       (873)     (1,946)     (2,112)
    -------------------------------------------------------------------------
                                  11,542      11,313      46,831      27,942
    Changes in non-cash
     operating working capital     2,461      (4,407)     (6,902)     (6,333)
    -------------------------------------------------------------------------
                                  14,003       6,906      39,929      21,609
    -------------------------------------------------------------------------
    Investing activities:
    Property and equipment
     additions                    (4,448)     (6,724)    (26,436)    (18,583)
    Proceeds on disposal of
     property and equipment          905       1,579       3,277       4,086
    Acquisition of Tier One
     Oil Services Ltd.                 -           -           -      (3,193)
    Acquisition of Advance
     Wireline Inc.                     -          81           -      (7,999)
    Acquisition of Xtreme
     Wireline                          -      (1,469)          -      (1,469)
    Changes in non-cash
     investing working capital        80         547      (1,207)        864
    -------------------------------------------------------------------------
                                  (3,463)     (5,986)    (24,366)    (26,294)
    -------------------------------------------------------------------------
    Financing activities:
    Advances under long-term
     debt                            109          50       3,109      12,050
    Repayment of long-term debt      (84)        (66)       (321)       (527)
    Repayment of capital lease
     obligations                     (72)        (68)       (305)        (90)
    Distributions paid to
     Unitholders                  (6,463)     (3,730)    (22,467)    (10,281)
    Trust Unit issuance costs          -          (2)          -         (17)
    Proceeds on exercise of
     Trust Unit options               19         144       2,734         637
    Increase (decrease) in bank
     indebtedness                 (3,310)      2,477       1,150       1,853
    -------------------------------------------------------------------------
                                  (9,801)     (1,195)    (16,100)      3,625
    -------------------------------------------------------------------------
    Change in cash and cash
     equivalents                     739        (275)       (537)     (1,060)

    Cash and cash equivalents,
     beginning of period             815       2,366       2,091       3,151
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period             $   1,554   $   2,091   $   1,554   $   2,091
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    %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.