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CATHEDRAL ENERGY SERVICES LTD. REPORTS RESULTS FOR 2010 Q4 AND THE YEAR ENDED DECEMBER 31, 2010, UPDATED 2011 CAPITAL BUDGET AND 2011 Q1 DIVIDEND

Mar 2, 2011
7:07pm

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, March 2 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral") (TSX: CET) is pleased to report its results for 2010 Q4 and the year-end December 31, 2010, updated 2011 capital budget and 2011 Q1 dividend. Dollars are in '000's except for day rates and per share amounts.

FINANCIAL HIGHLIGHTS
$ in 000's except per share amounts 

              Three months ended              Year ended
              December 31             December 31
              2010          2009              2010          2009
Revenues (excluding discontinued operations
2010 YTD - $2,403; 2009 YTD - $12,420) 
    $       42,877      $   24,741      $       141,396      $   82,100
                                                   
Gross margin %(1)              49%          48%              47%          49%
                                                   
EBITDAS from continuing operations (1)      $       12,900      $   6,423      $       38,899      $   19,831
  Per share - diluted      $       0.34      $   0.18      $       1.06      $   0.57
                                                   
EBITDAS (1)      $       13,103      $   5,864      $       37,964      $   16,652
  Per share - diluted      $       0.35      $   0.16      $       1.03      $   0.48
                                                   
Income from continuing operations      $       7,508      $   3,409      $       20,529      $   10,272
  Per share - diluted      $       0.20      $   0.10      $       0.56      $   0.29
                                                   
Net income      $       7,662      $   2,236      $       18,015      $   5,281
  Basic per share and diluted      $       0.21      $   0.06              0.49      $   0.15
                                                   
Dividends declared per share      $       0.06      $       $       0.24      $   0.31
                                                   
Property and equipment additions      $       10,304      $   1,614      $       35,233      $   8,923
                                                   
Weighted average shares outstanding:                                                
  Basic ('000) 
Diluted ('000) 



   
36,580 
37,394 




36,238 
36,400 




    36,453 
36,791 




34,841
34,857
                                                   
                        December 31                        December 31
                        2010                        2009
                                                   
Working capital                    $   18,536                    $    22,451
                                                   
Long-term debt excluding current portion                    $   34,502                    $   39,526
                                                   
Shareholders' equity                    $   109,115                    $   97,422

(1)  see "NON-GAAP MEASUREMENTS"

FORWARD LOOKING STATEMENTS

This news release contains certain forward-looking statements and forward-looking information (collectively referred to herein as "forward-looking statements") within the meaning of applicable Canadian securities laws.  All statements other than statements of present or historical fact are forward-looking statements.  Forward-looking statements are often, but not always, identified by the use of words such as "anticipate", "achieve", "believe", "plan", "intend", "objective", "continuous", "ongoing", "estimate", "outlook", "expect", "may", "will", "project", "should" or similar words suggesting future outcomes.  In particular, this news release contains forward-looking statements relating to, among other things,: access to capital; projected capital expenditures and commitments and the financing thereof; equipment delivery and deployment dates; establishment of new operating bases; customer commitments; financial results; activity levels; technology advances; tax rates; commencement of Venezuela operations and dividends.  The Company believes the expectations reflected in such forward-looking statements are reasonable as of the date hereof but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon.

Various material factors and assumptions are typically applied in drawing conclusions or making the forecasts or projections set out in forward-looking statements.  Those material factors and assumptions are based on information currently available to the Company, including information obtained from third party industry analysts and other third party sources.  In some instances, material assumptions and material factors are presented elsewhere in this news release in connection with the forward-looking statements.  You are cautioned that the following list of material factors and assumptions is not exhaustive.  Specific material factors and assumptions include, but are not limited to:

  • the performance of the Company's businesses, including current business and economic trends;
  • oil and natural gas commodity prices and production levels;
  • capital expenditure programs and other expenditures by the Company and its customers;
  • the ability of the Company to retain and hire qualified personnel;
  • the ability of the Company to obtain parts, consumables, equipment, technology, and supplies in a timely manner to carry out its activities;
  • the ability of the Company to maintain good working relationships with key suppliers;
  • the ability of the Company to market its services successfully to existing and new customers;
  • the ability of the Company to obtain timely financing on acceptable terms;
  • currency exchange and interest rates;
  • risks associated with foreign operations including Venezuela;
  • the ability of the Company to realize the benefit of its conversion from an income trust to a corporation;
  • risks associated with the formation of Cathedral's joint venture company in Venezuela which is required prior to commencement of Venezuela operations, some of which are out of the control of Cathedral;
  • risks associated with Venezuela joint venture company being awarded work by the Venezuela state run oil and natural gas corporation;
  • changes under governmental regulatory regimes and tax, environmental and other laws in Canada, United States ("U.S.") and Venezuela; and
  • a stable competitive environment.

Forward-looking statements are not a guarantee of future performance and involve a number of risks and uncertainties some of which are described herein.  Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause the Company's actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements.  These risks and uncertainties include, but are not limited to, the risks identified in this news release and in the Company's Annual Information Form under the heading "Risk Factors".  Any forward-looking statements are made as of the date hereof and, except as required by law, the Company assumes no obligation to publicly update or revise such statements to reflect new information, subsequent or otherwise.

All forward-looking statements contained in this news release are expressly qualified by this cautionary statement. Further information about the factors affecting forward-looking statements is available in the Company'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 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.

The specific measures being referred to include the following:

i) "Gross margin" - calculated as revenues less operating expenses is considered a primary indicator of operating performance (see tabular calculation under Results of Operations);

ii) "Gross margin %" - calculated as gross margin divided by revenues is considered a primary indicator of operating performance (see tabular calculation under Results of Operations);

iii) "EBITDAS" - defined as earnings before interest on long-term debt, taxes, depreciation, non-cash compensation expense and unrealized foreign exchange gain/loss; this measure is considered an indicator of the Company's ability to generate funds flow from operations prior to consideration of how activities are financed, how the results are taxed and measured and non-cash expenses.  The definition of EBITDAS was changed in 2009 Q2 to adjust for unrealized foreign exchange gain/loss.  Comparative amounts presented have been restated to the new calculation (see tabular calculation under EBITDAS);

iv) "EBITDAS from continuing operations" - defined as earnings before interest on long-term debt, taxes, depreciation, non-cash compensation expense and unrealized foreign exchange gain/loss excluding the portion due from discontinued operations in each component of the calculation;

v) "EBITDAS from discontinued operations" - defined as earnings before interest on long-term debt, taxes, depreciation, non-cash compensation expense and unrealized foreign exchange gain/loss from discontinued operations of the Company's former wireline division in each component of the calculation;

vi) "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

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

OVERVIEW

Cathedral Energy Services Ltd. (the "Company" or "Cathedral") is incorporated under the Business Corporations Act (Alberta) (the "Act").  The Company was created as a result of the conversion of Cathedral Energy Services Income Trust (the "Trust") to a corporation pursuant to a plan of arrangement ("Plan of Arrangement") under the Act, entered into by various entities including the Trust, Cathedral Energy Services Ltd. ("CES") and SemBioSys Genetics Inc. ("SBS") (the "Reorganization"). 

Upon closing of the Reorganization on December 18, 2009, the Company became the operator of the business of the Trust and its subsidiaries and the existing management and board of directors of CES, plus one director of SBS, became the management and board of directors of the Company.   The Reorganization resulted in the unitholders of the Trust becoming shareholders of the Company with no changes to the underlying business operations.  The Company did not acquire any additional business carried on by SBS.  The former business of SBS is being carried on by a new entity named SemBioSys Genetics Inc. ("New SBS") which is owned by the former shareholders of SBS.

Prior to the closing of the Reorganization, the consolidated financial statements included the accounts of the Trust, its subsidiaries and partnerships, all of which were wholly owned.  Subsequent to the Reorganization, the consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned.  The Company is considered a continuation of the Trust and these consolidated financial statements follow the continuity of interests method of accounting.  Under the continuity of interests method of accounting the transfer of assets, liabilities and equity from the Trust to the Company are recorded at their net book values as at December 18, 2009.

As a result of the application of the continuity of interests method of accounting, certain terms such as shareholders'/unitholders', shares/units, dividends/distributions and share-based/unit-based may be used interchangeably throughout this news release.

The Company is publicly traded on the Toronto Stock Exchange under the symbol CET.  The Company together with its wholly owned subsidiary, Cathedral Energy Services Inc., is engaged in the business of providing selected oilfield services to oil and natural gas companies in western Canada and selected oil and natural gas basins in the U.S.  The Company is in the process of establishing operations in Venezuela for providing directional drilling services through a joint venture with Petroleos de Venezuela, S.A. ("PDVSA"), the state owned oil and gas corporation of the Bolivarian Republic of Venezuela.  The Company strives to provide its clients with value added technologies and solutions to meet their drilling and production testing requirements.

UPDATED 2011 CAPITAL BUDGET

For 2011, the Board of Directors has approved an updated capital budget of $35,500; this is an increase of $10,647 from the previously announced 2011 capital budget.  The increase is mainly attributed to the addition of 6 high pressure production testing units and LWD (resistivity) equipment.  In summary, the major items within the updated 2011 capital budget are:  i) 27 MWD systems (including 7 carried forward from the 2010 capital budget) and related mud motors and collars to complement the increased job capability;  ii) LWD (resistivity) equipment;  iii) 6 high pressure production testing units and auxiliary production testing equipment to complement the overall fleet;  iv) $4,654 allocated to the new head office and operations facility in Calgary; and  v) $4,165 of maintenance capital.  The maintenance capital includes the retro-fit, upgrades and replacement of downhole tools. These capital expenditures are expected to be financed by way of cash flow from operations and the Company's credit facility.

DIVIDENDS

It is the intent of the Company to pay quarterly dividends to shareholders.  The Board of Directors will review the amount of dividends on a quarterly basis with due consideration to current performance, historical and future trends in the business, the expected sustainability of those trends and enacted tax legislation which will affect future taxes payable as well as required long-term debt repayments, maintenance capital expenditures required to sustain performance and future growth capital expenditures.  The Directors have approved a 2011 Q1 dividend in the amount of $0.06 per share which will have a date of record of March 31, 2011 and a payment date of April 15, 2011.

RESULTS OF OPERATIONS - 2010 COMPARED TO 2009

Overview

In 2010 Q1, the Company made the decision to discontinue the operations of its wireline division.  On March 31, 2010, the Company closed its Canadian slickline operations and on April 20, 2010 completed the sale of its U.S. wireline operations.  As such, the revenues and expenses for the wireline business are included in the statements of operations and retained earnings and statements of cash flows as discontinued operations and the related assets are classified as held for sale in the balance sheet.  The comparative figures have been reclassified to be consistent with this presentation.

On April 20, 2010, the Company closed the sale of its U.S. based electric wireline business to Pure Energy Services Ltd. ("Pure") in exchange for the operating assets of Pure's Motorworks division and $2,112 cash.  The assets of the Motorworks division included 58 drilling motors, 23 drilling jars, spare mud motor power sections and shop equipment valued at $4,980.  The assets of the Motorworks operations are being utilized in Cathedral's directional drilling business, and the net sale proceeds were used to reduce bank indebtedness.

The Company completed 2010 with revenues of $141,396 compared to 2009 at $82,100.  The 2010 revenues were lead by the Company's directional drilling division which represented 76% (2009 - 79%) of total revenues with the remainder composed of production testing division at 24% (2009 - 21%).  In 2009, there was a significant decline in drilling in the oil and gas sector due to low commodity prices and the overall decline in the economy.  Since those low activity levels, the Company experienced a significant increase in activities in all areas.

2010 EBITDAS was $37,964 ($1.03 per share - diluted) which represents a $21,312 or 128% increase from $16,652 ($0.48 per share - diluted) in 2009.  2009 EBITDAS is net of one-time charges in the amount of $1,130 of which $453 related to its restructuring of electric line ("E-Line") division and $677 related to the conversion to a corporation.  2010 EBITDAS from continuing operations was $38,899 ($1.06 per share - diluted) an increase of $19,068 or 96% from $19,831 ($0.57 per share - diluted) in 2009.

Revenues and operating expenses

                                         
                  2010      2009      $ Change          %
Revenues                141,396    82,100    59,296          72
Operating expenses                  74,585      41,835      32,750          78
Gross margin - $                66,811    40,265    26,546          66
Gross margin - %                  47%      49%      (2)%           
    Year ended December 31, 2010      Year ended December 31, 2009

Revenues 

Directional 
drilling 
 
Production 
testing 

 
Total   
Directional 
drilling 
 
Production 
testing 
 
 
Total
Canada  $ 65,827    $ 18,569    $   84,396    $ 40,597    $ 8,806    $     49,403
United States    41,013      15,987        57,000      24,161      8,536          32,697
  $ 106,840    $ 34,556    $   141,396    $ 64,758    $ 17,342    $     82,100

2010 revenues were $141,396 which represented an increase of $59,296 or 72% from 2009 revenues of $82,100.  The increase was primarily attributed to the focus on horizontal, multi-stage fracturing technology to complete conventional and unconventional resource plays in both Canada and the U.S. which has allowed for continued strength in activity levels for the oilfield services sector.   Demand for Cathedral's services has also been driven by both oil and liquids-rich natural gas plays.

The directional drilling division revenues increased 65% from $64,758 in 2009 to $106,840 in 2010.  This change was the net result of: i) a 75% increase in activity days from 6,836 in 2009 to 11,969 in 2010; and ii) a decrease in the average day rate from $9,275 in 2009 to $8,761 in 2010, which was caused in large part by a decrease in the Canadian dollar equivalent of U.S. day rates due to a strengthening of the Canadian dollar relative to the U.S. dollar.  While the average day rates have declined on a year-over-year basis due to market pressures, in Canada rates for 2010 Q4 have increased compared to rates at 2009 Q4 and in the U.S., the total average rate have increased from 2009 Q4 to 2010 Q4 in U.S. dollars. The increases in the Canadian rates were primarily to offset increased field labour costs.  Canadian activity days increased from 4,595 to 7,568 and U.S. activity days increased from 2,241 to 4,401.

The directional drilling division began the year with 62 Measurement-While-Drilling ("MWD") systems in Canada, 30 in the U.S. and 4 for international operations.  It ended 2010 with 65 MWD systems in Canada, 33 in the U.S. and 4 for international operations.  The Company continuously reviews the demand for its services and shifts equipment among its markets accordingly.

The Company's production testing division contributed $34,556 in revenues during 2010 which was a 99% increase over 2009 revenues of $17,342.  The division began the year with 21 units in Canada and 14 units in the U.S. and ended with 34 units in Canada and 22 in the U.S.  The increase in revenues was in part attributable to the increase in units plus the overall increase in oilfield service activities on a year-over-year basis.  The increased use of multi-fracturing technologies to complete wells has resulted in an increase in the amount of work associated with flowbacks after well stimulation.

The gross margin for 2010 was 47% down 2% from 49% in 2009.  The decrease is attributed to a number of factors including increases in labour and rental expense for auxiliary and specialty equipment. 

General and administrative expenses    

General and administrative expenses were $30,471 in 2010, an increase of $9,854 compared to $20,617 in 2009.  The increase was primarily related to increases in payroll related expenses and facility rental costs as well as other general increases due to increased activity levels, net of declines in certain professional and other fees in the amount of $677 incurred in 2009 Q4 related to the Plan of Arrangement.  In late 2008 and in 2009 due to the significant declines in activity levels several measures were taken to reduce staffing costs; these included lay-offs, a hiring freeze, elimination of incentive based compensation and wage roll-backs for all remaining staff.  The first level of wage roll-backs were re-instated in late 2009 and the remainder in 2010; as well the hiring freeze was removed and an incentive compensation plan was re-introduced in 2010.  Facility rental costs increased due to expansions into Pennsylvania and Texas.  As a percentage of revenues, general and administrative expenses were 22% in 2010 and 25% in 2009. 

Depreciation    

Depreciation for 2010 was $10,626 which compared to $11,602 in 2009.  The decrease was due to in part the declining balance depreciation method used by the Company and is expected as its assets get older.  In addition, the Company reviewed its estimate of useful lives of assets as at January 1, 2010 and adjusted its declining balance depreciation rates accordingly (refer to note 2(d) to the audited consolidated financial statements for the year ended December 31, 2010).  This change resulted in a decrease in depreciation of $2,733 in 2010.  Despite additional capital expenditures in the year the previous factors resulted in a decrease in depreciation.  During 2010, approximately $7,482 (2009 - $10,163) of property and equipment was temporarily removed from service and therefore no depreciation was recorded on these assets.  As a percentage of revenues, depreciation amounted to 8% for 2010 and 14% for 2009.  

Interest expense    

Interest expense related to long-term debt increased from $1,238 in 2009 to $1,256 in 2010 due to the net effect of a decrease in the average level of debt outstanding and an increase in the effective interest rate on the related debt.  Other interest expense increased from $290 in 2009 to $523 in 2010 and relates mainly to interest charges on use by the Company of its bank indebtedness/line of credit facility.  The increase in other interest expense was due to a combination of increased utilization of the related credit facility and increased bank interest rates.

Foreign exchange gain

The Company's foreign exchange gain decreased from $3,340 in 2009 to $1,309 in 2010 due to smaller fluctuations in the Canadian dollar in comparison to the U.S. dollar on a year-over-year basis.  The Company's U.S. operations are considered to be self-sustaining and therefore gains and losses due to fluctuations in the foreign currency exchange rates are recorded in other comprehensive income ("OCI") on the balance sheet as a component of equity.  However, gains and losses in the Canadian entity on U.S. denominated intercompany balances continue to be recognized in the statement of operations.  Included in the 2010 foreign currency gain are unrealized gains of $987 (2009 - $3,682) related to intercompany balances.

Share-based compensation expense     

For 2010, the Company had share-based compensation expense of $2,589 compared to $1,732 for 2009.  The value of the options is being amortized against income over the related vesting periods.  Share-based compensation has increased mainly due to 579,066 options issued in 2009 Q4 and 1,887,400 options issued in 2010.  As at December 31, 2010 there were 3,024,526 options outstanding as compared to 1,741,736 as at December 31, 2009.

In October 2009, insiders of the Company forfeited all of their outstanding 1,303,334 options, resulting in share based compensation expense of $794.  On October 13, 2009, non-insider optionees with vested or unvested out-of-the-money options were invited to reduce the exercise price of their share options to $3.81, which equaled the trust unit price on the last trading day immediately before the date of the modification.  In exchange for this reduction in the exercise price, longer vesting terms were established with due consideration of the original expiry date which did not change.  A total of 1,034,003 options were re-priced.  The unrecognized compensation costs from the original grant are recognized over the remainder of the original requisite service period and the incremental compensation costs for the modified share options are recognized over the new requisite service period.

Gain on disposal of property and equipment

During 2010 the Company had a gain on disposal of property and equipment of $2,760 compared to $815 in 2009. The Company's gains were 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 Company and therefore can fluctuate significantly from quarter-to-quarter and year-to-year. 

Taxes  

For 2010, the Company had a tax expense of $4,886 compared to tax recovery of $1,331 in 2009.

In 2010, the effective tax rate on continuing operations was 19%. The 2010 future tax provision was net of $2,429 utilization of deferred credit.  Excluding this utilization of deferred credit, the effective tax rate was 29% which is approximately the expected tax rate for the Company.  The Company's current income taxes for 2010 primarily related to U.S. operations. 

Included in the 2009 net tax recovery was $958 net tax expense related to tax on an internal reorganization related to ownership of assets.  At the beginning of 2009 Q1 the Company's U.S. subsidiary sold the majority of its operating assets to the Company's Canadian operating entity, as part of an internal reorganization related to ownership of operating assets within the Company.  This transaction created a one-time current tax expense in the amount of $4,168 (current taxable income was created mainly due to U.S. recaptured tax depreciation) and a recovery of future taxes in the amount of $3,210; for a net tax cost of $958.  Subsequent to this transaction, the Company's U.S. subsidiary leases the majority of its operating equipment from its Canadian parent company.  The future tax recovery for 2009 related to reversal of timing differences on U.S. taxes (see comments above) and the remaining future tax recovery was attributable to adjustments related to the future taxation of specified investment flow-through ("SIFT") income in Canada (prior to conversion to a corporation) and a tax benefit recognized on the conversion from a trust to a corporation.

Loss from discontinued operations

On March 31, 2010, the Company closed its Canadian slickline operations and on April 20, 2010 completed the sale of its U.S. wireline operations.  Cathedral management had determined that the wireline operations were not part of the core business going forward.  As such, operating results for the years ended December 31, 2009 and 2010 for the wireline business have been included in the statements of operations and retained earnings and statements of cash flows as discontinued operations.  For 2010, the loss from discontinued operations was $2,514 compared to $4,991 for 2009.  This amount is net of gain on disposal of property and equipment of $256 compared to $160 in 2009.

Other comprehensive loss

The Company incurred a loss of $1,463 compared to $5,293 in 2009.  Other comprehensive loss is comprised entirely of the foreign currency translation of the Company's U.S. self-sustaining subsidiary and reflects the changing value of the Canadian dollar compared to the U.S. dollar.  During 2010, the U.S. dollar weakened against the Canadian dollar to a lesser extent than in 2009.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of liquidity is cash generated from operations.  The Company also has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity.   At December 31, 2010, the Company had a demand operating line of credit with a major Canadian bank in the amount of $20,000 (December 31, 2009 - $20,000) of which $8,765 (December 31, 2009 - $2,181) was drawn.  The Company has a non-reducing revolving term loan facility in the amount of $45,000 (December 31, 2009 - $45,000) of which $34,500 (December 31, 2009 - $39,500) was drawn as at December 31, 2010.  In addition, at December 31, 2010, the Company had other long-term debt of $29 (December 31, 2009 - $234).  Effective June 30, 2010 the Company renewed its credit facility with a major Canadian bank and the new maturity date is June 29, 2011.

Operating activities     

Cash provided by operating activities for 2010 was $26,465 compared to $18,564 in 2009.  Funds from continuing operations (see Non-GAAP Measurements) for 2010 were $33,381 compared to $13,558 in 2009.  This increase was mainly caused by an increase in earnings due to increased activity levels. The Company has a working capital position at December 31, 2010 at $18,536 compared to $22,451 at December 31, 2009.

Investing activities   

Cash used in investing activities for 2010 amounted to $21,336 compared to $12,020 in 2009.  During 2010 the Company invested $35,062 (2009 - $8,470) in property and equipment for continuing operations.  The main additions were 6 MWD systems, resitivity logging while drilling ("LWD") equipment,  21 production testing units (including 9 production testing units acquired from a private company), production testing auxiliary equipment and $6,676  of maintenance capital, which was mainly related to the retrofit and upgrades to downhole tools.  These additions do not include the $4,980 of directional drilling assets acquired in the asset swap with Pure during 2010 Q2.  The actual property and equipment additions were lower than the 2010 budget amount as the budget anticipated the addition of 13 MWD systems as opposed to the 6 actually added.  The additional 7 MWD systems have been included in the 2011 budget discussed below.

In 2009, the Company made cash expenditures related to the Plan of Arrangement in the amount of $3,597.  For the year ended December 31, 2010, Cathedral had a source of funds by way of non-cash investing working capital in the amount of $3,438; the comparative figure for fiscal 2009 is a use of funds in the amount of $3,719.  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 following is a summary of major equipment owned by the Company:

                                               
                                2010            2009
Directional drilling equipment -                                            
  MWD systems                                102            96
  Drilling mud motors                                538            468
Production testing units                                56            35

Proceeds on disposal of property and equipment amounted to $10,459 (2009 - $4,219), excluding $4,980 of wireline equipment disposed of in the asset swap with Pure during 2010 Q2.  The 2010 year-over-year increase was the combined effect of a $2,652 increase in lost in hole equipment proceeds and a $3,588 in wireline equipment proceeds.   

Financing activities     

Cash used in financing activities for 2010 amounted to $3,865 compared to $13,194 in 2009.  In 2010 the Company repaid other long-term debt in the amount of $5,205 (2009 - $5,206).  Advances on (repayments of) bank indebtedness during 2010 were $6,584 compared to ($13,225) in 2009; fluctuations in bank indebtedness relates to the timing of cash receipts and cash disbursements.  During the year ended December 31, 2010 the Company paid dividends of $6,556 compared to $13,117 in 2009.  The trust distribution was $0.07 per trust unit in January 2009 and was reduced to $0.04 per trust unit per month from February to July 2009; the distribution was suspended upon the announcement of the intention to convert from a trust to a corporation in August 2009.  A quarterly dividend of $0.06 per share was paid in 2010.  During 2010 the Company received proceeds for the exercise of stock options of $1,312 versus $34 in 2009.  In 2009 Q2 the Company issued 3,615,600 trust units at $4.15 for proceeds net of issuance costs of $13,820.  As at December 31, 2010, the Company was in compliance with all covenants under its credit facility. 

Contractual obligations

In the normal course of business, the Company incurs contractual obligations.  The following is a summary of the Company's contractual obligations:

                                               
          Total      201     2012      2013      2014      2015      Thereafter
Property and equipment additions       8,983    8,983            -
Operating lease obligations          7,929      1,710      1,452      1,334      1,243      1,091      1,099
Long-term debt repayments (1)          34,529      27      5,752      11,500      11,500      5,750      -
        51,441    10,720    7,204    12,834    12,743    6,841    1,099

(1) Minimum principal amounts to be paid under long-term debt assumes the Company elects prior to the maturity date of the revolving term loan to repay the loan over 36 months with interest only payable for the first 12 months.

The 2011 contractual obligations are expected to be financed by way of cash flow from operations and the Company's credit facility.

EBITDAS

EBITDAS (refer to Non-GAAP Measurements) is calculated as follows:

                                   
              Three months ended      Years ended
              December 31      December 31
              2010        2009      2010      2009
Income from continuing operations            7,508      3,409    20,529    10,272
Add (deduct):                                  
  Depreciation              3,138        3,079      10,626      11,602
  Interest - long-term debt              292        276      1,256      1,238
  Share-based compensation              569        992      2,589      1,732
  Unrealized foreign exchange gain              (703)        (504)      (987)      (3,682)
  Taxes              2,096        (829)      4,886      (1,331)
EBITDAS from continuing operations              12,900        6,423      38,899      19,831
EBITDAS from discontinued operations              203        (559)      (935)      (3,179)
EBITDAS            13,103      5,864    37,964    16,652

FUNDS FROM CONTINUING OPERATIONS

Funds from operations (refer to Non-GAAP Measurements) is calculated as follows:

                                 
          Three months ended      Years ended
          December 31     December 31
          2010        2009      2010      2009
Cash provided by operating activities        12,347      2,175    26,465    18,564
Add (deduct):                              
  Cash flow from discontinued operations          42        191      1,807      1,290
  Changes in non-cash operating working capital          (459)        4,704      5,109      (6,296)
Funds from continuing operations        11,930      7,070    33,381    13,558

RELATED PARTY TRANSACTIONS

A director of the Company is a partner in a law firm and, through that law firm, is involved in providing and managing the legal services provided to the Company at market rates.  The total amount paid for these legal services in 2010 was $185 (2009 - $635). 

In 2009, StoneBridge Merchant Capital Corp. ("StoneBridge") acted as a special advisor to the Company in respect to the Plan of Arrangement and was paid a fee of $572.  A director of the Company is an officer of StoneBridge.

FOURTH QUARTER RESULTS

Revenues and operating expenses

                                                 
              2010 Q4            2009 Q4        $ Change              %
Revenues            42,877          24,741      18,136              73
Operating expenses              21,765            12,792        8,973              70
Gross margin - $            21,112          11,949      9,163              77
Gross margin - %              49%            48%        1%         

                                     
              Three months ended December 31, 2010      Three months ended December 31, 2009

Revenues 
         
Directional 
drilling 

Production 
testing 


Total
 
Directional 
 drilling 

Production 
testing 

Total
Canada            20,411  6,757  27,168   14,596  3,276  17,872
United States              11,156    4,553    15,709     4,448    2,421    6,869
            31,567  11,310  42,877   19,044  5,697  24,741

Revenues in Q4 have increased to $42,877 in 2010 from $24,741 in 2009, an increase of $18,136 or 73%. The increase was primarily attributed to the focus on horizontal, multi-stage fracturing technology to complete conventional and unconventional resource plays in both Canada and the U.S. which has allowed for continued strength in activity levels for the oilfield services sector.  Demand for Cathedral's services has also been driven by both oil and liquids-rich natural gas plays.

The directional drilling division revenues have increased from $19,044 in 2009 Q4 to $31,567 in 2010 Q4; a 66% increase.  This increase was the result of: i) a 55% increase in activity days from 2,200 in 2009 Q4 to 3,414 in 2010 Q4; and ii) an increase in the average day rate from $8,517 in 2009 Q4 to $9,079 in 2010 Q4, which was primarily to offset increased field labour costs.  Canadian activity days increased from 1,740 to 2,209 and U.S. activity days increased from 460 to 1,205.

The Company's production testing division contributed $11,310 in revenues during 2010 Q4 which was a 99% increase over 2009 revenues of $5,697.  The division ended 2009 Q4 with 21 units in Canada and 14 units in the U.S. and ended 2010 Q4 with 34 units in Canada and 22 in the U.S.  The increase in revenues was in part attributable to this increase in units plus the overall increase in oilfield service activities on a year-over-year basis.

The gross margin for 2010 was 49% which increased 1% from 48% in 2009.  The increase was attributed to a number of factors including increases in labour offset by decreases in expenses for certain consumables and a reduction in repair costs. 

General and administrative expenses were $8,409 in 2010 Q4; an increase of $2,909 compared with $5,500 in 2009.  The increase was primarily related to increases in payroll related expenses and facility rental costs as well as other general increases due to increased activity levels, net of declines in certain professional and other fees incurred in 2009 Q4 in the amount of $677 related to the Plan of Arrangement. In late 2008 and in 2009 due to the significant declines in activity levels several measures were taken to reduce staffing costs.  These included lay-offs, a hiring freeze, elimination of incentive based compensation and wage roll-backs for all remaining staff.  The first level of wage roll-backs were re-instated in late 2009 and the remainder in 2010.  In addition, the hiring freeze was removed and an incentive compensation plan was re-introduced in 2010.  Facility rental costs increased due to expansions into Pennsylvania and Texas.  As a percentage of revenues, general and administrative expenses were 20% in 2010 and 22% in 2009.

For 2010 Q4, the Company recorded a tax expense of $2,096 compared to the 2009 Q4 recovery of $829.  In 2010 Q4, the effective tax rate on continuing operations was 22%.  The 2010 Q4 future tax provision is net of $812 utilization of deferred credit.  Excluding this utilization of deferred credit, the effective tax rate was 30% which is approximately the expected tax rate for the Company.  The Company's current income taxes for 2010 Q4 primarily related to U.S. operations. 

Net income for 2010 Q4 was $7,662 ($0.21 per share - diluted) compared to $2,236 ($0.06 per share - diluted) in 2009 Q4.

SUMMARY OF QUARTERLY RESULTS

                                 
Three month period ended 
  Dec 
2010 
  Sep 
2010 
  Jun 
2010 
  Mar 
2010 
  Dec
2009
  Sep 
2009 
  Jun 
2009 
  Mar
2009
Revenues (1)    $42,877    $38,864    $23,979    $35,676    $24,741   $20,176    $ 10,654    $ 26,529
EBITDAS    13,103    11,967    2,415    10,479    5,864    5,724    (1,721)    6,785
Income (loss) from continuing operations    7,508    7,140    (2,881)    8,762    3,409   3,717    699    2,447
  Per share - basic and diluted    0.20    0.20    (0.08)    0.24    0.10   0.10    0.02    0.07
Net income (loss)    7,662    7,056    (3,440)    6,737    2,236   3,125    (1,484)    1,404
  Per share - basic    0.21    0.19    (0.09)    0.19    0.06   0.09    (0.04)    0.04
  Per share -diluted    0.21    0.19    (0.09)    0.18    0.06   0.09    (0.04)    0.04
Cash dividends declared per share    0.06    0.06    0.06    0.06    -   0.04    0.12    0.15

(1) Revenues have been rested to exclude discontinued operations.

OUTLOOK

Demand for Cathedral's services is currently being driven by both oil and liquids-rich natural gas plays.  Natural gas prices are expected to remain weak in the near term despite natural gas storage levels being below its five year average.  In due course, natural gas prices are expected to improve and thereby become a meaningful driver in demand for oilfield services.  The focus on horizontal, multi-stage fracturing to complete conventional and unconventional resource plays across North America has been a tremendous boost for the services provided by Cathedral.   Directional drilling and production testing flow back operations are considered key services in applying this new completion technology.  Cathedral has seen strong demand for all of its services in 2011 Q1, which is typically the busiest time for oilfield services in Canada.  The outlook post breakup is expected to remain robust as evidenced by customer's commitments to projects that are longer term in nature.

To accommodate the expected increase in activity levels, Cathedral continues its program to add new equipment and to train field personnel.  In 2011 Cathedral expects to add 27 MWD systems (including a carryover of 7 from the 2010 capital budget) and related mud motors and drill collars to complement the increased job capability.  The Production Testing division is expected to add 6 high pressure units and auxiliary equipment to complement its overall fleet.

Cathedral will continue to invest in resources - personnel and technology - to expand its offering of technologies to penetrate new markets as well as expand markets in which it operates.  The Company has focused its research and development spending on its MWD platform system to allow the MWD systems to drill deeper with the most efficient technologies and expects to introduce additional enhancements in the near term.  In-house design and manufacturing has allowed Cathedral to react to drilling issues on a timely basis. The Company has made significant inroads towards the vertical integration of the design and manufacture of MWD systems and will look towards expanding this vertical integration to further elements of its operations thereby gaining increased control of the Company's needs.

To assist in the ability to service the U.S. market, Cathedral opened a directional drilling operations/repair facility in Houston, Texas in November 2010.  This operations base, which will be used to service activity in the prolific Haynesville and Eagleford plays, is fully operational and commenced repairing equipment in January 2011.  Cathedral now services its U.S. directional drilling market from facilities in Colorado, Wyoming, Pennsylvania and Texas. 

Cathedral continues to work towards providing directional drilling services in Venezuela with its joint venture partner, PDVSA, the state-owned oil and natural gas corporation of the Bolivarian Republic of Venezuela.   PDVSA and Cathedral are currently in the process of incorporating and registering the joint venture company and this process has taken longer than expected.  Management's expectation was to commence operations in Venezuela in 2011 Q1 and this has been delayed.  Upon completion of the incorporation/registration process, Cathedral and PDVSA will work towards a start-up date for Vencana's operations.

CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
Dollars in '000s

                                   
                        2010          2009
Assets                                  
                                   
Current assets:                                  
  Cash and cash equivalents                      1,740        491
  Accounts receivable                        37,794          27,727
  Income taxes recoverable                        -          2,550
  Inventory                        7,648          5,389
  Assets held for sale                        1,754          740
  Prepaid expenses and deposits                        1,958          1,629
                        50,894          38,526
                                   
Property and equipment                        104,217          77,425
                                   
Assets held for sale                        1,457          14,027
                                   
Future income taxes                        19,044          23,491
                                   
Intangibles                                293
                                   
Goodwill                        18,448          19,775
                                   
                      194,060        173,537
                                   
Liabilities and Shareholders' Equity                                  
                                   
Current liabilities:                                  
  Bank indebtedness                      8,765        2,181
  Accounts payable and accrued liabilities                        21,309          13,686
  Dividends payable                        2,204          -
  Income taxes payable                        53          -
  Current portion of long-term debt                        27          208
                        32,358          16,075
                                   
Long-term debt                        34,502          39,526
                                   
Deferred credit                        18,085          20,514
                                   
                        84,945          76,115
Shareholders' equity:                                  
  Share capital                        70,753          68,995
  Contributed surplus                        6,533          4,390
  Retained earnings                        35,259          26,004
  Accumulated other comprehensive loss                        (3,430)          (1,967)
                        109,115          97,422
                      194,060        173,537
                                   
                                   

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Dollars in '000s except per share amounts

          Three months ended        Years ended
          December 31       December 31
          2010        2009       2010        2009
Revenues        $ 42,877      $ 24,741     $ 141,396      $ 82,100
Expenses:                                  
  Operating          21,765        12,792       74,585        41,835
  General and administrative          8,409        5,500       30,471        20,617
  Depreciation          3,138        3,079       10,626        11,602
  Share-based compensation          569        992       2,589        1,732
  Interest - long-term debt          292        276       1,256        1,238
  Interest - other          217        76       523        290
  Foreign exchange gain          (963)        (502)       (1,309)        (3,340)
          33,427       22,213       118,741        73,974
          9,450        2,528       22,655        8,126
Gain on disposal of property and equipment          154        52       2,760        815
Income before taxes and discontinued operations          9,604        2,580       25,415        8,941
Taxes:                                  
  Current (recovery)          524        (975)       1,502        4,220
  Future (recovery)          1,572        146       3,384        (5,551)
          2,096        (829)       4,886        (1,331)
Income from continuing operations          7,508        3,409       20,529        10,272
                                   
Income (loss) from discontinued operations          154        (1,173)       (2,514)        (4,991)
Net income          7,662        2,236       18,015        5,281
Retained earnings, beginning of period          29,801        23,679       26,004        31,559
Dividends declared          (2,204)        89       (8,760)        (10,836)
Retained earnings, end of period        $ 35,259      $ 26,004     $ 35,259      $  26,004
Income from continuing operations per share:                                  
  Basic and diluted        $ 0.20      $  0.10     $  0.56      $ 0.29
Income (loss) from discontinued operations per share:                                  
  Basic and diluted        $ 0.01      $ (0.04)     $ (0.07)      $ (0.14)
Net income per share:                                  
  Basic and diluted        $ 0.21      $ 0.06     $  0.49      $ 0.15
                                     

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Dollars in '000s except per share amounts

          Three months ended        Years ended
          December 31        December 31
          2010      2009        2010      2009
Net income        7,662    2,236      18,015    5,281
Other comprehensive loss:                              
  Unrealized foreign exchange loss on translation of
self-sustaining foreign operations 
        (1,020)      (692)        (1,463)      (5,293)
Comprehensive income (loss)        6,642    1,544      16,552    (12)
Accumulated other comprehensive income (loss), beginning of period        (2,410)    (1,275)      (1,967)    3,326
  Other comprehensive loss          (1,020)      (692)        (1,463)      (5,293)
Accumulated other comprehensive loss, end of period        (3,430)    (1,967)      (3,430)    (1,967)
                               
                           

CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in '000s except per share amounts

          Three months ended      Years ended
          December 31     December 31
          2010     2009     2010      2009
Cash provided by (used in):                            
Operating activities:                            
  Income from continuing operations        7,508    3,409   20,529    10,272
  Items not involving cash:                            
    Depreciation          3,138      3,079     10,626      11,602
    Future income tax (recovery)          1,572      146     3,384      (5,551)
    Unrealized foreign exchange gain          (703)      (504)     (987)      (3,682)
    Share-based compensation          569      992     2,589      1,732
    Gain on disposal of property and equipment          (154)      (52)     (2,760)      (815)
  Cash flow from continuing operations          11,930      7,070     33,381      13,558
  Cash flow from discontinued operations          (42)      (191)     (1,807)      (1,291)
  Changes in non-cash operating working capital          459      (4,704)     (5,109)      6,297
          12,347      2,175     26,465      18,564
Investing activities:                            
  Property and equipment additions from continuing operations          (10,304)      (1,549)     (35,062)      (8,470)
  Property and equipment additions from discontinued operations              (65)     (171)      (453)
  Transaction with SemBioSys Genetics Inc.              (3,597)      -      (3,597)
  Proceeds on disposal of property and equipment from continuing operations          419      73     4,151      1,499
  Proceeds on disposal of property and equipment from discontinued operations          807      1,720     6,308      2,720
  Changes in non-cash investing working capital          3,665      1,018     3,438      (3,719)
          (5,413)      (2,400)     (21,336)      (12,020)
Financing activities:                            
  Advances under long-term debt              3,000         4,500
  Repayment of long-term debt          (21)      (52)     (5,205)      (5,206)
  Dividends paid          (2,187)      89     (6,556)      (13,117)
  Shares issued for cash, net of issuance costs             -         13,820
  Proceeds on exercise of options          1,095      34     1,312      34
  Changes in bank indebtedness          (5,507)      (3,524)     6,584      (13,225)
          (6,620)      (453)     (3,865)      (13,194)
Effect of exchange rate on changes in cash and cash equivalents          (9)      (27)     (15)      (410)
Change in cash and cash equivalents          305      (705)     1,249      (7,060)
Cash and cash equivalents, beginning of period          1,435      1,196     491      7,551
Cash and cash equivalents, end of period        1,740    491   1,740    491




For further information:

Requests for further information should be directed to:
Mark L. Bentsen, President and Chief Executive Officer or P. Scott MacFarlane, Chief Financial Officer
Cathedral Energy Services Ltd., 1700, 715 - 5thAvenue 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.