Canyon Services Group Inc. (TSX:FRC) reports fourth quarter 2007 results



    CALGARY, March 5 /CNW/ - Canyon Services Group Inc. today announced its
fourth quarter 2007 results. The following should be read in conjunction with
the Management's Discussion and Analysis, the consolidated financial
statements and notes of Canyon Services Group Inc. which are available on
SEDAR at www.sedar.com.
    Certain statements in this document may constitute "forward-looking"
statements which involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of the
Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. When used in this document, such statements use
such words as "may", "would", "could", "will", "intend", "expect", "believe",
"plan", "anticipate", "estimate" and other similar terminology. These
statements reflect the Company's current expectations regarding future events
and operating performance and speak only as of the date of this document.
Forward-looking statements involve significant risks and uncertainties, should
not be read as guarantees of future performance or results, and will not
necessarily be accurate indications of whether or not such results will be
achieved. A number of factors could cause actual results to differ materially
from the results discussed in the forward-looking statements, including, but
not limited to price volatility for oil and natural gas and the consequent
effect on demand for oilfield services, competition, availability of materials
and personnel, and general political, economic and weather conditions. Actual
results may vary materially from those anticipated depending on the outcome of
any of these uncertainties.

    OVERVIEW OF THE YEAR 2007

    The 2007 year was characterized by a significant downturn in the well
stimulation services industry that commenced in 2006. Exploration and
production companies curtailed drilling activity in the Western Canadian
Sedimentary Basin in response to low natural gas prices, the significant
strengthening of the Canadian dollar and uncertainty around the proposed,
revised royalty structure announced by the Alberta Government in October 2007.
As a result, the well stimulation services industry operated throughout the
year in an increasingly competitive environment with lower than usual demand
for its services and corresponding pricing pressures.
    Despite these very difficult economic circumstances, Canyon achieved
revenue growth in 2007 and record quarterly revenues in the fourth quarter of
2007. In particular, Canyon also achieved a significant increase in customer
acceptance of its unique technologies, especially its proprietary Grand Canyon
process for which a Canadian patent was granted effective January 22, 2008.
The operational and financial highlights for the year and fourth quarter of
2007 may be summarized as follows:

    
    Highlights

    -   In Q4 2007 Canyon recorded a 66% increase in the total job count over
        the prior year comparable quarter. For the twelve months ended
        December 31, 2007, Canyon's total job count increased by 30% to 922
        from 707 over the prior year.

    -   Increased customer acceptance of the Company's Grand Canyon process
        is mostly responsible for the increase in the job count. In Q4 2007,
        Canyon recorded an eleven-fold increase in the number of Grand Canyon
        jobs completed compared to the prior year's quarter, while the year
        over year increase was seven-fold.

    -   In Q4 2007, Revenues increased by 45% to $19.7 million from
        $13.6 million in the prior year comparable quarter. For the 2007
        year, Revenues increased by 3% to $48.1 million compared to
        $46.7 million for 2006 and were impacted by pricing pressures
        associated with reduced demand for well stimulation services across
        the industry.

    -   For the year ended December 31, 2007, the revenue contributed by the
        three new service line offerings introduced during 2006, (i)
        Specialized Liquid/Proppant Fracturing, (ii) Specialty Foam
        Fracturing and (iii) Chemical Stimulation using custom-designed
        equipment, was more than four times the revenue achieved in the prior
        year. In Q4 2007, the revenue contributed by the new service lines
        was more than twice the revenue from these lines in the comparable
        quarter of 2006. Additional sales staff members were hired effective
        Q4 2007 to increase activity levels in these service lines.

    -   For Q4 2007, EBITDA before stock option expense increased by 21% to
        $3.3 million compared to $2.7 million for the fourth quarter of 2006
        as the significant increase in the job count more than offset pricing
        declines.

    -   The achievements in Q4 were offset by weak activity levels in the
        prior three quarters as Canyon recorded a net loss for 2007 of
        ($8.8) million compared to net earnings of $2.0 million in 2006.
        Pricing pressures and higher operating costs and depreciation expense
        to support more equipment led to the decrease in 2007.

    -   Effective September 1, 2007, Canyon appointed Mr. Bradley Fedora as
        President of Canyon. In conjunction with the appointment, Mr. Fedora
        subscribed for, on a private placement basis, 280,000 common shares
        of the Company at a price of $3.60 per common share for total gross
        proceeds of $1 million;

    -   In response to reduced industry activity and effective November 1,
        2007, Canyon has implemented significant, company-wide cost
        reductions that will result in significant annual operating and
        general and administration savings.


    QUARTERLY COMPARATIVE STATEMENTS OF OPERATIONS

    Quarter Ended                                 December 31,   December 31,
                                                         2007           2006
    -------------------------------------------------------------------------
    ($, except per share amounts)                  (Unaudited)    (Unaudited)

    Revenues                                      $19,706,099    $13,557,142

    Expenses
      Operating                                    14,905,484      9,554,073
      Selling, general and administrative           1,744,925      1,435,416
      Interest on long-term debt                      402,573        146,783
      Other interest                                   50,930         61,160
      Depreciation                                  2,404,446      1,939,885
                                                  ---------------------------
    Earnings from continuing operations
     before income taxes                              197,741        419,825
                                                  ---------------------------

      Income taxes-current (recovery)                   1,228       (474,884)
      Income taxes-future                             197,514        710,490
                                                  ---------------------------
                                                      198,742        235,606
                                                  ---------------------------
    Net earnings (loss) from continuing
     operations                                        (1,001)       184,219
    Loss from discontinued operations - Note(1)             -              -
                                                  ---------------------------
    Net earnings (loss)                               ($1,001)      $184,219
                                                  ---------------------------
                                                  ---------------------------

    EBITDA before stock option expense - Note(2)   $3,271,642     $2,697,607

    EBITDA - Note(2)                               $3,055,690     $2,567,653

    Earnings (loss) per share from continuing
     operations:
      Basic                                            ($0.00)         $0.01
      Diluted                                          ($0.00)         $0.01

    Earnings per share from discontinued
     operations:
      Basic                                                 -              -
      Diluted                                               -              -

    Earnings (loss) per share:
      Basic                                            ($0.00)         $0.01
      Diluted                                          ($0.00)         $0.01

    Note (1): Effective March 15, 2006, the Company sold the water and vacuum
              truck services division for cash consideration of $6.0 million
              and discontinued these operations. As a result, Q4 2007 and its
              comparative Q4 2006 do not reflect any results from
              discontinued operations.
    Note (2): See NON-GAAP MEASURES.
    

    Revenues

    In Q4 2007, the total number of jobs completed by Canyon increased by 66%
to 395 from 238 in the prior year's quarter, while revenues increased by 45%
to $19.7 million from $13.6 million over the same periods. The percentage
increase in job count was not matched by a comparable increase in job revenues
as the pricing of well stimulation services across the industry declined in
response to lower demand by E&P companies. Revenue per job declined by 11% to
$50,261 in Q4 2007 from $56,563 in the prior year's quarter.

    Operating Expenses

    Operating expenses for the quarter ended December 31, 2007 were
$14.9 million compared to $9.6 million for Q4 2006, a 56% increase. These
expenses included a higher fixed component because during Q4 2007, Canyon had
13 equipment spreads available, requiring higher support staff levels,
compared to ten equipment spreads at the end of the comparable 2006 quarter.
Management is minimizing operating costs supporting any equipment not being
utilized.

    Selling, General and Administrative Expenses

    Selling, general and administrative expenses ("SG&A") have increased in
Q4 2007 to $1.7 million from $1.4 million in Q4 2006. The increase is mostly
due to costs associated with a second operating base in Grande Prairie which
will be fully operational in early 2008. Included in this category of expense
is non-cash stock-based compensation expense of $0.2 million in Q4 2007
compared to $0.1 million for Q4 2006.

    EBITDA (See NON-GAAP MEASURES)

    EBITDA before stock option expense in Q4 2007 increased by 21% to
$3.3 million. This amount is computed as earnings from continuing operations
before income taxes of $0.2 million, plus Depreciation and amortization of
$2.4 million, plus Interest on long-term debt and other interest of
$0.5 million, plus non-cash stock option expense $0.2 million. The prior
year's quarter recorded EBITDA before stock option expense of $2.7 million
which comprises earnings from continuing operations before income taxes of
$0.4 million, plus Depreciation and amortization of $2.0 million, plus
Interest on long-term debt and Other interest of $0.2 million, plus stock
option expense $0.1 million. The increase in EBITDA was not proportionate to
the increase in Revenues because of pricing pressures associated with the
reduced demand by E&P companies for well stimulation services, and higher
operating and SG&A costs to support more equipment spreads and field offices.

    Interest Expense

    Interest on long-term debt and other interest increased to $0.5 million
for Q4 2007 from $0.4 million for Q4 2006 as the average level of long-term
debt outstanding increased to partially fund Canyon's equipment build program
that was completed in 2007.

    Depreciation Expense

    Depreciation expense has increased to $2.4 million in Q4 2007 from
$2.0 million in Q4 2006 with the deployment of more capital equipment to
support the NGC fracturing service lines and the three new service lines added
during 2006. In the current quarter, Canyon has 13 spreads available for use
compared to ten spreads available at the end of the comparable quarter of
2006. Effective October 1, 2007 in consultation with suppliers and operations
management, Canyon changed its estimate for salvage value used in the
calculation of depreciation on fracturing equipment which is amortized over
ten years on a straight line basis. Previously, salvage values had been
estimated to be nil. This change reduced the depreciation expense in Q4 2007
by $0.5 million.

    Income Tax Expense

    At the expected combined income tax rate of 32%, net earnings before
income taxes from continuing operations for Q4 2007 of $198,000 would have
resulted in income provision of approximately $64,000 compared to the actual
provision of $199,000. The future income tax expense increased by $135,000 as
a result of the effect of stock based compensation and other non deductible
expenses.

    Net Earnings (Loss) from Continuing Operations

    Net loss from continuing operations totaled $1 thousand for Q4 2007
compared to net earnings of $0.2 million for Q4 2006. Although Revenues were
higher in Q4 2007, the decrease in Net earnings (loss) from continuing
operations is due to several factors including higher fixed and variable
operating costs, higher interest expense, higher depreciation due to an
expanded equipment fleet, compared to the prior year's quarter.

    Net Earnings and Earnings per Share

    For the quarter ended December 31, 2007, basic and diluted net loss was
$1 thousand compared to net earnings of $0.2 million for the comparable
quarter of 2006.

    
    2007 YEAR COMPARATIVE STATEMENTS OF OPERATIONS

    Year Ended                                    December 31,   December 31,
                                                         2007           2006
    -------------------------------------------------------------------------
    ($, except per share amounts)                  (Unaudited)    (Unaudited)

    Revenues                                      $48,069,958    $46,668,455

    Expenses
      Operating                                    41,477,067     32,356,346
      Selling, general and administrative           6,847,650      5,587,311
      Interest on long-term debt                    1,339,747        625,493
      Other interest                                  214,569        115,328
      Depreciation                                 10,115,212      5,241,945
                                                  ---------------------------
    Earnings (loss) from continuing
     operations before income taxes               (11,924,287)     2,742,032
                                                  ---------------------------

      Income taxes-current (recovery)                (812,935)    (1,221,030)
      Income taxes-future (reduction)              (2,354,477)     1,844,147
                                                  ---------------------------
                                                   (3,167,412)       623,117
                                                  ---------------------------
    Net earnings (loss) from continuing
     operations                                    (8,756,875)     2,118,915
    Loss from discontinued operations - Note (1)            -        (96,227)
                                                  ---------------------------
    Net earnings (loss)                           $(8,756,875)    $2,022,688
                                                  ---------------------------
                                                  ---------------------------

    EBITDA before stock option expense - Note (2)    $579,053     $9,129,568

    EBITDA - Note (2)                               ($254,759)    $8,724,798

    Earnings (loss) per share from continuing
     operations:
      Basic                                            ($0.40)         $0.11
      Diluted                                          ($0.40)         $0.10

    Loss per share from discontinued operations:
      Basic                                                 -         ($0.01)
      Diluted                                               -              -

    Earnings (loss) per share:
      Basic                                            ($0.40)         $0.10
      Diluted                                          ($0.40)         $0.10

    Note (1): Effective March 15, 2006, the Company sold the water and vacuum
              truck services division for cash consideration of $6.0 million
              and discontinued these operations.
    Note (2): See NON-GAAP MEASURES.
    

    Revenues

    For the year ended December 31, 2007, Canyon's job count increased by 30%
as 922 jobs were completed compared to 707 jobs in the prior year. However,
the ongoing downturn in the demand by E&P companies for well stimulation
services lead to price pressures in 2007 and, as a result, Revenues increased
by 3% to $48.1 million over $46.7 in the prior year. In 2007, Canyon also
experienced an increase in revenues from newly introduced service lines
introduced to customers in the latter half of 2006. These new services, (i)
Specialized Liquid/Proppant Fracturing, (ii) Specialty Foam Fracturing and
(iii) Chemical Stimulation using custom-designed equipment, contributed
$13.5 million in revenues in the year ended December 31, 2007, up dramatically
from the $3.2 million contributed to revenues in the prior year.

    Operating Expenses

    Although revenues were marginally higher in 2007 over 2006, as noted
above, 2007 operating costs increased to $41.5 million from $32.4 million in
the prior year. This 28% increase in operating costs is due to increased job
activity in the year and also due to fixed costs associated with the increased
equipment fleet. During 2007, Canyon had 13 equipment spreads supporting four
service line offerings compared to ten equipment spreads at the end of 2006.
With its current equipment fleet, Canyon can support a much higher level of
activity. As a result, when the industry returns to more normal activity
levels, Canyon will incur only variable operating costs for the additional job
activity, as the necessary manpower and operating infrastructure is mostly in
place.

    Selling, General and Administrative Expenses

    Selling, general and administrative expenses have increased to
$6.8 million for the year ended December 31, 2007 from $5.6 million for the
2006 year mostly due to the expansion in the Company's scope of operations
including the opening of a new operating base in Grande Prairie in September
2007, and due to increased regulatory and compliance costs arising from
becoming a reporting issuer in May 2006. In addition, SG&A include non-cash
stock option expense of $0.8 million compared to $0.4 million in 2006.
Management expects that SG&A will grow at a proportionately lesser rate as the
Company's operating activities continue to expand, as much of the back-office
support infrastructure necessary to support expanded operational activities is
in place.

    EBITDA (See NON-GAAP MEASURES)

    The pricing pressures associated with the downturn in market conditions
discussed above and the higher expenses associated with a larger equipment
fleet has resulted in EBITDA before stock option expense for the year ended
December 31, 2007 declining to $0.6 million. This amount consists of Loss from
continuing operations before income taxes of ($11.9) million, plus
Depreciation and amortization of $10.1 million, plus Interest on long-term
debt of $1.4 million, plus Other interest of $0.2 million, plus stock option
expense $0.8 million. This compares to EBITDA before stock option expense of
$9.1 million in 2006 which consists of Earnings from continuing operations
before income taxes of $2.7 million, plus Depreciation and amortization of
$5.2 million, plus Interest on long-term debt of $0.7 million, other interest
of $0.1 million and stock option expense of $0.4 million.

    Interest Expense

    Interest on long-term debt and other interest increased to $1.6 million
for the year ended December 31, 2007 from $0.8 million for 2006 as the average
level of long-term debt outstanding increased to partially fund Canyon's
equipment build program.

    Depreciation Expense

    Depreciation expense has increased to $10.1 million for the year ended
December 31, 2007 from $5.2 million for 2006 with the deployment of more
capital equipment to support the NGC fracturing service lines and the three
new service lines added during 2006. As at December 31, 2007, Canyon has 13
equipment spreads available for use compared to 10 spreads as at December 31,
2006.

    Net Earnings from Continuing Operations

    Net loss from continuing operations totaled ($8.8) million for the year
ended December 31, 2007 compared to net earnings of $2.1 million for 2006. The
loss for the current year is primarily due to poor market conditions. In
addition, operating costs included a higher fixed component and the
administrative infrastructure has been expanded to support the increased
number of equipment spreads.

    Discontinued Operations

    Effective March 15, 2006, the Company sold the water and vacuum truck
services division for cash consideration of $6.0 million and discontinued
these operations. For the year ended December 31, 2006, the water and vacuum
truck services division contributed a loss of $0.1 million.

    Net Earnings and Earnings per Share

    For the year ended December 31, 2007, net loss was ($8.8) million
compared to net earnings of $2.0 million for 2006.
    Basic and diluted loss per share for the year ended December 31, 2007 was
($0.40) compared to basic and diluted earnings per share of $0.10 in the
comparable period of 2006.

    NON-GAAP MEASURES

    The Company's Consolidated Financial Statements are prepared in
accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and
are reported in Canadian currency.
    The term "EBITDA" is used in this document to refer to Earnings from
continuing operations before interest, taxes, depreciation and amortization
and "EBITDA before stock option expense" refers to EBITDA with stock-based
compensation added back. EBITDA and EBITDA before stock option expense are
terms not recognized under Canadian GAAP and do not have a standardized
meaning prescribed by GAAP. While management of the Company believes that
EBITDA and EBITDA before stock option expense are commonly used, and are
useful measures for readers in evaluating financial performance of the
Company, the Company's method of calculating EBITDA may differ from, and
therefore, not be comparable to similar measures provided by other reporting
issuers. Readers should be cautioned that these terms should not be construed
as alternatives to net earnings (loss) determined in accordance with GAAP as
an indicator of the Company's performance.

    2008 OUTLOOK

    Despite the lower levels of demand for well stimulation services relative
to recent historical highs, management believes that the fundamentals for
natural gas remain attractive as conventional reserves decline at 25% to 30%
per annum. To replace these declining reserves, the development of
unconventional gas plays is critical, which is where Canyon's proprietary
technologies are playing a major role by improving production and recovery
rates.
    Production enhancement through technology is key to future replacement of
natural gas reserves. Canyon's unique technology is demonstrating to customers
that unconventional gas plays are economically viable as natural gas contained
in difficult-to-produce formations such as organic shales, sands and limes,
and coal seams, require innovative completion, stimulation techniques to
achieve economic production. This was evident in the third and fourth quarters
of 2007 when the Grand Canyon process which received its Canadian patent
effective January 22, 2008, was used by both existing and new customers
resulting in a fourth quarter record for both job count and revenues since the
company commenced offering this service to customers in the first quarter of
2006.
    In the near term however, well stimulation activity levels will continue
to be impacted by capital expenditure cutbacks by exploration and production
("E&P") companies in response to weak natural gas prices and uncertainty
around the revised royalty structure announced by the Alberta Government in
October 2007. The timing for a return to higher activity levels will depend on
how natural gas storage levels are impacted by slowing production and weather
conditions, as well as how the royalty changes impact exploration and
development expenditure programs.
    In the meantime, with its patented, proprietary Grand Canyon process and
with recently-hired, additional sales staff, Canyon will continue to meet the
growing demand by customers for this technology in western Canada.
    In addition, management continues to actively manage operating and
administrative costs at all levels throughout the Company. In November 2007,
Canyon implemented significant, company-wide cost reductions that will result
in significant annual operating and general and administration savings.





For further information:

For further information: Brad Fedora, President, Canyon Technical
Services Ltd, No. 1600, 510-5th St. S.W., Calgary, Alberta, T2P 3S2, Phone
(403) 290-2491, Fax; (403) 355-2211; Or Barry O'Brien, Vice President, Finance
and CFO, Canyon Technical Services Ltd, No. 1600, 510-5th St. S.W., Calgary,
Alberta, T2P 3S2, Phone (403) 290-2478, Fax: (403) 355-2211

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Canyon Services Group Inc.

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