Canyon Services Group Inc. (TSX:FRC) reports second quarter 2008 results



    CALGARY, Aug. 7 /CNW/ - Canyon Services Group Inc. today announced its
second quarter 2008 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 SECOND QUARTER 2008

    The second quarter of each year is characterized as "break-up", a time at
which seasonal weather severely impacts the oilfield services industry in the
Western Canadian Sedimentary Basin for the months of March to June. The spring
thaw makes the ground unstable for purposes of moving heavy equipment and as a
result, municipalities and transportation departments enforce road bans,
thereby significantly reducing drilling and well servicing activity levels. As
a result, Q2 is a quarter of relative inactivity for Canyon and represents the
Company's lowest utilization quarter in the year. In addition, the second
quarter of 2008 experienced a wetter than normal June prolonging the spring
break-up in western Canada and impacting equipment utilization rates. Year
over year, well completions in Western Canada were down approximately 18%.
    Nevertheless, each of Canyon's service divisions continued to gain market
share in Q2 2008 and in the six months ended June 30, 2008 compared to the
prior year comparable periods. Canyon achieved a job count in Q2 2008 almost
three times the number of jobs completed in Q2 2007, while for the six months
ended June 30, 2008, Canyon's job count was more than double the level
achieved in the comparable quarter of 2007. Most importantly, the Conventional
Fracturing Division experienced significant growth with a fourfold increase in
the number of jobs completed in the first half of 2008 compared to the prior
year comparable period.
    The operational and financial highlights for the first quarter of 2008
may be summarized as follows:

    Highlights

    -  Canyon's job count continued to grow quarter by quarter, with 132 jobs
    completed in Q2 2008, compared to 47 jobs completed in Q2 2007. For
    the six months ended June 30, 2008, Canyon's job count was 632, more
    than double the 312 jobs achieved in the comparable period of 2007.

    -  The additions to the sales team in the last half of 2007 and in March
    2008 largely contributed to the growth in Canyon's Conventional
    Fracturing Division. In Q2 2008, this division contributed 40% of the
    job count, up significantly from the 15% contributed in Q2 2007 while
    for the year to date, this division represented 265 jobs, or 42%, of
    total jobs completed versus 74 jobs, or 24%, in Q2 2007.

    -  In June 2008, Canyon completed its first remedial cementing job,
    thereby increasing the utilization of equipment in the Chemical
    Stimulation and Remedial Services Division. No capital expenditures
    were required to introduce this new service line and the staffing is
    in place.

    -  In June 2008, Canyon completed a reorganization of its debt facilities
    by replacing a portion of short-term debt with a long-term facility,
    resulting in an annual reduction of $2.1 million in debt service costs
    (loan principal and interest) and an increase in available credit
    facilities to fund operating initiatives.

    -  In Q2 2008, Revenues increased by 38% to $4.2 million from $3.0
    million in the prior year comparable quarter. Year to date Revenues
    total $22.6 million, an increase of 31% from Revenues of $17.3 million
    in the first half of 2007. The increase in revenues did not match the
    increase in the job count due to the impact of pricing pressures
    resulting from lower demand by E&P companies for well stimulation
    services.

    -  Weak demand across the industry for well stimulation services in the
    quarter and the extended spring break-up resulted in a loss before
    income taxes of $6.7 million for Q2 2008 compared to a loss before
    income taxes of $7.0 million in Q2 2007. For the six months ended
    June 30, 2008, the loss before income taxes was $7.9 compared to a
    loss before income taxes of $8.2 million in the comparable period of
    2007.


    QUARTERLY COMPARATIVE STATEMENTS OF OPERATIONS

    Quarter Ended                               June 30, 2008  June 30, 2007
    -------------------------------------------------------------------------
    ($, except per share amounts)                 (Unaudited)    (Unaudited)

    Revenues                                     $  4,191,145   $  3,041,399

    Expenses
    Operating                                     5,972,049      5,482,487
    Selling, general and administrative           2,081,725      1,656,684
    Interest on long-term debt                      379,892        295,136
    Other interest                                   62,287         56,016
    Depreciation and amortization                 2,355,458      2,561,115
    ----------------------------
    Loss before income taxes                       (6,660,266)    (7,010,039)
    ----------------------------

    Income taxes-current (recovery)                       -        (65,265)
    Income taxes-future (reduction)                 (96,415)    (1,872,229)
    ----------------------------
    (96,415)    (1,937,494)
    ----------------------------
    Net loss                                      ($6,563,851)   ($5,072,545)
    ----------------------------
    ----------------------------

    Loss per share:
    Basic                                            ($0.30)        ($0.23)
    Diluted                                          ($0.29)        ($0.23)


    Revenues

    In Q2 2008, each of Canyon's service divisions, High Rate Fracturing,
Conventional Fracturing, and Chemical Stimulation and Remedial Services,
achieved significant increases in activity levels as the total number of jobs
completed by Canyon increased by 181% to 132 from 47 in the prior year's
quarter, while revenues increased by 38% to $4.2 million from $3.0 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 significantly in response to lower
demand by E&P companies. As a result, revenue per job declined to $32,521 in
Q2 2008, from $64,673 for the prior year's comparable quarter.

    Operating Expenses

    Operating expenses increased by 9% to $6.0 million in Q2 2008 from $5.5
million in Q2 2007. This increase is less than the threefold increase in the
Q2 2008 job count compared to Q2 2007, because of a significant fixed
operating cost component. In Q2 2008, Canyon reduced fixed operating expenses
by 11% as a result of cost cutting measures introduced in late 2007.

    Selling, General and Administrative Expenses
    Selling, general and administrative expenses have increased in Q2 2008 to
$2.1 million from $1.7 million in Q2 2007. The increase is mostly due to a
second operating base in Grande Prairie which became fully operational in
January 2008 and an increased sales force. Also included in this category of
expense is non-cash stock-based compensation expense of $0.2 million in Q2
2008, unchanged from the $0.2 million recorded in Q2 2007.

    Interest Expense

    Interest on long-term debt and Other interest increased to $0.4 million
for Q2 2008 from $0.3 million for Q2 2007 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 was recorded at $2.4 million in Q2 2008, compared to
$2.6 million recorded in Q2 2007. 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 insignificant. This change impacted
the depreciation expense in Q2 2008 by $0.5 million. This reduction in
depreciation expense was partially offset by additional depreciation in Q2
2008 attributable to the Grande Prairie facility which became operational in
January 2008, and additional depreciation attributable to equipment added in
the second half of 2007.

    Income Tax Expense

    At the expected combined income tax rate of 29.5%, Loss before income
taxes for Q2 2008 of $6.7 million would have resulted in income tax recovery
of approximately ($2.0) million compared to the actual provision of ($0.1)
million. The future income tax recovery was reduced by a future tax valuation
allowance of $1.8 million despite expectations of future profits, and by
$72,000 as a result of the effect of stock based compensation and other
non-deductible expenses.

    Net Loss and Loss per Share

    Net loss totaled ($6.6) million for Q2 2008 compared to ($5.1) million
for Q2 2007, primarily due to lower margins due to significant downward
pricing pressure caused by industry-wide reduced demand for well stimulation
services.
    For the quarter ended June 30, 2008, basic and diluted Loss per share was
($0.30) and ($0.29) respectively, compared to ($0.23) recorded in Q2 2007.

    
    2008 YEAR-TO-DATE COMPARATIVE STATEMENTS OF OPERATIONS


    Period Ended                                June 30, 2008  June 30, 2007
    -------------------------------------------------------------------------
    ($, except per share amounts)                 (Unaudited)    (Unaudited)

    Revenues                                      $22,645,286    $17,261,634

    Expenses
      Operating                                    20,994,390     16,439,550
      Selling, general and administrative           4,028,443      3,344,682
      Interest on long-term debt                      736,506        565,969
      Other interest                                   92,649         92,860
      Depreciation and amortization                 4,736,693      5,007,569
                                                 ----------------------------
    Loss before income taxes                       (7,943,395)    (8,188,996)
                                                 ----------------------------

      Income taxes-current (recovery)                       -       (815,129)
      Income taxes-future (reduction)                (395,727)    (1,469,251)
                                                 ----------------------------
                                                     (395,727)    (2,284,380)
                                                 ----------------------------
    Net loss                                      ($7,547,668)   ($5,904,616)
                                                 ----------------------------
                                                 ----------------------------

    EBITDA before stock option expense - Note(1)  ($1,974,081)   ($2,198,386)

    EBITDA - Note(1)                              ($2,377,547)   ($2,522,598)

    Loss:
      Basic                                            ($0.34)        ($0.27)
      Diluted                                          ($0.34)        ($0.27)
    

    Note (1): See Non-GAAP Measures.

    Revenues

    For the six months ended June 30, 2008, each of Canyon's divisions
achieved increases in activity levels as the total job count increased by 103%
with 632 jobs completed compared to 312 jobs in the six months ended June 30,
2007. Importantly, the Conventional Fracturing division accounted for 42% of
the jobs completed in the six months ended June 30, 2008 compared to 24% in
the comparable period of 2007. The additions to the sales team in the last
half of 2007 and in March 2008 largely contributed to the growth in this
division. However, the downturn in the demand by E&P companies for well
stimulation services reduced margins further in 2008 and, as a result,
Revenues increased by 31% to $22.6 million over $17.3 in the six months ended
June 30, 2007.

    Operating Expenses

    Operating expenses for the six months ended June 30, 2008 increased by
28% to $21.0 million from $16.4 million due to the increased job activity.
Importantly, fixed operating costs decreased by 16% for the current period
under review compared to the corresponding period of 2007 mainly due to cost
cutting measures introduced in the latter half of 2007. Canyon's current level
of fixed operating costs will support a much higher level of activity, with
the result that, when the industry returns to more normal activity levels,
Canyon will incur fixed costs at a proportionately lesser rate 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 $4.0
million for the six months ended June 30, 2008 from $3.3 million for the prior
year's comparable period. The increase is mostly due to the expansion in the
Company's scope of operations including the opening of new operating bases in
Grande Prairie and Medicine Hat, an increase in the sales force along with
one-time hiring costs. In addition, SG&A includes non-cash stock option
expense of $0.4 million for the six months ended June 30, 2008 compared to
$0.3 million in the comparable 2007 period. 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 low equipment utilization and resulting pricing pressures associated
with the downturn in market conditions over the past two years have resulted
in EBITDA before stock option expense for the six months ended June 30, 2008
of negative $2.0 million, down by about 10% from the EBITDA before stock
option expenses of negative $2.2 million recorded in the six months ended June
30, 2007. This 2008 amount consists of Loss before income taxes of ($7.9)
million, plus Depreciation and amortization of $4.7 million, plus Interest on
long-term debt of $0.7 million, plus Other interest of $0.1 million, plus
stock option expense $0.4 million. The comparable 2007 amount of negative $2.2
million consists of Loss before income taxes of ($8.2) million, plus
Depreciation and amortization of $5.0 million, plus Interest on long-term debt
of $0.6 million, other interest of $0.1 million and stock option expense of
$0.3 million.

    Interest Expense

    Interest on long-term debt and other interest increased to $0.8 million
for the six months ended June 30, 2008 from $0.7 million for 2007 comparable
period, as the average level of long-term debt outstanding increased to
partially fund Canyon's equipment build program that was completed in the last
half of 2007.

    Depreciation Expense

    Depreciation expense has decreased to $4.7 million for the six months
ended June 30, 2008 from $5.0 million for the comparable 2007 period. As
discussed previously, the reduction in depreciation expense is attributable to
the change in estimate of salvage values that was implemented effective
October 1, 2007, has been partially offset by higher depreciation charges
relating to the introduction of the Grande Prairie facility to commercial
operations and to equipment additions in the last half of 2007.

    Income Tax Expense

    At the expected combined income tax rate of 29.5%, Loss before income
taxes for the six months ended June 30, 2008 of $7.9 million would have
resulted in income tax recovery of approximately ($2.3) million compared to
the actual provision of ($0.4) million. The future income tax recovery was
reduced by a future tax valuation allowance of $1.8 million despite
expectations of future profits, and by $72,000 as a result of the effect of
stock based compensation and other non-deductible expenses.

    Net Loss and Loss per Share

    Net loss totaled ($7.5) million for the six months ended June 30, 2008
compared to a net loss of ($5.9) million for the comparable 2007 period
primarily due to a prolonged spring break-up and poor market conditions.
    Basic and diluted loss per share for the six months ended June 30, 2008
was ($0.34) compared to basic and diluted loss per share of ($0.27) in the
comparable period of 2007.

    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.
EBITDA is not a term recognized under Canadian GAAP and does not have a
standardized meaning prescribed by GAAP. While management of the Company
believes that EBITDA is commonly used, and is a useful measure 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.

    2008 OUTLOOK

    The outlook for activity levels across the WCSB for the second half of
2008 has improved considerably, supported by higher commodity prices. The
trend in strengthening natural gas and oil prices, which commenced in late
2007, has continued into Q2 2008 when the one-month NYMEX natural gas price
increased by 50% over the Q2 2007 average price, while the 12-month futures
price increased by 35% over the same periods. In the case of oil prices, the
average spot price of West Texas Intermediate increased by 91% in Q2 2008 over
Q2 2007. It is expected that the resulting increase in cash flows for E&P
companies operating in the WCSB will lead to E&P companies expanding capital
programs resulting in increased drilling activity over the last half of 2008
and into 2009. Already as we enter the third quarter, drilling rig utilization
levels, a key indicator for utilization of stimulation equipment, have been
moving ahead of 2007 levels.
    Supported by higher commodity prices and advances in technology, there is
now an increased emphasis on new drilling and completions' methods, especially
fracturing technology, as E&P companies focus on unconventional gas and
resource plays, such as multi-stage horizontal Montney, Bakken wells and Horn
River plays, to replace depleting reserves in the WCSB. With its thirteen
equipment spreads and its proprietary stimulation technologies, including its
light weight proppant (LWP), Canyon is well positioned to provide stimulation
services to customers in these plays as well as in any difficult-to-produce
formations such as organic shales, sands and limes, and coal seams. To date,
Canyon has achieved growing customer satisfaction with its stimulation
solutions, especially the LWP technology. In preparation, Canyon has begun
recruiting and training the staff required to meet the increased activity
levels expected for the 2008/2009 winter.





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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