Canyon Services Group Inc. (TSX:FRC) Reports Third Quarter 2007 Results



    CALGARY, Nov. 6 /CNW/ - Canyon Services Group Inc. today announced its
third 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.

    The Company's Interim Consolidated Financial Statements are prepared in
accordance with 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.

    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 THIRD QUARTER 2007

    The current downturn in the well stimulation services industry, which
began about one year ago, continues to impact Canyon's results of operations.
The key indicators for utilization of stimulation equipment, well licensing
activity and drilling rig utilization, continue to trail prior year levels.
The chief factors leading to the reduced activity levels across the services
sector are low natural gas prices, the significant strengthening of the
Canadian dollar and, more recently, the revised royalty structure announced by
the Alberta Government on October 25, 2007. Nevertheless, in this very
difficult economic environment, Canyon continues to achieve increased customer
acceptance of its unique technologies, especially its proprietary Grand
Canyon(TM) process. This is evidenced by a fifteen-fold increase in the number
of Grand Canyon jobs completed in the third quarter of 2007 compared to the
comparable quarter of 2006. Year to date September 30, 2007, Canyon
experienced a six-fold increase in the number of Grand Canyon jobs completed
compared to the comparable period in 2006.

    
    Highlights

    -   In the quarter, Canyon completed a record number of stimulation jobs
        utilizing the Grand Canyon(TM) process, as new customers continued to
        adopt and existing customers increased their demand for the Company's
        proprietary technology;

    -   In Q3 2007, Canyon's total job count increased by 12% over the prior
        year comparable quarter. However, revenues in the current quarter
        declined by 11% to $11.1 million from $12.5 million in Q3 2006 as the
        pricing of well stimulation services across the industry declined in
        response to lower aggregate demand by the exploration and development
        companies;

    -   In the nine months ended September 30, 2007, Canyon's total job count
        increased by 12% over the prior year comparable period. However,
        revenues in the current period were impacted by the afore-mentioned
        pricing pressure and total revenue declined by 14% to $28.4 million
        from $33.1 million in the comparable period of 2006;

    -   In Q3 2007, the revenue contributed by the three new service line
        offerings introduced during 2006, (i) Chemical Stimulation using
        custom-designed equipment, (ii) Specialty Foam Fracturing and (iii)
        Specialized Liquid/Proppant Fracturing, was more than double the
        revenue achieved in the comparable quarter of 2006. On a year-to-date
        basis, the revenues contributed by the new service lines was more
        than six times the revenue from these lines in the comparable period
        of 2006;

    -   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 be effective for the balance of 2007 and for
        2008. These changes will result in an estimated annual operating and
        general and administration savings of over $3.0 million;

    -   The ongoing down-turn in market conditions has resulted in net
        earnings (loss) from continuing operations for Q3 2007 of
        ($2.9 million) compared to $0.6 million in the comparable quarter of
        2006.

    OPERATIONS

    In the third quarter of 2007, Canyon had 13 equipment spreads across four
service lines available to service customers compared to six equipment spreads
across three service lines available at the end of the third quarter of 2006.
The four service lines currently available for Canyon's customers may be
described as follows:

        NGC Fracturing: - with four custom-designed equipment spreads, this
        service line offers well stimulation services to companies focused on
        shallow gas including shale gas and coal formations. Two of these
        equipment spreads support Canyon's patent pending Grand Canyon(TM)
        process whereby proppant is injected at high rates with a dry gas
        carrier (e.g., nitrogen) into reservoirs. The other two equipment
        spreads support high rate nitrogen fracturing services for naturally
        fractured reservoirs (e.g., coal bed methane) where proppant is not
        required;

        Specialized Liquid/Proppant Fracturing: - with three custom-designed
        equipment spreads, this service line offers deep fluid fracturing
        capability to customers in deeper more technical areas including the
        foothills of Alberta and north eastern British Columbia;

        Specialty Foam Fracturing: - with two custom-designed equipment
        spreads, this service provides customers with the ability to exploit
        low-pressure, low-permeability reservoirs;

        Chemical Stimulation: - with four custom-designed equipment spreads,
        this service provides acid treatments utilizing proprietary acidizing
        chemical systems to treat oil and natural gas wells;
    

    At the end of Q3 2006, Canyon had one Chemical Stimulation equipment
spread, one Specialty Foam Fracturing Spread and four NGC Fracturing equipment
spreads.
    Canyon's current fleet of 13 equipment spreads is the result of Canyon
taking delivery in the first half of 2007 of the final equipment items under
the previously-announced $86 million capital program following the successful
completion of the initial public offering in May 2006. As at September 30,
2007, new equipment in the amount of $4.4 million had not been introduced to
service customers because of economic conditions in the well stimulation
services industry.
    The deterioration in the demand by E&P companies for well stimulation
services in the Western Canadian Sedimentary Basin ("WCSB"), which commenced
shortly after the 2006 spring break-up, has impacted the 2007 results of all
companies providing these services. The commonly accepted key indicators for
utilization of well stimulation service equipment in the WCSB are well license
activity and drilling rig utilization levels. In Q3 2007 well licensing
decreased by 13% relative to the comparable 2006 quarter, while for the nine
months ended September 30, 2007, the decrease was 28% compared to the
comparable 2006 period. For the third quarter of 2007, WCSB drilling rig
utilization was about 39%, down from the 57% recorded for Q3 2006. On a year
over year basis to September 30, drilling rig utilization has tracked about
40% in 2007 compared to 57% in 2006. Leading causes for the reduced demand by
E&P companies for well stimulation services include continuing low natural gas
prices and the strengthening Canadian dollar.
    More recently, on October 25, 2007, the Alberta Government announced a
revised oil and gas royalty regime. Although the royalty changes will come
into effect in 2009, it is uncertain how the recommended changes will impact
the drilling budgets of exploration and production companies.
    Despite these economic conditions, a notable achievement for Canyon since
the beginning of 2007 is the growing acceptance by customers of its
proprietary Grand Canyon(TM) process. Canyon's technical focus on the
development of unconventional resources such as shale gas and other low
pressure, water sensitive formations has led to the development of the
Company's proprietary, patent pending Grand Canyon(TM) process, with which a
deformable light weight proppant ("LWP") is injected into a
hydrocarbon-bearing reservoir utilizing a dry gas carrier. Grand Canyon(TM)
treatments recently completed in low-quality shaley formations which are
common throughout Alberta have resulted in these previously uneconomic
reservoirs now being commercially viable. As a result, E&P companies utilizing
the Grand Canyon(TM) process can extend reservoir development to areas
previously considered uneconomic.
    The equipment spreads delivering the Grand Canyon(TM) process technology
to customers experienced increased utilization levels during Q3 2007. In this
quarter, Canyon completed almost double the number of Grand Canyon jobs
compared to the number completed in the calendar 2006 year.
    The economic conditions resulted in Canyon's remaining equipment spreads
experiencing less than satisfactory utilization levels in the current quarter
and for the year to date. Nevertheless, in Q3 2007, revenue contributed by the
three new service line offerings introduced during 2006, (i) Chemical
Stimulation using custom-designed equipment, (ii) Specialty Foam Fracturing
and (iii) Specialized Liquid/Proppant Fracturing, was more than double the
revenue achieved in the comparable quarter of 2006. On a year-to-date basis,
revenues contributed by the new service lines was more than six times the
revenue from these lines in the comparable period of 2006.
    The total number of jobs across all service lines completed by Canyon in
Q3 2007 increased by 12% compared to Q3 2006 while, for the nine months ended
September 30, 2007, Canyon's total job count also increased by 12% over the
prior year comparable period. The increase in the number of jobs did not
result in increased revenues as the industry-wide lower demand by E&P
companies for well stimulation services has reduced pricing levels for all
service companies.
    In the current quarter, Canyon spent $2.2 million mostly related to
completing construction of its Grande Prairie facility. As at September 30,
2007, $79 million of the previously announced $86 million capital expenditure
program has been spent. A further $3 million is expected to be incurred over
the balance of 2007 and will include an amount to add a third Grand Canyon
unit to an existing NGC spread. The amount of $3 million will be financed from
funds generated from operations in the fourth quarter and existing bank credit
facilities. The balance of about $5 million has been deferred to 2008 and
beyond as Canyon seeks to match capital commitments with operational
requirements.

    
    QUARTERLY COMPARATIVE STATEMENTS OF OPERATIONS

    Quarter Ended                                September 30,  September 30,
                                                         2007           2006
    -------------------------------------------------------------------------
    ($, except per share amounts)                  (Unaudited)    (Unaudited)

    Revenues                                      $11,102,225    $12,533,833

    Expenses
      Operating                                    10,132,033      8,468,498
      Selling, general and administrative           1,758,043      1,855,619
      Interest on long-term debt                      371,205        153,731
      Other interest                                   70,779              -
      Depreciation                                  2,703,197      1,259,269
                                                -----------------------------
    Earnings (loss) from continuing operations
     before income taxes                           (3,933,032)       796,716
                                                -----------------------------

      Income taxes-current (recovery)                     966       (517,569)
      Income taxes-future (reduction)              (1,082,740)       745,319
                                                -----------------------------
                                                   (1,081,774)       227,570
                                                -----------------------------
    Net earnings (loss) from continuing
     operations                                    (2,851,258)       568,966
    Loss from discontinued operations - Note (1)             -              -
                                                -----------------------------
    Net earnings (loss)                           ($2,851,258)      $568,966
                                                -----------------------------
                                                -----------------------------
    Earnings (loss) per share from continuing
     operations:
      Basic                                            ($0.13)         $0.03
      Diluted                                          ($0.13)         $0.02

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

    Earnings (loss) per share:
      Basic                                            ($0.13)         $0.03
      Diluted                                          ($0.13)         $0.02

        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, Q3 2007 and its
        comparative Q3 2006 do not reflect any results from discontinued
        operations.
    

    Revenues

    Although the total number of jobs completed by Canyon increased by 12% in
Q3 2007 compared to Q3 2006, Revenues decreased by 11% to $11.1 million for Q3
2007 compared to $12.5 million recorded in the comparable quarter of 2006 as
the pricing of well stimulation services across the industry declined in
response to lower demand by E&P companies. In Q3 2007, revenues from the three
new service lines introduced in 2006, chemical stimulation, specialty foam
fracturing and specialized liquid/proppant fracturing, were more than twice
the level for the comparative quarter of 2006.

    Operating Expenses

    Operating expenses for the quarter ended September 30, 2007 were
$10.1 million compared to $8.5 million for Q3 2006. The decrease in revenues
noted above was not matched by a decrease in operating costs because this
category of costs includes a large fixed component. During the current
quarter, Canyon had 13 equipment spreads available to support four service
line offerings compared to six equipment spreads and three service line
offerings in the comparable quarter of 2006. As a result, the operating
expenses incurred in Q2 2007 include a fixed component to support a much
higher level of activity than has taken place. Management is actively
minimizing operating costs supporting any equipment not being utilized.

    Selling, General and Administrative Expenses

    Selling, general and administrative expenses have decreased slightly in
Q3 2007 to $1.8 million from $1.9 million in Q3 2006. Included in this
category of expense is non-cash stock-based compensation expense of
$0.3 million in Q3 2007 compared to $0.1 million for Q3 2006. Management
believes that general and administrative expenses 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

    The continuing reduced demand by E&P companies for well stimulation
services across the oil and gas industry has resulted in EBITDA for Q3 2007 of
negative $0.8 million (Earnings (loss) from continuing operations before
income taxes of ($3.9) million, plus Depreciation and amortization of
$2.7 million, plus Other interest and Interest on long-term debt of $0.4
million) compared to positive $2.2 million in the comparable quarter of 2006
(Earnings (loss) from continuing operations before income taxes of $0.8
million, plus Depreciation and amortization of $1.2 million, plus Other
interest and Interest on long-term debt of $0.2 million). EBITDA is impacted
by the inclusion in selling, general and administrative expenses of $0.3
million of stock-based compensation expense in Q3 2007 compared to $0.1
million in the comparable quarter of 2006.

    Interest Expense

    Interest on long-term debt and Other interest increased to $0.4 million
for Q3 2007 from $0.2 million for Q2 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 $2.7 million in Q3 2007 from
$1.2 million in Q3 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 four spreads in the comparable quarter of 2006.

    Net Earnings (Loss) from Continuing Operations

    Net loss from continuing operations totaled ($2.9) million for Q3 2007
compared to net earnings of $0.6 million for Q3 2006. The increased loss is
primarily due to the down-turn in market conditions. In addition, operating
costs included a higher fixed component to support 13 equipment spreads
compared to four spreads in Q3 2006.

    Net Earnings (Loss) and Net Earnings (Loss) per Share

    For the quarter ended September 30, 2007, the net loss was ($2.9) million
compared to net earnings of $0.6 million for the comparable quarter of 2006.
    Net earnings (loss) per share for Q3 2007 decreased to ($0.13) per share
from $0.03 per share in Q3 2006, while on a diluted basis the net earnings
(loss) per share for Q3 2007 decreased to ($0.13) per share from $0.02 per
share in Q3 2006.

    
    YEAR-TO-DATE COMPARATIVE STATEMENTS OF OPERATIONS

    Nine Months Ended                            September 30,  September 30,
                                                         2007           2006
    -------------------------------------------------------------------------
    ($, except per share amounts)                  (Unaudited)    (Unaudited)

    Revenues                                      $28,363,859    $33,111,313
    Expenses
      Operating                                    26,571,583     22,802,273
      Selling, general and administrative           5,102,725      4,151,895
      Interest on long-term debt                      937,174        478,710
      Other interest                                  163,639         54,168
      Depreciation                                  7,710,766      3,302,060
                                                -----------------------------
    Earnings (loss) from continuing operations
     before income taxes                          (12,122,028)     2,322,207
                                                -----------------------------

      Income taxes-current (recovery)                (814,163)      (659,917)
      Income taxes-future (reduction)              (2,551,991)     1,047,428
                                                -----------------------------
                                                   (3,366,154)       387,511
                                                -----------------------------
    Net earnings (loss) from continuing
     operations                                    (8,755,874)     1,934,696
    Loss from discontinued operations                       -        (96,227)
                                                -----------------------------
    Net earnings (loss)                           ($8,755,874)    $1,838,469
                                                -----------------------------
                                                -----------------------------
    Earnings (loss) per share from continuing
     operations:
      Basic                                            ($0.40)         $0.10
      Diluted                                          ($0.40)         $0.09

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

    Earnings (loss) per share:
      Basic                                            ($0.40)         $0.09
      Diluted                                          ($0.40)         $0.09
    

    Revenues

    For the nine months ended September 30, 2007, Canyon's total job count
increased by 12% over the comparable 2006 period. However, the ongoing
downturn in the demand by E&P companies for well stimulation services has
resulted in Revenues decreasing to $28.4 million from $33.1 million in the
comparable period of 2006 due to lower pricing. The decrease in Canyon's
revenues was mitigated by an increase in revenues from newly introduced
services to customers in the latter half of 2006. These new services, (i)
Chemical Stimulation using custom-designed equipment, (ii) Specialty Foam
Fracturing and (iii) Specialized Liquid/Proppant Fracturing, contributed
$8.6 million in revenues in the nine months ended September 30, 2007, up
dramatically from the $1.2 million contributed to revenues in the comparable
period of 2006.

    Operating Expenses

    Although revenues were lower in the nine months ended September 30, 2007,
as noted above, operating costs increased to $26.6 million from $22.8 million
in the comparable period of 2006. This 17% increase in operating costs is due
to the 12% increase in jobs completed by Canyon in the period and also due to
fixed costs associated with the increased equipment spread fleet. Canyon now
has 13 equipment spreads supporting four service line offerings compared to
six equipment spreads and three service line offerings in the comparable
quarter of 2006. As a result, the operating expenses incurred in Q3 2007
include a fixed component to support a much higher level of activity than
occurred. 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 already in place.

    Selling, General and Administrative Expenses

    Selling, general and administrative expenses have increased to
$5.1 million for the nine months ended September 30, 2007 from $4.2 million
for the comparable period of 2006 mostly due to the expansion in the Company's
scope of operations as previously discussed and due to regulatory and
compliance costs arising from becoming a reporting issuer in May 2006.
Management expects that general and administrative expenses 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

    The downturn in market conditions discussed above has resulted in
negative EBITDA for the nine months ended September 30, 2007 of
($3.3) million. This amount consists of Earnings (loss) from continuing
operations before income taxes of ($12.1) million, plus Depreciation and
amortization of $7.7 million, plus Other interest of $0.2 million, plus
Interest on long-term debt of $0.9 million. This compares to EBITDA of $6.2
million in the comparable period of 2006 which consists of Earnings (loss)
from continuing operations before income taxes of $2.3 million, plus
Depreciation and amortization of $3.3 million, plus Other interest of $0.1
million, plus Interest on long-term debt of $0.5 million. EBITDA is impacted
by the inclusion in selling, general and administrative expenses of $0.6
million of stock-based compensation expense in the nine months ended September
30, 2007 compared to $0.3 million in the comparable period of 2006.

    Interest Expense

    Interest on long-term debt and Other interest increased to $1.1 million
for the nine months ended September 30, 2007 from $0.5 million for the nine
months ended September 30, 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 $7.7 million for the nine months
ended September 30, 2007 from $3.3 million for the comparable period of 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
September 30, 2007, Canyon has 13 equipment spreads available for use compared
to six spreads as at September 30, 2006.

    Net Earnings (Loss) from Continuing Operations

    Net earnings (loss) from continuing operations totaled ($8.8) million for
the nine months ended September 30, 2007 compared to $1.9 million for the nine
months ended September 30, 2006. The loss for the current period under review
is primarily due to 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 nine months ended September 30, 2006, the water and
vacuum truck services division contributed a loss of $0.1 million.

    Net Earnings (Loss) and Earnings (Loss) per Share

    For the nine months ended September 30, 2007, net loss was ($8.8) million
compared to net earnings of $1.8 million for the comparable period of 2006.
    Basic and diluted loss per share for the nine months ended September 30,
2007 was ($0.40) compared to basic and diluted earnings per share of $0.09 in
the comparable period of 2006.

    2007 OUTLOOK

    Despite the current economic downturn, 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, and this is where
Canyon's proprietary technologies are playing a major role. 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 quarter when the Grand Canyon(TM) process was
used by both existing and new customers resulting in a quarterly record for
Grand Canyon(TM) job count since the company commenced offering this service
to customers in the first quarter of 2006.
    Even though conventional gas reserves continue to decline at a high rate
while demand for the commodity grows, several factors combine to lead
management to believe that the current downturn will continue well into 2008.
These factors include an ongoing weakness in natural gas prices in response to
record-high storage levels across North America and, more recently, the
uncertainty around the revised royalty structure announced by the Alberta
Government on October 25, 2007. Therefore, the timing for a return to higher
activity levels will depend on how storage levels are impacted by slowing
production and winter weather, as well as how the royalty changes impact the
exploration and development expenditure programs of E&P companies over the
coming winter months and in 2008.
    In the meantime, Canyon will continue to meet the growing demand by
customers for its proprietary Grand Canyon(TM) process by adding one Grand
Canyon unit to a conventional high rate nitrogen frac spread in the fourth
quarter. In addition management is actively managing operating and
administrative costs at all levels throughout the Company. Effective
November 1, 2007, Canyon has implemented significant, company-wide cost
reductions that will be effective for the balance of 2007 and for 2008. These
changes will result in an estimated annual operating and general and
administration savings of over $3.0 million.





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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