Cathedral Energy Services reports results for the three and six months ended June 30, 2008



    /NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

    CALGARY, Aug. 6 /CNW/ - Cathedral Energy Services Income Trust (the
"Trust"/TSX: CET.UN) is pleased to report its results for the three and six
months ended June 30, 2008. Dollars are in '000's except for day rates and per
Trust Unit amounts.


    
    FINANCIAL HIGHLIGHTS
    $ in 000's except               Three months ended      Six months ended
     per Trust Unit amounts                    June 30               June 30
                                  --------------------- ---------------------
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    Revenues                      $  29,483  $  24,985  $  75,736  $  67,697

    EBITDAS(1)                    $   4,632  $   4,837  $  20,027  $  19,249
      Per Trust Unit - diluted    $    0.14  $    0.15  $    0.62  $    0.61

    EBITDAS(1) as a % of revenue        16%        19%        26%        28%

    Income before taxes           $     797  $   1,112  $  12,486  $  12,145

    Net Income (loss)             $     189  $  (2,415) $  10,106  $   7,372
      Per Trust Unit - basic      $    0.01  $   (0.08) $    0.32  $    0.24
      Per Trust Unit - diluted    $    0.01  $   (0.08) $    0.31  $    0.23

    Cash distributions declared
     per Trust Unit               $    0.21  $    0.21  $    0.42  $    0.42

    Distributable cash(1)         $   2,038  $   3,132  $  15,152  $  16,203

    Cash distributions declared   $   6,770  $   6,660  $  13,439  $  13,130

    Payout ratio(1)                    332%       211%        89%        81%

    Property and equipment
     additions                    $   7,475  $   4,483  $  11,435  $  10,288

    Weighted average Trust Units
     outstanding:
      Basic ('000)                   32,178     31,405     31,943     31,219
      Diluted ('000)                 32,849     31,893     32,464     31,744


                                                             June   December
                                                          30 2008    31 2007
    -------------------------------------------------------------------------

    Working capital                                     $  13,071  $  16,947
    Long-term debt and capital lease obligations
     excluding current portion                          $  17,365  $  17,441
    Unitholders' equity                                 $  79,712  $  79,250
    -------------------------------------------------------------------------
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    (1) Non-GAAP measure; see "NON-GAAP FINANCIAL MEARSURMENTS" within
        Management's Discussion & Analysis.
    


    MANAGEMENT'S DISCUSSION & ANALYSIS

    This Management's Discussion & Analysis ("MD&A") for the three and six
months ended June 30, 2008 should be read in conjunction with the annual
audited consolidated financial statements and notes thereto for the year ended
December 31, 2007, as well as the MD&A in the Trust's 2007 Annual Report, and
with the unaudited interim consolidated financial statements for the three
months and six months ended June 30, 2008. This MD&A has been prepared as of
August 6, 2008. Dollar amounts are in '000's except for day rates and per
Trust Unit amounts.

    FORWARD-LOOKING INFORMATION

    Certain statements in this MD&A including (i) statements that may contain
words such as "anticipate", "could", "expect", "seek", "may" "intend", "will",
"believe", "should", "project", "forecast", "plan" and similar expressions,
including the negatives thereof, (ii) statements that are based on current
expectations and estimates about the markets in which the Trust/Cathedral
operates and (iii) statements of belief, intentions and expectations about
developments, results and events that will or may occur in the future,
constitute "forward-looking statements" and are based on certain assumptions
and analysis made by the Trust/Cathedral. Forward-looking statements in this
MD&A include, but are not limited to, statements with respect to future
capital expenditures, including the amount, nature and timing thereof; oil and
natural gas prices and demand; other development trends within the oil and
natural gas industry; business strategy; expansion and growth of the
Trust's/Cathedral's business and operations including the Trust/Cathedral's
market share and position in the oilfield service market; and other such
matters. Such forward-looking statements are subject to important risks and
uncertainties, which are difficult to predict and that may affect the
Trust's/Cathedral's operations, including, but not limited to: the impact of
general economic conditions in Canada and the United States; industry
conditions, including the adoption of new environmental, safety and other laws
and regulations and changes in how they are interpreted and enforced;
volatility of oil and natural gas prices; oil and natural gas product supply
and demand; risks inherent in the Trust's/Cathedral's ability to generate
sufficient cash flow from operations to meet its current and future
obligations; increased competition; the lack of availability of qualified
personnel or labor unrest; fluctuation in foreign exchange or interest rates;
stock market volatility; opportunities available to or pursued by the
Trust/Cathedral and other factors, many of which are beyond the control of the
Trust/Cathedral. The Trust's/Cathedral's actual results, performance or
achievements could differ materially from those expressed in, or implied by,
these forward-looking statements and, accordingly, no assurance can be given
that any of the events anticipated by the forward-looking statements will
transpire or occur, or if any of them do transpire or occur, what benefits the
Trust/Cathedral will derive therefrom. Subject to applicable law, the Trust
disclaims any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
    All forward-looking statements contained in this document are expressly
qualified by this cautionary statement. Further information about the factors
affecting forward-looking statements is available in the Trust's current
Annual Information Form and 2007 Annual Report which has been filed with
Canadian provincial securities commissions and are available on www.sedar.com.

    NON-GAAP FINANCIAL MEASUREMENTS

    This MD&A refers to certain financial measurements that do not have any
standardized meaning within Canadian Generally Accepted Accounting Principles
("GAAP") and therefore may not be comparable to similar measures provided by
other companies and/or trusts.
    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;

    ii)  "EBITDAS" - defined as earnings before interest on long-term debt
         and capital lease obligations, taxes, depreciation, amortization
         and unit-based compensation expense; this measure is considered an
         indicator of the Trust'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 (see
         tabular calculation under EBITDAS);

    iii) "Distributable cash" - defined as cash flow from operating
         activities before changes in non-cash operating working capital less
         required principal repayments on long-term debt and capital lease
         obligations and maintenance capital expenditures; distributable cash
         is a key performance measurement used by management, analysts and
         investors to evaluate the financial performance of the Trust (see
         tabular calculation under Distributions);

    iv)  "Maintenance capital expenditures" - refers to capital expenditures
         required to maintain existing levels of service but excludes
         replacement cost of lost-in-hole equipment to the extent the
         replacement equipment is financed from the proceeds on disposal of
         the equipment lost-in-hole;

    v)   "Payout ratio" - calculated as cash distributions declared divided
         by distributable cash, is an indicator of the Trust's ability to
         fund its distributions from the Trust's ongoing operations excluding
         changes in non-cash working capital (see tabular calculation under
         Distributions) (see distributable cash definition above); and

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

    OVERVIEW

    The Trust completed the second quarter of 2008 with solid quarterly
revenues of $29,483 and year-to-date revenues of $75,736. The second quarter
is traditionally the weakest period of the year and while industry activity
levels showed moderate recovery, weather continued to affect activity levels.
Within the oilfield service sector, the directional drilling sub-sector has
been a very active area with a growing number of wells being drilled
directionally/horizontally. In resource plays such as the Bakken (southeast
Saskatchewan) and Montney (northeast B.C.), operators are using the
combination of horizontally drilled wells and multi-stage fracturing to
increase reservoir recoveries and it is expected that such completion
techniques will continue to expand the number of horizontal wells drilled. The
2008 Q2 revenues were lead by the Trust's directional drilling division which
represented 82% (2007 Q2 - 82%) of 2008 Q2 total revenues. The Trust's U.S.
drilling division grew significantly over the 2007 Q2 period, generating
period revenues 51% higher than in 2007 and on a year-to-date basis increasing
revenues by 31% over 2007. The Trust's production testing and wireline
divisions continue to be negatively affected by the decline in natural gas
drilling in western Canada. 2008 Q2 EBITDAS was $4,632 ($0.14 per diluted
Trust Unit) which represents a $205 or 4% decrease from $4,837 ($0.15 per
diluted Trust Unit) in 2007. On a 2007 Q2 year-to-date basis, the Trust's net
income was $10,106 ($0.31 per diluted Trust Unit) which compares to $7,372
($0.23 per diluted Trust Unit) in 2007.


    
    RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2008

                                            Three months ended June 30, 2008
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                     drilling(1)  Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $   9,832  $   2,803  $   1,037  $  13,672
    United States                    14,515      1,296          -     15,811
    -------------------------------------------------------------------------
                                  $  24,347  $   4,099  $   1,037  $  29,483
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                            Three months ended June 30, 2007
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                     drilling(1)  Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $  10,926  $   3,079  $   1,340  $  15,345
    United States                     9,640          -          -      9,640
    -------------------------------------------------------------------------
                                  $  20,566  $   3,079  $   1,340  $  24,985
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) (including rental of related equipment)
    


    2008 Q2 revenues of $29,483 were the result of increased growth in the
directional drilling portion of the Trust's operations offset by the
traditional seasonal fluctuations related to spring break-up. Directional
drilling activity days increased 26.6% from 2,194 in 2007 Q2 to 2,777 in 2008
Q2. The average day rate received for providing directional drilling services
decreased 6.2% on a quarter-over-quarter basis to $8,591 (2007 - $9,160). The
decrease in the average day rate is mainly the result of industry-wide
Canadian day rate decreases due to market pressures. While directional
drilling activity days in Canada decreased 3.6%, the U.S. activity increased
55.8% due to additional equipment, increased activity levels within the
existing client base supplemented by the expansion of the current client base.
For 2008 Q2 U.S. activity days represented 62.4% of total activity compared to
50.7% of total activity during the same period in 2007. On a
quarter-over-quarter basis revenues from the production testing division are
down 22.6% due mainly to pricing pressures but also a result of a decrease in
activity levels. As previously announced the Trust is in the process of
expanding its production testing business to the U.S. Rocky Mountain region
with the build out of 6 production testing units. In early 2008 Q2 one
production testing unit was transferred to the U.S. operations and it started
to generate revenues in late July 2008. The Trust's wireline division had a
quarter-over-quarter increase in revenues of 33.1% with the increase being due
to the start-up of a U.S. wireline division in 2007 Q3. In early 2008 the
Trust established a second U.S. operations base for its wireline division in
Dickinson, North Dakota with one wireline unit.

    Gross margin - The gross margin for 2008 Q2 was 40.8% which compares to
44.2% in 2007 Q2. The decrease is attributed to number of factors including:
i) a decrease in the average day rate in providing directional drilling
services; ii) increased directional field labour rates and iii) equipment
repair charges due to the increase in the quarter-over-quarter activity levels
in the U.S.

    General and administrative expenses - General and administrative expenses
increased from $6,082 in 2007 Q2 to $7,591 in 2008 Q2 - an increase of $1,509.
 The increase was primarily related to i) increased personnel; ii) office/shop
rental costs; iii) increase in activity levels for the U.S. directional
drilling division; and iv) costs associated with pursuing international
business opportunities. As a percentage of revenues, general and
administrative expenses were 25.7% in 2008 Q2 and 24.3% in 2007 Q2.

    Depreciation and amortization - Depreciation for 2008 Q2 was $3,019 which
compares to $2,943 in 2007 Q2. Despite a significant amount of capital
expenditures on the Trust's depreciable asset base over the past 12 months
depreciation on a quarter-over-quarter did not increase significantly due to
the change in accounting method for foreign currency translation of the
Trust's U.S. operations. As a percentage of revenues, depreciation amounted to
10.2% for 2008 and 11.8% for 2007.

    Interest expense - Interest expense related to long-term debt and capital
leases decreased from $260 in 2007 Q2 to $243 in 2008 Q2 due to the combined
net effect of: i) an increase in the average level of debt outstanding; and
ii) a decrease in the effective interest rate on the related debt. Other
interest expense, which increased marginally on a quarter-over-quarter basis
from $66 in 2007 Q2 to $76 in 2008 Q2, relates mainly to interest charges on
use by the Trust of its bank indebtedness/line of credit facility.

    Foreign exchange gain/loss - The Trust's foreign exchange gain/loss has
changed from a $237 loss in 2007 Q2 to a $32 loss in 2008 Q2. Effective
January 1, 2008, the Trust changed the classification of its U.S. operations
to self-sustaining (as opposed to integrated) resulting in the financial
statements being translated using the current rate method as opposed to the
temporal method (refer to changes in accounting policies section).

    Unit-based compensation expense - For 2008 Q2 the Trust had unit-based
compensation expense of $573 which compares to $522 for 2007 Q2. The value of
the options is being amortized against income over the three-year vesting
period.

    Gain on disposal of property and equipment - During 2008 Q2 the Trust had
a gain on disposal of property and equipment of $314, which compares to a gain
of $187 in 2007 Q2. The Trust's gains are 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 Trust and therefore can fluctuate significantly from quarter-to-quarter.

    Taxes - In 2007 Q2, tax legislation included in Bill C-52, the Budget
Implementation Act, 2007 (the "Bill"), was substantively enacted and resulted
in the taxation of exiting income and royalty trusts at effective rates
similar to Canadian corporations. The substantive enactment of the Bill
resulted in the recognition of future income tax amounts based on estimated
net taxable temporary differences leading the initial recognition of a
non-cash future income tax expense and net future income tax liability of
$3,318. For 2008 Q2, the Trust had a tax expense of $608 which compares to
$209 (after removing the adjustment noted above).

    
    RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2008

                                              Six months ended June 30, 2008
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                     drilling(1)  Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $  32,343  $   9,020  $   5,187  $  46,550
    United States                    26,527      2,659          -     29,186
    -------------------------------------------------------------------------
                                  $  58,870  $  11,679  $   5,187  $  75,736
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                              Six months ended June 30, 2007
    -------------------------------------------------------------------------
    Revenues                    Directional            Production
                                 drilling(1)  Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $  31,383  $  10,145  $   5,806  $  47,334
    United States                    20,363          -          -     20,363
    -------------------------------------------------------------------------
                                  $  51,746  $  10,145  $   5,806  $  67,697
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) (including rental of related equipment)
    


    2008 Q2 year-to-date revenues were $75,736 which represented an increase
of $8,039 or 11.9% over 2007 Q2 year-to-date revenues of $67,697. Ongoing
activity reductions in the Canadian markets for production testing and
wireline services were offset by continued growth and expansion in the U.S.
operations.
    The directional drilling division revenues have increased from $51,746 in
2007 to $58,870 in 2008. This increase is the net result of: i) an increase in
activity days from 5,517 in 2007 to 6,782 in 2008; and ii) a decrease in the
average day rate from $9,134 in 2007 to $8,489 in 2008. On a year-to-date
basis Canadian activity days increased from 3,194 to 3,544 as did the U.S.
activity days which increased 2,323 to 3,237. The U.S. Q2 year-to-date
revenues increased 43.3% on a year-over-year basis.
    The continued slowdown in natural gas drilling expenditures in the
western Canada market resulted in lower revenues for both of the Trust's
production testing and wireline divisions. The Trust's production testing
division contributed $5,187 in revenues during 2008 Q2 year-to-date which is a
10.7% decline from 2007 revenues of $5,806. The wireline division generated
revenues of $11,679 for 2008 Q2 year-to-date which compares to $10,145 for
2007 which represents a 15.1% increase; this increase was the result of the
expansion of wireline operations to the U.S. commencing in 2007 Q3.

    Gross margin - The gross margin (revenues less operating expenses) for
2008 was 45.8%, which compares to 48.0% in 2007. The decrease is attributed to
number of factors including: i) a decrease in the average day rate in
providing directional drilling services; ii) increased directional field
labour rates and iii) equipment repair charges due to the increase in the year
over year activity levels in the U.S.

    General and administrative expenses - General and administrative expenses
increased from $13,014 in 2007 to $15,022 in 2008 - an increase of $2,008. 
The increase was primarily related to i) increased personnel; ii) office/shop
rental costs; iii) increase in activity levels for the U.S. directional
drilling division; and iv) costs associated with pursuing international
business opportunities. Offsetting these increases was a $214 decline in bad
debt expense provision. As a percentage of revenues, general and
administrative expenses were 19.8% in 2008 and 19.2% in 2007.

    Depreciation and amortization - Depreciation and amortization for 2008
was $5,870 compared to $5,699 in 2007. The $171 increase is related to the
Trust's investment in property and equipment over the past 12 months. Despite
a significant amount of capital expenditures on the Trust's depreciable asset
base over the past 12 months depreciation on a quarter-over-quarter did not
increase significantly due to the change in accounting method for foreign
currency translation of the Trust's U.S. operations. As a percentage of
revenues, depreciation and amortization amounted to 7.8% for 2008 and 8.4% for
2007.

    Interest expense - Interest on long-term debt has decreased from $523 in
2007 to $519 in 2008 due to the combined net effect of: i) an increase in the
average level of debt outstanding; and ii) a decrease in the effective
interest rate on the related debt. Other interest expense, which decreased on
a year-over-year basis from $162 in 2007 Q2 to $175 in 2008 Q2, relates mainly
to interest charges on use by the Trust of its bank indebtedness/line of
credit facility.

    Foreign exchange - The Trust's foreign exchange loss has decreased from
$284 in 2007 to a gain of $1 in 2008. Effective January 1, 2008, the Trust
changed the classification of its U.S. operations to self-sustaining (as
opposed to integrated) resulting in the financial statements being translated
using the current rate method as opposed to the temporal method (refer to
changes in accounting policies section).

    Unit-based compensation expense - Unit-based compensation expense for
2008 was $1,152 which compares to $882 in 2007. The Trust Unit options granted
are valued using the Black-Scholes option pricing model and such value is
being amortized against income over their three-year vesting period.

    Gain on disposal of property and equipment - During 2008 Q2 YTD the Trust
had a gain on disposal of property and equipment of $540 which compares to
$184 in 2007. These gains are 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
Trust and therefore can fluctuate significantly from quarter-to-quarter and
year-to-year basis.

    Taxes - For 2008, the Trust had a tax expense of $2,380 (effective tax
rate of 19.1%) which compares to $4,773 (effective tax rate of 39.3%) in 2007.
 The 2007 tax provision includes a cumulative non-cash adjustment of $3,318
related to the substantive enactment of the previously announced changes to
the taxation of income and royalty trusts, other than real estate investment
trusts. Removing the 2007 adjustment noted above the effective tax rate for
2007 was 12.0%. The adjusted effective tax rate has increased mainly due to
the continuing growth in the U.S. operations which are taxed at a higher rate
as well as some expenses not being deductible for tax purposes.

    OTHER COMPREHENSIVE INCOME

    Other comprehensive income ("OCI") for the three month period ended June
30, 2008 amounted to a loss of $157 but for the six month period June 30, 2008
a gain of $434. The year-to-date gain, entirely comprised of an unrealized
foreign currency translation gain (loss), reflects the weakening/strengthening
of the Canadian dollar compared to the U.S. dollar.

    LIQUIDITY AND CAPITAL RE

SOURCES The Trust's principal source of liquidity is cash generated from operations. The Trust also has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. At June 30, 2008, the Trust had an operating line of credit with a major Canadian bank in the amount of $12,500 (December 31, 2007 - $12,500) of which $5,030 (December 31, 2007 - $6,030) was drawn. In addition, the Trust has a non-reducing revolving term loan facility in the amount of $25,000 (December 31, 2007 - $25,000) of which $17,000 (December 31, 2007 - $17,000) was drawn as at June 30, 2008. In addition, at June 30, 2008 the Trust had obligations under capital leases in the amount of $348 (December 31, 2007 - $451) and other long-term debt of $280 (December 31, 2007 - $283). Operating activities - Cash flow from operating activities for the three and six months ended June 30, 2008 was $17,596 (2007 - $14,297) and $24,478 (2007 - $24,073) respectively. The Trust has a strong working capital position at June 30, 2008 at $13,071 which compares to $16,947 at December 31, 2007. Investing activities - Cash used in investing activities for the three and six months ended June 30, 2008 amounted to $7,754 and $11,264, respectively which compares to $5,320 and $8,346 for the same period in 2007. During 2008 Q2 the Trust invested an additional $7,475 (2007 - $4,483) in property and equipment for a total Q2 year-to-date investment of $11,435 (2007 - $10,288). The significant additions included expansion of the overall mud motor and drill collar fleet, MWD components which will be used in the 2008 build out of 20 EM-MWD systems, final progress payments on the construction of a mud motor facility in Nisku, Alberta and progress payments on the construction of new production testing units. At June 30, 2008, the Trust's operating entities had 78 MWD systems, 19 production testing units and 27 wireline units. The Trust's 2008 capital budget is set at $33,300 and includes maintenance capital in the amount of $1,244. The Trust expects its 2008 capital budget to be financed by way of a combination of cash flow from operations and bank debt. Financing activities - Cash used in financing activities for the three and six months ended June 30, 2008 amounted to $8,165 and $10,370, respectively, which compares to $9,670 and $16,500 for the same periods in 2007. Distributions paid to Unitholders for 2008 Q2 amounted to $6,741 (2007 - $6,585) bringing year-to-date distributions for the six months ended June 30, 2008 to $13,391 (2007 - $14,642). The increase in distributions paid are related to a combination of: i) an increase in the number of Trust Units outstanding; offset by ii) the payment of a "special" $0.05 per Trust Unit cash distribution declared in December 2006 ($1,549) and payable January 15, 2007 - there was no such "special" cash distribution paid in 2008. The Trust's "regular" monthly distribution has been at $0.07 per Trust Unit since September 2006. Cash distributions paid have been financed from cash flow from operations and management currently expects future cash distributions will also be financed from cash flow from operations. For the six months ended June 30, 2008 financing cash inflows resulted from: i) $4,128 (2007 - $2,392) cash received on the exercise of Trust Unit options, and ii) an $47 increase in new long-term debt (2007 - $173). Offsetting these inflows were cash outflows of: i) a $1,000 reduction in bank indebtedness (2007 - $4,230); and ii) a $154 (2007 - $193) repayment of long-term debt and capital lease obligations. At August 6, 2008, the Trust had 32,376,021 Trust Units and 2,543,365 Trust Unit options outstanding. Contractual obligations - In the normal course of business, the Trust incurs contractual obligations and those obligations are disclosed in the Trust's MD&A for the year ended December 31, 2007. As at June 30, 2008 the Trust's commitment to purchase property and equipment is approximately $21,529. The commitments are expected to be financed from a combination of cash flow from operations and bank debt. CONTROLS AND PROCEDURES Management is responsible for establishing and maintaining adequate disclosure controls and internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with GAAP. Internal control over financial reporting may not prevent or detect fraud or misstatements because of limitations inherent in any system of internal control. There were no significant changes in the design or effectiveness of the Trust's disclosure controls or internal controls over financial reporting in the second quarter of 2008. CHANGE IN FOREIGN CURRENCY TRANSLATION Prior to January 1, 2008, the Trust's U.S. operations were classified as integrated operations and were translated using the temporal method with all translation gains (losses) included in the determination of net income for the current period. Effective January 1, 2008, the Trust changed the classification of its U.S. operations to self-sustaining resulting in the financial statements being translated using the current rate method as opposed to the temporal method. Under the current rate method of translation, revenues and expenses of the subsidiary are translated at the rates in effect at the time of the transactions while assets and liabilities are translated at the current exchange rate in effect at the balance sheet date. Upon consolidation of the U.S. operations, gains and losses due to fluctuations in the foreign currency exchange rates are deferred on the balance sheet as a separate component of Other Comprehensive Income ("OCI"). Accumulated other comprehensive income (loss) forms part of Unitholders' equity. This change in foreign currency translation has been applied prospectively and resulted in a foreign exchange loss of $1,894 being deferred and recorded as OCI as at January 1, 2008. NEW ACCOUNTING POLICIES Effective January 1, 2008, The Trust adopted the Canadian Institute of Chartered Accountants ("CICA") section 3031, "Inventories", section 1535, "Capital Disclosures", and section 3861, "Financial Instruments - Disclosure and Presentation". These standards have been adopted prospectively. For the three months ended March 31, 2008, the adoption of these standards did not have an effect on the Trust's results, financial position or cash flows but additional disclosures have been provided in the notes to the interim financial statements. In February 2008, The Canadian Accounting Standards Board confirmed that the use of International Financial Reporting Standards ("IFRS") will be required in Canada for publicly accountable profit oriented enterprises for fiscal years beginning on or after January 1, 2011. The Trust will be required to report using IFRS beginning January 1, 2011. The Trust has begun the process of evaluating the impact of the change to IFRS. BUSINESS RISKS The MD&A for the year ended December 31, 2007, which is included in the Trust's 2007 Annual Report, includes an overview on business risks associated with the Trust and its operating entities. Those business risks remain in effect as at June 30, 2008 as well as the following additional risks: Risks of foreign operations The Trust is currently pursuing providing oilfield services in Venezuela. Working outside of Canada gives rise to the risk of dealing with business and political systems that are different than the Trust is accustomed to in Canada. The Trust expects to hire employees and consultants who have experience working in the international arena and it is committed to recruiting qualified resident nationals on the staff of its international operations. In addition, the Trust is committed to continuing expansion of its North American market to mitigate this risk. These potential risks include: expropriation or nationalization; civil insurrection; labour unrest; strikes and other political risks; fluctuation in foreign currency and exchange control; increases in duties and taxes; and changes in laws and policies governing operations of foreign based companies. Those business risks remain in effect as at June 30, 2008. Foreign currency risk In addition to foreign currency risk associated with U.S. dollar, the Trust is now exposed to foreign currency fluctuations in relation to Venezuelan Bolivar. The Trust's foreign currency policy is to monitor foreign current risk exposure in its areas of operations and mitigate that risk where possible by matching foreign currency denominated expense with revenues denominated in foreign currencies. The Trust strives to maintain limited amounts of cash and cash equivalents denominated in foreign currency on hand and attempts to further limit its exposure to foreign currency through collecting and paying foreign currency denominated balance in a timely fashion. DISTRIBUTIONS The Administrator of the Trust reviews the level and nature of distributions (cash, in-kind or a combination of cash and in-kind) on an on-going basis giving 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. Despite the seasonality of the Trust's business, it is the Trust's policy to pay consistent distributions throughout the year. The Trust's operations in western Canada are subject to seasonality as activity levels in the oilfield services industry are generally lower during "spring breakup" which normally commences in late March and continues through to May (mainly in the Q2 of the fiscal year). The net result of the Trust's policy to pay consistent distributions throughout the year despite the seasonality of its operations is that in Q2 cash distributions declared may exceed net income, cash flow from operating activities and/or distributable cash for the quarter. Distributable cash is a supplemental non-GAAP financial measurement that management considers a key measure in demonstrating the Trust's ability to generate the cash necessary to pay distributions, fund future capital investments and the repayment of long-term debt and capital lease obligations. Distributable cash as presented is not intended to represent operating profit for the period nor should it be viewed as an alternative to operating profit, net income or other measures of financial performance calculated in accordance with Canadian GAAP. Distributable cash does not have any standardized meaning within Canadian GAAP and therefore may not be comparable to similar measures presented by other trusts (refer to Non-GAAP Financial Measurements). The following is a comparison of cash distributions declared and certain defined amounts: Fiscal year 2008 --------------------- 2008 Q2 Q2 YTD 2007 2006 ------------------------------------------------------------------------- Cash flow from operating activities $ 17,596 $ 24,478 $ 39,729 $ 39,929 ------------------------------------------------------------------------- Net income for the period $ 189 $ 10,106 $ 24,863 $ 35,348 ------------------------------------------------------------------------- Distributable cash $ 2,038 $ 15,152 $ 38,993 $ 45,972 ------------------------------------------------------------------------- Cash distributions declared $ 6,770 $ 13,439 $ 26,405 $ 24,681 ------------------------------------------------------------------------- Excess of cash flow from operating activities over cash distributions declared $ 10,826 $ 11,039 $ 13,324 $ 15,248 ------------------------------------------------------------------------- Excess (short-fall) of net income over cash distributions declared $ (6,581) $ (3,333) $ (1,542) $ 10,667 ------------------------------------------------------------------------- Excess (short-fall) of distributable cash over cash distributions declared $ (4,732) $ 1,713 $ 12,588 $ 21,921 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net income includes significant non-cash charges, which for the three months ended June 30, 2008 were $2,746, for the six months ended June 30, 2008 were $6,354 and for the years ended December 31, 2007 and 2006 were $16,607 and $13,429, respectively, that do not impact cash flow. Included in these non-cash charges is a provision for depreciation that is not a reasonable proxy for the cost of maintaining existing levels of service (i.e. maintenance capital expenditures). In addition, operating results for the three and six months ended June 30, 2008 (mainly 2008 Q2) are negatively affected by "spring breakup" (see comments above). Therefore, in certain periods cash distributions declared may exceed net income. On a year-to-date basis, cash distributions declared are less than distributable cash; due to the seasonality of the Trust's operations wide variances and shortfalls may occur in specific quarters, as in 2008 Q2. In light of this seasonality, the Trustees review distributable cash over a cumulative annualized period rather than a specific quarter. On an annualized basis it is not management's intent to distribute 100% of distributable cash. Distributable cash for the three and six months ended June 30, 2008 and 2007 is calculated as follows: Three months ended Six months ended June 30 June 30 --------------------- --------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Cash flow from operating activities $ 17,596 $ 14,297 $ 24,478 $ 24,073 Add: - changes in non-cash operating working capital(1) (14,975) (11,071) (8,558) (7,683) Less: - required principal repayments on long-term debt and capital lease obligations (79) (83) (154) (176) - maintenance capital expenditures (504) (11) (614) (11) ------------------------------------------------------------------------- Distributable Cash $ 2,038 $ 3,132 $ 15,152 $ 16,203 ------------------------------------------------------------------------- Cash distributions declared $ 6,770 $ 6,600 $ 13,439 $ 13,130 ------------------------------------------------------------------------- Payout ratio 332% 211% 89% 81% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Changes in non-cash operating working capital have been added back (deducted) as such changes are financed using the Trust's bank indebtedness/line of credit facility. In addition, if changes in non-cash operating working capital were not excluded from the calculation of distributable cash it would introduce cash flow variability and affect underlying cash flow from operating activities. EBITDAS: EBITDAS is calculated as follows: Three months ended Six months ended June 30 June 30 --------------------- --------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- EBITDAS as reported $ 4,632 $ 4,837 $ 20,027 $ 19,249 Deduct: - depreciation and amortization 3,019 2,943 5,870 5,699 - interest - long-term debt and capital lease obligations 243 260 519 523 - unit-based compensation expense 573 522 1,152 882 - provision for taxes 608 3,527 2,380 4,773 ------------------------------------------------------------------------- Net income for the period $ 189 $ (2,415) $ 10,106 $ 7,372 ------------------------------------------------------------------------- ------------------------------------------------------------------------- RELATED PARTY TRANSACTIONS A Trustee of the Trust and Director of Cathedral Energy Services Ltd., is a partner in a law firm and, through that law firm, is involved in providing and managing the legal services provided to the Trust at market rates. The total amount paid for these legal services for the three and six months ended June 30, 2008 was $19 and $21 (2007 - $30 and $31), respectively. SUMMARY OF QUARTERLY RESULTS ------------------------------------------------------------------------- Three month period Jun Mar Dec Sep Jun Mar Dec Sep ended 2008 2008 2007 2007 2007 2007 2006 2006 ------------------------------------------------------------------------- Revenues $29,483 $46,253 $39,054 $38,355 $24,985 $42,712 $35,327 $38,041 EBITDAS 4,632 15,395 13,707 13,775 4,837 14,412 13,046 16,010 Net income (loss) 189 9,917 10,365 7,126 (2,415) 9,787 8,127 11,396 Net income (loss) per Trust Unit - basic 0.01 0.31 0.33 0.23 (0.08) 0.32 0.26 0.37 Net Income (loss) per Trust Unit - diluted 0.01 0.31 0.33 0.22 (0.08) 0.31 0.26 0.36 Cash distri- butions declared per Trust Unit 0.21 0.21 0.21 0.21 0.21 0.21 0.26 0.20 ------------------------------------------------------------------------- OUTLOOK Industry analysts continue to forecast strong oil and natural gas prices for the balance of 2008 and into 2009. Overall the Trust's management considers the long-term fundamentals for the supply and demand for energy to be positive for the oilfield services sector. As a result of current strength in commodity prices many producers have announced increases in their capital expenditure budgets and it is expected that others will follow suit. This in turn is expected to increase demand for oilfield services, including those provided by Cathedral's operating divisions. Within the directional drilling division, the Trust expects to add 20 EM-MWD systems in 2008 along with the related mud motors and drill collars to complement the increased directional drilling job capacity and it is expected that 10 EM-MWD systems and related equipment will be deployed in the U.S. market. Use of Cathedral's Remote Drilling System ("RDS"), which allows for secure transmission of drilling data from the rig site to Cathedral's Calgary operations centre and therefore permits the full experience of measurement-while-drilling ("MWD") supervisors and directional coordinators to manage directional drilling activities in real time from a central location, continues to expand in the Canadian market. The Trust continues to pursue offering our RDS capabilities in the U.S. market. The production testing division will be adding 11 production testing units during 2008 with 6 targeted for the U.S. market and 5 for expansion of the Canadian fleet. Deliveries of these units are expected over the period from early August 2008 to late October 2008. In July 2008 Cathedral's U.S. based production testing operations commenced to revenue generating activity and this division is expected to continually build up its revenue base as new equipment is added as part of the 2008 capital expenditure program. Based upon customer demand, a fourth electric line wireline unit was relocated during 2008 Q2 to Cathedral's U.S. wireline operations based in Dickinson, North Dakota. A fifth electric line unit is expected to be relocated during 2008 Q3 to the Dickinson operations base. The Trust continues to actively pursue opportunities to offer an expanded range of services to its customers, increase its market share, enter new geographic territories and make strategic acquisitions. Cathedral is pursuing directional drilling business opportunities in South America. A bid has been submitted, the bid evaluation process continues and we will in due course be advised as to the outcome of the bidding process. Since the end of 2008 Q2 and the removal of road bans and drier operating conditions, all of Cathedral's operating divisions have seen a significant increase in demand and activity levels. CONSOLIDATED BALANCE SHEETS Dollars in 000's June December (unaudited) 30 2008 31 2007 ------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 4,150 $ 1,306 Accounts receivable 31,270 37,359 Inventory 4,501 3,584 Prepaid expenses and deposits 1,301 781 ------------------------------------------------------------------------- 41,222 43,030 Property and equipment 71,382 67,639 Intangibles 515 588 Goodwill 19,775 19,775 ------------------------------------------------------------------------- $ 132,894 $ 131,032 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND UNITHOLDERS' EQUITY Current liabilities: Bank Indebtedness $ 5,030 $ 6,030 Accounts payable and accrued liabilities 19,603 17,203 Distribution payable to Unitholders 2,265 2,216 Taxes payable 990 341 Current portion of capital lease obligations 155 194 Current portion of long-term debt 108 99 ------------------------------------------------------------------------- 28,151 26,083 Capital lease obligations 193 257 Long-term debt 17,172 17,184 Future income taxes 7,666 8,258 Unitholders' equity: Unitholders' capital 53,352 48,193 Contributed surplus 2,301 2,205 Retained earnings 25,519 28,852 Accumulated other comprehensive loss (1,460) - ------------------------------------------------------------------------- 79,712 79,250 ------------------------------------------------------------------------- $ 132,894 $ 131,032 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS Dollars in 000's except per Trust Unit amounts (unaudited) Three months ended Six months ended June 30 June 30 --------------------- --------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Revenues $ 29,483 $ 24,985 $ 75,736 $ 67,697 Expenses: Operating 17,466 13,950 41,053 35,172 General and administrative 7,591 6,082 15,022 13,014 Depreciation and amortization 3,019 2,943 5,870 5,699 Interest - long-term debt and capital lease obligations 243 260 519 523 Interest - other 76 66 175 162 Foreign exchange loss (gain) 32 237 (1) 284 Unit-based compensation expense 573 522 1,152 882 ------------------------------------------------------------------------- 29,000 24,060 63,790 55,736 ------------------------------------------------------------------------- 483 925 11,946 11,961 Gain on disposal of property and equipment 314 187 540 184 ------------------------------------------------------------------------- Income before taxes 797 1,112 12,486 12,145 Taxes: Current 1,467 1,062 3,009 2,050 Future (reduction) (859) 2,465 (629) 2,723 ------------------------------------------------------------------------- 608 3,527 2,380 4,773 ------------------------------------------------------------------------- Net income (loss) for the period 189 (2,415) 10,106 7,372 Retained earnings, beginning of period 32,100 33,651 28,852 30,394 Less: Distributions declared (6,770) (6,600) (13,439) (13,130) ------------------------------------------------------------------------- Retained earnings, end of period $ 25,519 $ 24,636 $ 25,519 $ 24,636 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net income (loss) per Trust Unit: Basic $ 0.01 $ (0.08) $ 0.32 $ 0.24 Diluted $ 0.01 $ (0.08) $ 0.31 $ 0.23 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS Dollars in 000's (unaudited) Three months ended Six months ended June 30 June 30 --------------------- --------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Net income (loss) for the period $ 189 $ (2,415) $ 10,106 $ 7,372 Other comprehensive income (loss): Unrealized foreign exchange gain (loss) on translation of self-sustaining foreign operations (157) - 434 - ------------------------------------------------------------------------- Comprehensive income (loss) for the period $ 32 $ (2,415) $ 10,540 $ 7,372 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accumulated other comprehensive income, beginning of period $ (1,303) $ - $ - $ - Adjustment for change in foreign currency translation method - - (1,894) - Other comprehensive income (loss) (157) - 434 - ------------------------------------------------------------------------- Accumulated other comprehensive loss, end of period $ (1,460) $ - $ (1,460) $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in 000's (unaudited) Three months ended Six months ended June 30 June 30 --------------------- --------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Net income (loss) for the period $ 189 $ (2,415) $ 10,106 $ 7,372 Items not involving cash: Depreciation and amortization 3,019 2,943 5,870 5,699 Future taxes (reduction) (859) 2,465 (629) 2,723 Unrealized foreign exchange gain (loss) 13 (102) (39) (102) Unit-based compensation expense 573 522 1,152 882 Gain on disposal of property and equipment (314) (187) (540) (184) ------------------------------------------------------------------------- 2,621 3,226 15,920 16,390 Changes in non-cash operating working capital 14,975 11,071 8,558 7,683 ------------------------------------------------------------------------- 17,596 14,297 24,478 24,073 ------------------------------------------------------------------------- Investing activities: Property and equipment additions (7,475) (4,483) (11,435) (10,288) Proceeds on disposal of property and equipment 341 490 802 514 Expenditure on other assets - (110) - (110) Changes in non-cash investing working capital (620) (1,217) (631) 1,538 ------------------------------------------------------------------------- (7,754) (5,320) (11,264) (8,346) ------------------------------------------------------------------------- Financing activities: Distributions paid to Unitholders (6,741) (6,585) (13,391) (14,642) Advances under long-term debt - - 47 173 Repayment of long-term debt (25) (27) (51) (73) Repayment of capital lease obligations (54) (56) (103) (120) Proceeds on exercise of Trust Unit options 2,995 1,033 4,128 2,392 Increase (decrease) in bank indebtedness (4,340) (4,035) (1,000) (4,230) ------------------------------------------------------------------------- (8,165) (9,670) (10,370) (16,500) ------------------------------------------------------------------------- Change in cash and cash equivalents (1,677) (693) (2,844) (773) Cash and cash equivalents, beginning of period 2,473 1,474 1,306 1,554 ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 4,150 $ 781 $ 4,150 $ 781 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cathedral Energy Services Income Trust is a limited purpose trust which owns the securities of Cathedral Energy Services Ltd. and Cathedral Energy Services Limited Partnership (collectively "Cathedral") represents the right to receive cash flow available for distribution from Cathedral. Cathedral is engaged in the business of providing selected oilfield services to oil and natural gas companies in Western Canada and the Rocky Mountain and Williston Basin regions of the United States and currently provides drilling services and related equipment rentals, production testing services and wireline services. Cathedral markets its services under six brand names: Directional Plus and The Directional Company which provide directional drilling services; CAT Downhole Tools which provides downhole equipment including drilling jars, shock subs and high performance drilling motors on a rental basis; Tier One Oil Services which provides oil and natural gas production testing services; Advance Wireline which provides cased hole logging and perforating, complete slickline services and casing integrity inspection logging; and Xtreme Wireline which provides slickline services. Cathedral strives to provide its clients with value added technologies and solutions to meet their drilling and production testing requirements. Its mandate is to supply "Best in Class, Best in Service" equipment and personnel to its clients. The trust units trade on the TSX under the symbol: CET.UN. For more information, visit www.cathedralenergyservices.com. %SEDAR: 00018316E

For further information:

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 - 5th Avenue S.W., Calgary, Alberta, T2P 2X6, Telephone: (403)
265-2560, Fax: (403) 262-4682, www.cathedralenergyservices.com


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