Cathedral Energy Services reports results for the three and six months ended June 30, 2009



    /NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

    CALGARY, Aug. 5 /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, 2009. Dollars are in '000's except for day rates and per
Trust Unit amounts.

    
    FINANCIAL HIGHLIGHTS
    $ in 000's except per           Three months ended      Six months ended
     Trust Unit amounts                        June 30               June 30
                                  --------------------- ---------------------
                                       2009       2008       2009       2008
    -------------------------------------------------------------------------
    Revenues                      $  12,913  $  29,483  $  44,281  $  75,736

    Gross margin %(1)                   36%        41%        42%        46%

    EBITDAS(1)                    $  (1,721) $   4,632  $   5,064  $  20,207
      Diluted per Trust Unit      $   (0.05) $    0.14  $    0.15  $    0.62

    Income (loss) before taxes    $  (4,057) $     797  $  (2,302) $  12,486

    Net income (loss)             $  (1,484) $     189  $     (80) $  10,106
      Basic per Trust Unit        $   (0.04) $    0.01  $       -  $    0.32
      Diluted per Trust Unit      $   (0.04) $    0.01  $       -  $    0.31

    Cash distributions declared
     per Trust Unit               $    0.12  $    0.21  $    0.27  $    0.42

    Distributable cash(1),
     including one-time 2009
     Q1 current tax provision
     of $4,168 (refer to MD&A)    $  (2,525) $   2,038  $    (178) $  15,152

    Adjusted distributable
     cash(1), excluding one-time
     2009 Q1 current tax provision
     of $4,168 (refer to MD&A)    $  (2,525) $   2,038  $   3,990  $  15,152

    Cash distributions
     declared(2)                  $   4,199  $   6,770  $   9,086  $  13,439

    Payout ratio(1), net of
     one-time 2009 Q1 current
     tax provision of $4,168             nm       332%         nm        89%

    Adjusted payout ratio(1),
     net of one-time 2009 Q1
     current tax provision
     of $4,168                           nm       332%       228%        89%

    Property and equipment
     additions                    $   1,839  $   7,475  $   5,976  $  11,435

    Weighted average Trust Units
     outstanding:
      Basic ('000)                   34,290     32,178     33,441     31,943
      Diluted ('000)                 34,290     32,849     33,441     32,464


                                                             June   December
                                                          30 2009    31 2008
    -------------------------------------------------------------------------

    Working capital                                     $  13,729  $  17,435
    Long-term excluding current portion                 $  36,622  $  40,233
    Unitholders' equity                                 $  93,293  $  91,859
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Refer to MD&A; see "NON-GAAP MEASUREMENTS"
    (2) Excludes foreign taxes paid that have been allocated to Unitholders
    nm  Calculation not meaningful for current operations
    

    MANAGEMENT'S DISCUSSION & ANALYSIS

    This Management's Discussion & Analysis ("MD&A") for the three and six
months ended June 30, 2009 should be read in conjunction with the annual
audited consolidated financial statements and notes thereto for the year ended
December 31, 2008, as well as the MD&A in the Trust's 2008 Annual Report, and
with the unaudited interim consolidated financial statements and notes thereto
for the three and six months ended June 30, 2009. This MD&A has been prepared
as of August 5, 2009. 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 specifically 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/Cathedral's business and operations including the Trust/Cathedral's
market share and position in the oilfield service market; and other such
matters.
    The forward-looking statements contained in this MD&A reflect several
material factors, expectations and assumptions including, without limitation:
(i) oil and natural gas production levels; (ii) commodity prices and interest
rates; (iii) capital expenditure programs and other expenditures by the
Trust/Cathedral and its customers; (iv) supply and demand for oil and natural
gas; (v) expectations regarding the Trust's/Cathedral's ability to raise
capital, generate cash flow and to increase its equipment fleets through
acquisitions and manufacture; (vi) schedules and timing of certain projects
and the Trust's/Cathedral's strategy for growth; (vii) the Trust's/Cathedral's
future operating and financial results; (viii) the Trust's/Cathedral's ability
to retain and hire qualified personnel; and (ix) treatment under governmental
regulatory regimes and tax, environmental and other laws.
    Financial outlook information contained in this MD&A about prospective
results of operations, financial position or cash flows is based on
assumptions about future events, including economic conditions and proposed
courses of action, based on management's assessment of the relevant
information currently available. Readers are cautioned that such financial
outlook information contained in this MD&A and certain documents incorporated
by reference into this MD&A should not be used for purposes other than for
which it is disclosed herein.
    Such forward-looking statements are subject to important risks and
uncertainties, which are difficult to predict and that may affect the
Trust/Cathedral's operations, including, but not limited to: the impact of
general economic conditions in Canada, the United States and Internationally;
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/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 labour unrest; fluctuation in foreign exchange or interest rates;
foreign currency controls; 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/Cathedral 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/Cathedral's
current Annual Information Form which has been filed with the applicable
Canadian provincial securities commissions and is available on www.sedar.com.

    NON-GAAP 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 (see tabular
         calculation under Results of Operations);

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

    iii) "EBITDAS" - defined as earnings before interest on long-term debt,
         taxes, depreciation, amortization, unit-based compensation expense
         and foreign currency gain/loss on intercompany debt; 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);

    iv)  "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 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);

    v)   "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;

    vi)  "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

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

    OVERVIEW

    The second quarter is traditionally the weakest period of the year, but
in the current year the overall decline in drilling in both Canada and the
United States has had a more significant impact on operations. In the Western
Canadian Sedimentary Basin ("WCSB"), the number of wells drilled in 2009 Q2 is
down approximately 45% compared to 2008 Q2 and on a year-to-date basis down
42%. In the U.S., drilling activity is down significantly and in particular in
the Rocky Mountain region of the U.S., which was the Trust's main area of
focus.
    The Trust completed the second quarter of 2009 with quarterly revenues of
$12,913 and year-to-date revenues of $44,281 compared to 2008 Q2 at $29,483
and 2008 year-to-date revenues of $75,736. The 2009 Q2 revenues were lead by
the Trust's directional drilling division which represented 67% (2008 Q2 -
82%) of 2009 total revenues. The decline in drilling in the oil and gas sector
due to low commodity prices and the overall decline in the economy have
resulted in a significant decline in revenues as compared to 2008 Q2. The
Trust's production testing and wireline divisions continue to be negatively
affected by the decline in natural gas drilling in western Canada. In mid-June
2009, the Trust re-organized its wireline operations to focus its Canadian
operations on providing slickline services and to concentrate its electric
line ("E-Line") services in the U.S. As such, the Trust has ceased providing
E-Line services in Canada.
    2009 year-to-date EBITDAS was $5,064 ($0.15 per diluted Trust Unit) which
represents a $15,143 or 75% decrease from $20,207 ($0.62 per diluted Trust
Unit) in 2008. On a 2009 Q2 year-to-date basis, the Trust's net loss was $80
($- per diluted Trust Unit) which compares to net income of $10,106 ($0.31 per
diluted Trust Unit) in 2008.

    
    RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2009

    Revenues and operating expenses

                                    2009 Q2    2008 Q2     Change          %
    -------------------------------------------------------------------------
    Revenues                      $  12,913  $  29,483  $ (16,570)       (56)
    Operating expenses               (8,301)   (17,466)    (9,165)       (52)
    -------------------------------------------------------------------------
    Gross margin - $              $   4,612  $  12,017  $  (7,405)       (62)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Gross margin - %                    36%        41%       (5)%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                            Three months ended June 30, 2009
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                       drilling   Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $   3,372  $     940  $     310  $   4,622
    United States                     5,294      1,319      1,678      8,291
    -------------------------------------------------------------------------
                                  $   8,666  $   2,259  $   1,988  $  12,913
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                            Three months ended June 30, 2008
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                       drilling   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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    2009 Q2 revenues were $12,913 which represented a decrease of $16,570 or
56% from 2008 Q2 revenues of $29,483. The decline is primarily attributed to
the decline in oil and natural gas activity in 2009 which has been caused by
low commodity prices and the global recession.
    The directional drilling division revenues have decreased from $24,347 in
2008 to $8,666 in 2009. This decrease is the net result of: i) the 70%
decrease in activity days from 2,777 in 2008 to 833 in 2009; and ii) the
increase in the average day rate from $8,591 in 2008 to $10,181 in 2009, which
was due in large part to the increase in U.S. rates due to the decline in the
Canadian dollar compared with 2008 Q2. Canadian activity days decreased from
1,044 to 354 and the U.S. activity days decreased from 1,733 to 479.
    Expansion to the U.S. resulted in increased revenues for the Trust's
production testing division. The Trust's production testing division
contributed $1,988 in revenues during 2009 Q2 which is a 92% increase over
2008 revenues of $1,037. The wireline division has been affected significantly
by the decline in oil and natural gas activity. The wireline division
generated revenues of $2,259 for 2009 Q2 which compares to $4,099 for 2008
which represents a 45% decrease. In mid-June 2009, the Trust re-organized its
wireline operations to focus its Canadian operations on providing slickline
services and to concentrate its electric line ("E-Line") services in the U.S.
As such, the Trust has ceased providing E-Line services in Canada.
    The gross margin for 2009 Q2 was 36% compared to 41% in 2008 Q2. The
decrease is attributed to a number of factors including: i) the fixed nature
of a portion of labour costs within operating expense; ii) inclusion of annual
equipment repairs and maintenance costs (spread over less revenue); iii) an
overall change in revenue mix as wireline and production testing revenues now
make up a greater percentage of total revenues and these divisions have a
lower gross margin; and iv) included in 2009 Q2 operating expenses are $307 of
costs associated with the restructuring of the Trust's wireline operations.

    General and administrative expenses

    General and administrative expenses were $6,214 in 2009 Q2, a decrease of
$1,377 compared with $7,591 in 2008. The decrease was primarily related to the
elimination of the accrual for annual bonus in 2009. As a percentage of
revenues, general and administrative expenses were 48% in 2009 Q2 and 26% in
2008 Q2. Recognizing the expected lower activity levels, the Trust has taken
several initiatives to improve operating results and further strengthen its
balance sheet. The Trust's operating entities have undertaken a detailed
review of all operating costs and general and administrative expenditures and
have initiated cost reductions to enhance profitability including layoff of
staff and wage rollbacks ranging from 4 - 12%. Included in the 2009 Q2 general
and administrative expenses are $146 related to restructuring of the Trust's
wireline operations.

    Depreciation and amortization

    Depreciation for 2009 Q2 was $3,970 which compares to $3,019 in 2008 Q2.
This increase is due to the expansion of the equipment fleet since 2008 Q2. As
a percentage of revenues, depreciation amounted to 31% for 2009 and 10% for
2008.

    Interest expense

    Interest expense related to long-term debt increased from $243 in 2008 Q2
to $304 in 2009 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 decreased from $76
in 2008 Q2 to $48 in 2009 Q2, this relates mainly to interest charges on use
by the Trust of its bank indebtedness/line of credit facility which was repaid
in full in 2009 Q2.

    Foreign exchange gain/loss

    The Trust's foreign exchange gain/loss has changed from a $32 loss in
2008 Q2 to a gain of $2,073 in 2009 Q2 due to the fluctuations in the Canadian
dollar in comparison to the U.S. dollar. The Trust's U.S. operations are
considered to be self-sustaining and therefore gains and losses due to
fluctuations in the foreign currency exchange rates are recorded in other
comprehensive income ("OCI") on the balance sheet as a component of equity.
However, gains and losses in the Canadian entity on U.S. denominated
intercompany balances continue to be recognized in the statement of
operations. Included in the 2009 Q2 foreign currency gain are unrealized gains
of $2,201 related to intercompany balances.

    Unit-based compensation expense

    For 2009 Q2 the Trust had unit-based compensation expense of $263 which
compares to $573 for 2008 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 2009 Q2 the Trust had a gain on disposal of property and equipment
of $57, which compares to $314 in 2008 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

    For 2009 Q2, the Trust had a tax recovery of $2,573 as compared to tax
expense of $608 in 2008 Q2.

    
    RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2009

    Revenues and operating expenses

                                       2009       2008
                                     Q2 YTD     Q2 YTD     Change          %
    -------------------------------------------------------------------------
    Revenues                      $  44,281  $  75,736  $ (31,455)       (42)
    Operating expenses              (25,633)   (41,053)   (15,420)       (38)
    -------------------------------------------------------------------------
    Gross margin - $              $  18,648  $  34,683  $ (16,035)       (46)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Gross margin - %                    42%        46%       (4)%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                              Six months ended June 30, 2009
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                       drilling   Wireline    testing      Total
    -------------------------------------------------------------------------
    Canada                        $  14,165  $   4,909  $   4,035  $  23,109
    United States                    14,850      2,189      4,133     21,172
    -------------------------------------------------------------------------
                                  $  29,015  $   7,098  $   8,168  $  44,281
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                              Six months ended June 30, 2008
    -------------------------------------------------------------------------
                                Directional            Production
    Revenues                       drilling   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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    2009 revenues were $44,281 which represented a decrease of $31,455 or 42%
from 2008 revenues of $75,736. The decline is primarily attributed to the
decline in oil and natural gas activity in 2009 which has been caused by low
commodity prices and the global recession.
    The directional drilling division revenues have decreased from $58,870 in
2008 to $29,015 in 2009; a 51% decrease. This decrease is the net result of:
i) the 59% decrease in activity days from 6,782 in 2008 to 2,762 in 2009; and
ii) the increase in the average day rate from $8,489 in 2008 to $10,251 in
2009, which was due in large part to the increase in U.S. rates due to the
decline in the Canadian dollar compared with 2008. Canadian activity days
decreased from 3,544 to 1,483 and the U.S. activity days decreased from 3,238
to 1,279.
    Expansion to the U.S. resulted in increased revenues for the Trust's
production testing division. The Trust's production testing division
contributed $8,168 in revenues during 2009 which is a 57% increase over 2008
revenues of $5,187. The wireline division generated revenues of $7,098 for
2009 which compares to $11,679 for 2008 which represents a 39% decrease. In
mid-June 2009, the Trust re-organized its wireline operations to focus its
Canadian operations on providing slickline services and to concentrate its
electric line ("E-Line") services in the U.S. As such, the Trust has ceased
providing E-Line services in Canada.
    The gross margin for 2009 was 42% compared to 46% in 2008. The decrease
is attributed to a number of factors including: i) the fixed nature of a
portion of labour costs within operating expense; ii) inclusion of annual
equipment repairs and maintenance costs (spread over less revenue); iii) an
overall change in revenue mix as wireline and production testing revenues now
make up a greater percentage of total revenues and these divisions have a
lower gross margin; and iv) included in 2009 Q2 operating expenses are $307 of
costs associated with the restructuring of the Trust's wireline operations.

    General and administrative expenses

    General and administrative expenses were $13,979 in 2009; a decrease of
$1,043 compared with $15,022 in 2008. The decrease was primarily related to
the elimination of the accrual for annual bonus in 2009 as well as reductions
in travel and promotion expenses. As a percentage of revenues, general and
administrative expenses were 32% in 2009 and 20% in 2008. Recognizing the
expected lower activity levels, the Trust has taken several initiatives to
improve operating results and further strengthen its balance sheet. The
Trust's operating entities have undertaken a detailed review of all operating
costs and general and administrative expenditures and have initiated cost
reductions to enhance profitability including layoff of staff and wage
rollbacks ranging from 4 - 12%. Included in the 2009 Q2 general and
administrative expenses are $146 related to restructuring of the Trust's
wireline operations.

    Depreciation and amortization

    Depreciation for 2009 was $7,803 which compares to $5,870 in 2008. This
increase is due to the expansion of the equipment fleet since 2008 Q2. As a
percentage of revenues, depreciation amounted to 18% for 2009 and 8% for 2008.

    Interest expense

    Interest expense related to long-term debt increased from $519 in 2008 to
$676 in 2009 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 decreased from $175 in 2008 to
$163 in 2009, relates mainly to interest charges on use by the Trust of its
bank indebtedness/line of credit facility which was repaid in full in 2009 Q2.

    Foreign exchange gain/loss

    The Trust's foreign exchange gain has increased from $1 in 2008 to $1,434
in 2009 due to the fluctuations in the Canadian dollar in comparison to the
U.S. dollar. The Trust's U.S. operations are considered to be self-sustaining
and therefore gains and losses due to fluctuations in the foreign currency
exchange rates are recorded in other comprehensive income ("OCI") on the
balance sheet as a component of equity. However, gains and losses in the
Canadian entity on US denominated intercompany balances continue to be
recognized in the statement of operations. Included in the 2009 foreign
currency gain are unrealized gains of $1,653 related to intercompany balances.

    Unit-based compensation expense

    For 2009, the Trust had unit-based compensation expense of $540 which
compares to $1,152 for 2008. The value of the options is being amortized
against income over the three-year vesting period.

    Gain on disposal of property and equipment

    During 2009 the Trust had a gain on disposal of property and equipment of
$777, which compares to $540 in 2008. 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

    For 2009, the Trust had a tax recovery of $2,222 as compared to tax
expense of $2,380 in 2008. At the beginning of 2009 Q1 the Trust's U.S.
subsidiary sold the majority of its operating assets to the Trust's Canadian
operating entity, Cathedral Energy Services Limited Partnership, as part of an
internal reorganization related to ownership of operating assets within the
Trust. This transaction created a one-time current tax expense in the amount
of $4,168 (current taxable income was created mainly due to U.S. recaptured
tax depreciation) and a recovery of future taxes in the amount of $3,210; for
a net tax cost of $958. Subsequent to this transaction, the Trust's U.S.
subsidiary leases the majority of its operating equipment from Cathedral
Energy Services Limited Partnership. Excluding the one-time tax effect of this
inter-company sale of assets the Trust had a tax recovery of $3,180.

    LIQUIDITY AND CAPITAL RE

SOURCES The Trust's primary 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. Effective June 30, 2009 the Trust renewed its credit facility with a major Canadian bank and the new maturity date is June 30, 2010. At June 30, 2009, the Trust had a demand operating line of credit with a major Canadian bank in the amount of $20,000 (December 31, 2008 - $20,000) of which $Nil (December 31, 2008 - $15,406) was drawn. In addition, the Trust has a non-reducing revolving term loan facility in the amount of $45,000 (December 31, 2008 - $45,000) of which $36,500 (December 31, 2008 - $40,000) was drawn as at June 30, 2009. In addition, at June 30, 2009, the Trust had other long-term debt of $334 (December 31, 2008 - $440). Operating activities Cash flow from operating activities for the three and six months ended June 30, 2009 was $9,170 and $21,474 which compares to $17,596 and $24,478 in the same periods in 2008. Funds from operations (see Non-GAAP Measurements) for 2009 were $(2,358) and $185 which compares to $2,621 and $15,920 in 2008. This decrease was caused mainly by a reduction in earnings due to reduced activity levels. The Trust has a working capital position at June 30, 2009 at $13,729 which compares to $17,435 at December 31, 2008. Investing activities Cash used in investing activities for the three and six months ended June 30, 2009 amounted to $2,903 and $8,238 which compares to $7,754 and $11,264 for the same periods in 2008. During 2009 Q2 the Trust invested an additional $1,839 (2008 - $7,475) in property and equipment with the main additions being for progress payments on 5 production testing units. The revised 2009 capital expenditure program is $8,400 including approximately $540 of maintenance capital. Management currently expects that property and equipment additions for 2009 (on an annualized basis) will be financed from a combination of cash flow from operations, equity issuance proceeds and its debt facility. At June 30, 2009, the Trust's operating entities had 96 MWD systems, 33 production testing units and 28 wireline units. Financing activities Cash used in financing activities for the three and six months ended June 30, 2009 amounted to $4,109 and $15,495 which compares to $8,165 and $10,370 for the same periods in 2008. During 2009 Q2 the Trust issued 3,615,600 trust units at $4.15 for proceeds net of issuance costs of $13,820. These proceeds were added to working capital and used to repay $5,000 of long-term debt and to fully repay the Trust's outstanding operating line of credit. In 2008 Q2 the trust received $2,995 on the exercise of Trust Unit options. There were no options exercised in 2009 Q2. As at June 30, 2009, the Trust was in compliance with all covenants under its credit facility. At August 5, 2009, the Trust had 36,197,622 Trust Units and 2,768,763 Trust Unit options outstanding. Distributions paid to Unitholders for 2009 Q2 totaled to $4,438 (2008 - $6,741). The quarter-over-quarter decrease is mainly the result of reducing the Trust's "regular" monthly distribution from $0.07 per Trust Unit where it had been since September 2006 to $0.04 per Trust Unit commencing in February 2009. Cash distributions paid have been financed from cash flow from operations and bank indebtedness. Management currently expects cash distributions for 2009 (on an annualized basis) will be financed from cash flow from operations. 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, 2008. As at June 30, 2009, the Trust has a commitment to purchase approximately $649 of property and equipment. 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 2009. NEW ACCOUNTING POLICIES Effective January 1, 2009, the Trust adopted the Canadian Institute of Chartered Accountants ("CICA") section 3064, Goodwill and Intangible Assets and amendments to Section 1000, Financial Statement Concepts. These standards have been adopted prospectively. For the six months ended June 30, 2009, the adoption of these standards did not have an effect on the Trust's results, financial position or cash flows. BUSINESS RISKS The MD&A for the year ended December 31, 2008, which is included in the Trust's 2008 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, 2009. EBITDAS EBITDAS (refer to Non-GAAP Measurements) is calculated as follows: Three months ended Six months ended June 30 June 30 --------------------- --------------------- 2009 2008 2009 2008 ------------------------------------------------------------------------- Net income (loss) for the period $ (1,484) $ 189 $ (80) $ 10,106 Add (deduct): - depreciation and amortization 3,970 3,019 7,803 5,870 - interest - long-term debt 304 243 676 519 - unit-based compensation expense 263 573 540 1,152 - unrealized foreign currency gain on inter-company debt (2,201) - (1,653) - - provision for taxes (2,573) 608 (2,222) 2,380 ------------------------------------------------------------------------- EBITDAS $ (1,721) $ 4,632 $ 5,064 $ 20,027 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 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. 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 Measurements). The Trust currently intends to pay cash distributions to Unitholders but the payment of cash distributions cannot be guaranteed. The following is a comparison of cash distributions declared and certain defined amounts: Fiscal year 2009 --------------------- 2009 Q2 Q2 YTD 2008 2007 ------------------------------------------------------------------------- Cash flow from operating activities $ 9,170 $ 21,474 $ 36,143 $ 39,729 Net income (loss) for the period $ (1,484) $ (80) $ 30,139 $ 24,863 Distributable cash $ (2,525) $ (178) $ 39,791 $ 38,993 Cash distributions declared $ 4,199 $ 9,086 $ 27,094 $ 26,405 Excess (shortfall) of cash flow from operating activities over cash distributions declared $ 4,971 $ 12,388 $ 9,049 $ 13,324 Excess (short-fall) of net income over cash distributions declared $ (5,683) $ (9,166) $ 3,045 $ (1,542) Excess (short-fall) of distributable cash over cash distributions declared $ (6,724) $ (9,264) $ 12,697 $ 12,588 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net income includes significant non-cash items which for the three and six months ended June 30, 2009 were ($874) and $265 and for the years ended December 31, 2008 and 2007 were $12,823 and $16,607, respectively, which 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). Therefore, in certain periods cash distributions declared may exceed net income. Management does not consider the excess of cash distributions declared over net income for the year ended December 31, 2007 or the three and six months ended June 30, 2009 to be an economic return of capital. Instead the excess is considered a function of the timing of cash flows versus accounting income. With respect to the short-fall of distributable cash over cash distributions declared for 2009 Q2 year-to-date, if the calculation of distributable cash is adjusted for the one-time current tax provision ($4,168 as discussed under the Results of Operations, six months ended June 30, 2009 - Taxes section of this MD&A and as follows with respect to comments on Distributable Cash) there would be a short-fall of distributable cash over cash distributions declared in the amount of $5,096. Management considers the exclusion of this one-time current tax provision to be reasonable in comparing distributable cash to cash distributions declared as this current tax provision is being incurred for the long-term benefit of Trust as opposed to being limited to 2009 Q1 when the taxes were incurred. On an annualized basis, management expects the adjusted distributable cash to exceed cash distributions declared and, therefore, short-falls during the year are a reflection on timing of cash flows. In addition, it is not management's intent to distribute 100% of distributable cash. Distributable cash (refer to Non-GAAP Measurements) is calculated as follows: Three months ended Six months ended June 30 June 30 --------------------- --------------------- 2009 2008 2009 2008 ------------------------------------------------------------------------- Cash flow from operating activities $ 9,170 $ 17,596 $ 21,474 $ 24,478 Add (Less): - changes in non-cash operating working capital(1) (11,528) (14,975) (21,289) (8,558) - required principal repayments on long-term debt (51) (79) (106) (154) - maintenance capital expenditures (116) (504) (257) (614) ------------------------------------------------------------------------- Distributable cash $ (2,525) $ 2,038 $ (178) $ 15,152 Add: one-time 2009 Q1 current tax provision (see comments below) - - 4,168 - ------------------------------------------------------------------------- Adjusted distributable cash $ (2,525) $ 2,038 $ 3,990 $ 15,152 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash distributions declared(2) $ 4,199 $ 6,770 $ 9,086 $ 13,439 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Payout ratio, net of one- time 2009 Q1 current tax provision of $4,168 nm 332% nm 89% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted payout ratio, excluding one-time 2009 Q1 current tax provision of $4,168 nm 332% 228% 89% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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. (2) Excludes foreign taxes paid that have been allocated to Unitholders nm Calculation not meaningful at/for current operations At the beginning of 2009 Q1 the Trust's U.S. subsidiary sold the majority of its operating assets to the Trust's Canadian operating entity, Cathedral Energy Services Limited Partnership, as part of an internal reorganization related to ownership of operating assets within the Trust. This transaction created a one-time current tax expense in the amount of $4,168 (this taxable income was created mainly due to recaptured U.S. tax depreciation). SUMMARY OF QUARTERLY RESULTS ------------------------------------------------------------------------- Three month period Jun Mar Dec Sep Jun Mar Dec Sep ended 2009 2009 2008 2008 2008 2008 2007 2007 ------------------------------------------------------------------------- Revenues $12,913 $31,368 $50,506 $52,686 $29,483 $46,253 $39,054 $38,355 EBITDAS (1,721) 6,237 13,932 16,914 4,632 15,395 13,707 13,775 Net income (loss) (1,484) 1,404 9,737 10,296 189 9,917 10,365 7,126 Net income (loss) per Trust Unit - basic (0.04) 0.04 0.30 0.32 0.01 0.31 0.33 0.23 Net Income (loss) per Trust Unit - diluted (0.04) 0.04 0.30 0.32 0.01 0.31 0.33 0.22 Cash distr- ibutions declared per Trust Unit 0.12 0.15 0.21 0.21 0.21 0.21 0.21 0.21 ------------------------------------------------------------------------- ------------------------------------------------------------------------- OUTLOOK After coming out of a breakup period that was significantly more protracted than normal, the post breakup seasonal recovery has been muted. The global recession and natural gas commodity prices continue to put a drag on oilfield service activity levels, equipment utilization and prices for services. Drilling activity in both Canada and the U.S. are down significantly and drilling activity is the most significant driver for the Trust's revenues. A meaningful rebound in drilling activity is only expected if there is a significant increase in the natural gas commodity prices. In the current operating environment, oil and natural gas producers are being cautious and this has resulted in a lack of visibility for the oilfield services sector. The strength in oil prices has directed more drilling to oil prospects and the Trust is benefiting from this; in particular with drilling activity in southeast Saskatchewan. Our G3 EM/MWD system operates effectively in this market, which is considered not to be an "EM" friendly environment, and continues to demonstrate significant cost savings to operators in comparison to the use of the traditional mud pulse MWD systems. The Trust's marketing activities around its G3 EM/MWD system to current and prospective customers to highlight this competitive advantage has been successful in adding additional work from existing customers and work from new customers. The increased signal detection capabilities provided by the G3 EM/MWD system has allowed the Trust to utilize this system in a competitive advantage in areas such as the Montney. The Trust is expanding its operating areas to include various North American shale plays (that continue to be active including Montney, Horn River, Quebec, Marcellus and Fayetteville). To facilitate the expansion into the Marcellus basin in eastern U.S. the Trust expects to establish a new operations facility in Pennsylvania in 2009 Q3. The Trust's management considers the long-term fundamentals for the supply and demand for energy to be positive for the oilfield services sector. The Trust's Venezuela directional drilling business is now ready to commence operations with a 3-4 job capability. The Trust's operations base in Maturin, Venezuela is fully operational and we expect to commence our first directional drilling job in 2009. CONSOLIDATED BALANCE SHEETS Dollars in 000's June 30 December 31 (unaudited) 2009 2008 ------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 5,293 $ 7,551 Accounts receivable 12,372 43,629 Taxes recoverable - 688 Inventory 6,660 8,963 Prepaid expenses and deposits 1,861 1,538 ------------------------------------------------------------------------- 26,186 62,369 Property and equipment 98,523 101,287 Intangibles 367 441 Goodwill 19,775 19,775 ------------------------------------------------------------------------- $ 144,851 $ 183,872 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND UNITHOLDERS' EQUITY Current liabilities: Bank indebtedness $ - $ 15,406 Accounts payable and accrued liabilities 10,727 27,040 Distribution payable to Unitholders 1,448 2,281 Taxes payable 70 - Current portion of long-term debt 212 207 ------------------------------------------------------------------------- 12,457 44,934 Long-term debt 36,622 40,233 Future income taxes 1,218 6,846 Unitholders' equity: Unitholders' capital 68,131 54,311 Contributed surplus 3,203 2,663 Retained earnings 22,010 31,559 Accumulated other comprehensive loss 1,210 3,326 ------------------------------------------------------------------------- 94,554 91,859 ------------------------------------------------------------------------- $ 144,851 $ 183,872 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS Three months ended Six months ended Dollars in 000's except June 30 June 30 per Trust Unit amounts --------------------- --------------------- (unaudited) 2009 2008 2009 2008 ------------------------------------------------------------------------- Revenues $ 12,913 $ 29,483 $ 44,281 $ 75,736 Expenses: Operating 8,301 17,466 25,633 41,053 General and administrative 6,214 7,591 13,979 15,022 Depreciation and amortization 3,970 3,019 7,803 5,870 Interest - long-term debt 304 243 676 519 Interest - other 48 76 163 175 Foreign exchange (gain) loss (2,073) 32 (1,434) (1) Unit-based compensation expense 263 573 540 1,152 ------------------------------------------------------------------------- 17,027 29,000 47,360 63,790 ------------------------------------------------------------------------- (4,114) 483 (3,079) 11,946 Gain on disposal of property and equipment 57 314 777 540 ------------------------------------------------------------------------- Income (loss) before taxes (4,057) 797 (2,302) 12,486 Taxes: Current 276 1,467 3,426 3,009 Future recovery (2,849) (859) (5,648) (629) ------------------------------------------------------------------------- (2,573) 608 (2,222) 2,380 ------------------------------------------------------------------------- Net income (loss) for the period (1,484) 189 (80) 10,106 Retained earnings, beginning of period 28,076 32,100 31,559 28,852 Less: distributions (4,582) (6,770) (9,469) (13,439) ------------------------------------------------------------------------- Retained earnings, end of period $ 22,010 $ 25,519 $ 22,010 $ 25,519 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net income per Trust Unit: Basic $ (0.04) $ 0.01 $ - $ 0.32 Diluted $ (0.04) $ 0.01 $ - $ 0.31 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Three months ended Six months ended June 30 June 30 Dollars in 000's --------------------- --------------------- (unaudited) 2009 2008 2009 2008 ------------------------------------------------------------------------- Net income (loss) for the period $ (1,484) $ 189 $ (80) $ 10,106 Other comprehensive income: Unrealized foreign exchange gain (loss) on translation of self-sustaining foreign operations 2,670 (157) (2,116) 434 ------------------------------------------------------------------------- Comprehensive income (loss) for the period $ 1,186 $ 32 $ (2,196) $ 10,540 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accumulated other comprehensive income (loss), beginning of period $ (1,460) $ (1,303) $ 3,326 $ - Adjustment for change in foreign currency translation method - - - (1,894) Other comprehensive income (loss) 2,670 (157) (2,116) 434 ------------------------------------------------------------------------- Accumulated other comprehensive income (loss), end of period $ 1,210 $ (1,460) $ 1,210 $ (1,460) ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended Six months ended June 30 June 30 Dollars in 000's --------------------- --------------------- (unaudited) 2009 2008 2009 2008 ------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Net income (loss) for the period $ (1,484) $ 189 $ (80) $ 10,106 Items not involving cash: Depreciation and amortization 3,970 3,019 7,803 5,870 Future taxes recovery (2,849) (859) (5,648) (629) Unrealized foreign exchange (gain) loss (2,201) 13 (1,653) (39) Unit-based compensation expense 263 573 540 1,152 Gain on disposal of property and equipment (57) (314) (777) (540) ------------------------------------------------------------------------- (2,358) 2,621 185 15,920 Changes in non-cash operating working capital 11,528 14,975 21,289 8,558 ------------------------------------------------------------------------- 9,170 17,596 21,474 24,478 ------------------------------------------------------------------------- Investing activities: Property and equipment additions (1,839) (7,475) (5,976) (11,435) Proceeds on disposal of property and equipment 548 341 1,626 802 Changes in non-cash investing working capital (1,612) (620) (3,888) (631) ------------------------------------------------------------------------- (2,903) (7,754) (8,238) (11,264) ------------------------------------------------------------------------- Financing activities: Proceeds on Trust Units issued for cash, net of issuance costs 13,820 - 13,820 - Distributions paid to Unitholders (4,438) (6,741) (10,303) (13,391) Repayment of long-term debt (5,051) (79) (5,106) (154) Advances under long-term debt - - 1,500 47 Proceeds on exercise of Trust Unit options - 2,995 - 4,128 Change in bank indebtedness (8,440) (4,340) (15,406) (1,000) ------------------------------------------------------------------------- (4,109) (8,165) (15,495) (10,370) ------------------------------------------------------------------------- Effect of exchange rate on changes in cash and cash equivalents (183) - 1 - ------------------------------------------------------------------------- Change in cash and cash equivalents 1,975 1,677 (2,258) 2,844 Cash and cash equivalents, beginning of period 3,318 2,473 7,551 1,306 ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 5,293 $ 4,150 $ 5,293 $ 4,150 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Certain statements in this news release 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 news release 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 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 are not limited to: the impact of general economic conditions; industry conditions; government and regulatory developments; oil and natural gas product supply and demand; competition; and the Trust's/Cathedral's ability to attract and retain qualified personnel. 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 Annual Report which have been filed with Canadian provincial securities commissions and are available on www.sedar.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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