CE Franklin Ltd. announces 2009 Third Quarter Results

CALGARY, Oct. 27 /CNW/ - CE FRANKLIN LTD. (TSX.CFT, NASDAQ.CFK) reported net income of $0.01 per share (basic) for the third quarter ended September 30, 2009, compared to $0.31 per share earned in the third quarter ended September 30, 2008.

    
    Financial Highlights
    --------------------

    (millions of Cdn.$ except         Three Months Ended   Nine Months Ended
     per share data)                      September 30        September 30
                                      ------------------- -------------------
                                         2009      2008      2009      2008
                                      --------- --------- --------- ---------
                                           (unaudited)         (unaudited)

    Sales                             $   94.1  $  149.3  $  344.0  $  386.2

    Gross profit                          17.4      27.8      61.3      73.8
    Gross profit - % of sales            18.5%     18.6%     17.8%     19.1%

    EBITDA(1)                              0.5       9.1      11.7      21.6
    EBITDA(1) % of sales                  0.5%      6.1%      3.4%      5.6%

    Net income                        $    0.2  $    5.7  $    6.8  $   13.0

    Per share - basic                 $   0.01  $   0.31  $   0.38  $   0.71
              - diluted               $   0.01  $   0.31  $   0.38  $   0.70

    Net working capital(2)            $  131.1  $  123.1
    Bank operating loan(2)            $   21.3  $   20.9
    

"CE Franklin remained profitable despite depressed oil and gas industry activity levels. The integration of the oilfield supply competitor acquired June 1, 2009 is complete and the Company will continue to focus on its key strategic initiatives," said Michael West, President and Chief Executive Officer.

Net income for the third quarter of 2009 was $0.2 million, down from $5.7 million in the third quarter of 2008. Third quarter sales were $94.1 million, a decrease of $55.2 million (37%) compared to the third quarter of 2008 as well completions declined 65% and rig counts declined 56% compared to 2008 levels. Capital project business for the third quarter comprised 51% of total sales (2008 - 58%), and decreased $38.2 million (44%) from the prior year period due to declines in conventional oilfield and oil sands activity. Gross profit for the third quarter was down $10.4 million with gross profit margins consistent with the prior year period. Selling, general and administrative expenses decreased by $1.5 million for the quarter compared to the prior year period. Excluding the $0.8 million ($0.2 million after tax) cost associated with the implementation of a cash settlement mechanism for the Company's stock option program in the third quarter and $0.7 million of costs associated with the integration of the second quarter acquisition of an oilfield supply competitor ("the Acquired Business"), selling, general and administrative costs decreased by $3.0 million (16%) compared to the prior year period as compensation, selling and marketing costs have been managed to a lower level in response to the reduced oil and gas industry activity levels. The Acquired Business expanded the Company's store network from 44 to 50 locations adding $14 million of sales and $0.8 million of net income to the third quarter. The weighted average number of shares outstanding during the third quarter decreased by 0.6 million shares (3%) from the prior year period principally due to shares purchased for cancellation pursuant to the Company's normal course issuer bid. Net income per share (basic) was $0.01 in the third quarter of 2009, down $0.30 from that earned in the third quarter 2008.

Net income for the first nine months of 2009 was $6.8 million, down $6.2 million from the first nine months of 2008. Sales were $344.0 million, a decrease of $42.2 million (11%) compared to the first nine months of 2008. Capital project business for the first nine months of 2009 comprised 58% of total sales (2008 - 56%), and decreased $17.2 million (8%) from the prior year period due to decreased conventional oilfield sales offset partially by increased oil sands sales. Gross profit for the first nine months was down $12.5 million with margins reducing by 1.3% from the prior year period. The decrease is a result of the increase in lower margin oil sands sales and increased competitive pressure. Selling, general and administrative expenses decreased by $2.5 million for the first nine months compared to the prior year period as compensation, selling and marketing costs have been managed to a lower level in response to the reduced oil and gas industry activity levels offset by increased costs associated with the expansion of the Company's store network resulting from the Acquired Business. Costs to complete the integration of the Acquired Business were $1.5 million. The weighted average number of shares outstanding during the first nine months of the year decreased by 0.5 million shares (3%) from the prior year period principally due to shares purchased in 2009 for cancellation pursuant to the Company's normal course issuer bid. Net income per share (basic) was $0.38 in the first nine months of 2009, down $0.33 (46%) from the first nine months of 2008.

Business Outlook

Natural gas prices continued to deteriorate during the third quarter with North American production capacity and inventory levels dominating demand. The only significant gas capital expenditure activities are focused on the emerging shale gas plays in north eastern British Columbia. Conventional and heavy oil economics are reasonable at current price levels leading to moderate activity in eastern Alberta and south eastern Saskatchewan. Conventional oil and gas industry activity in western Canada, as measured by well completions and the average drilling rig count, is down approximately 60% from the prior year period. These trends are expected to continue to subdue demand for the Company's products for the balance of 2009 and into 2010. Oil sands project announcements are beginning to gain momentum with the recovery in oil prices and capital markets. Approximately 60% of the Company's sales are driven by our customers' capital project expenditures.

The oilfield supply industry continues to struggle with too much inventory complicated by declining revenues. Competitor pricing is erratic, particularly with tubular and line pipe products and is expected to continue to pressure the company's gross profit margins.

For the balance of 2009 and into 2010, sales levels and sales margins are expected to decline compared to 2008. The Company will continue to manage its cost structure to protect profitability while maintaining service capacity and advancing strategy initiatives. Over the medium to longer term, the Company is confident its strong financial and competitive position will enable profitable growth of its distribution network by expanding product lines, supplier relationships and capability to service additional oil and gas and industrial end use markets.

    
    (1) EBITDA represents net income before interest, taxes, depreciation and
        amortization. EBITDA is a supplemental non-GAAP financial measure
        used by management, as well as industry analysts, to evaluate
        operations. Management believes that EBITDA, as presented, represents
        a useful means of assessing the performance of the Company's ongoing
        operating activities, as it reflects the Company's earnings trends
        without showing the impact of certain charges. The Company is also
        presenting EBITDA and EBITDA as a percentage of sales because it is
        used by management as supplemental measures of profitability. The use
        of EBITDA by the Company has certain material limitations because it
        excludes the recurring expenditures of interest, income tax, and
        amortization expenses. Interest expense is a necessary component of
        the Company's expenses because the Company borrows money to finance
        its working capital and capital expenditures. Income tax expense is a
        necessary component of the Company's expenses because the Company is
        required to pay cash income taxes. Amortization expense is a
        necessary component of the Company's expenses because the Company
        uses property and equipment to generate sales. Management compensates
        for these limitations to the use of EBITDA by using EBITDA as only a
        supplementary measure of profitability. EBITDA is not used by
        management as an alternative to net income, as an indicator of the
        Company's operating performance, as an alternative to any other
        measure of performance in conformity with generally accepted
        accounting principles or as an alternative to cash flow from
        operating activities as a measure of liquidity. A reconciliation of
        EBITDA to Net income is provided within the Company's Management
        Discussion and Analysis. Not all companies calculate EBITDA in the
        same manner and EBITDA does not have a standardized meaning
        prescribed by GAAP. Accordingly, EBITDA, as the term is used herein,
        is unlikely to be comparable to EBITDA as reported by other entities.

    (2) Net working capital is defined as current assets less accounts
        payable and accrued liabilities, income taxes payable and other
        current liabilities, excluding the bank operating loan. Net working
        capital and Bank operating loan are as at quarter end.

    Additional Information
    ----------------------
    

Additional information relating to CE Franklin, including its third quarter 2009 Management Discussion and Analysis and interim consolidated financial statements and its Form 20-F/Annual Information Form, is available under the Company's profile on the SEDAR website at www.sedar.com and at www.cefranklin.com.

    
    Conference Call and Webcast Information
    ---------------------------------------
    

A conference call to review the 2009 third quarter results, which is open to the public, will be held on Wednesday, October 28, 2009 at 11:00 a.m. Eastern Time (9:00 a.m. Mountain Time).

Participants may join the call by dialing 1-416-644-3423 in Toronto or dialing 1-800-589-8577 at the scheduled time of 11:00 a.m. Eastern Time. For those unable to listen to the live conference call, a replay will be available at approximately 1:00 p.m. Eastern Time on the same day by calling 1-416-640-1917 in Toronto or dialing 1-877-289-8525 and entering the Passcode of 4169372 followed by the pound sign and may be accessed until midnight Wednesday, November 11, 2009.

The call will also be webcast live at: http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2830960 and will be available on the Company's website at http://www.cefranklin.com.

Michael West, President and Chief Executive Officer will lead the discussion and will be accompanied by Mark Schweitzer, Vice President and Chief Financial Officer. The discussion will be followed by a question and answer period.

About CE Franklin

For more than half a century, CE Franklin has been a leading supplier of products and services to the energy industry. CE Franklin distributes pipe, valves, flanges, fittings, production equipment, tubular products and other general oilfield supplies to oil and gas producers in Canada as well as to the oil sands, midstream, refining, heavy oil, petrochemical and non oilfield related industries such as forestry and mining. These products are distributed through its 50 branches, which are situated in towns and cities serving particular oil and gas fields of the western Canadian sedimentary basin.

Forward-looking Statements: The information in this news release may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and other applicable securities legislation. All statements, other than statements of historical facts, that address activities, events, outcomes and other matters that CE Franklin plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates or anticipates (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements are based on management's current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements and refer to the Form 20-F or our annual information form for further detail.

Management's Discussion and Analysis as at October 27, 2009

The following Management's Discussion and Analysis ("MD&A") is provided to assist readers in understanding CE Franklin Ltd.'s ("CE Franklin" or the "Company") financial performance and position during the periods presented and significant trends that may impact future performance of CE Franklin. This discussion should be read in conjunction with the Company's interim consolidated financial statements for the three and nine month periods ended September 30, 2009, the interim consolidated financial statements and MD&A for the three and six month period ended June 30, 2009 and the three month period ended March 31, 2009, and the MD&A and the consolidated financial statements for the year ended December 31, 2008.

All amounts are expressed in Canadian dollars and in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"), except where otherwise noted.

Overview

CE Franklin is a leading distributor of pipe, valves, flanges, fittings, production equipment, tubular products and other general industrial supplies primarily to the oil and gas industry in Canada through its 50 branches situated in towns and cities that serve oil and gas fields of the western Canadian sedimentary basin. In addition, the Company distributes similar products to the oil sands, midstream, refining, petrochemical industries and non-oilfield related industries such as forestry and mining.

The Company's branch operations service over 3,000 customers by providing the right materials where and when they are needed, for the best value. Our branches, supported by our centralized Distribution Centre in Edmonton, Alberta, stock over 25,000 stock keeping units. This infrastructure enables us to provide our customers with the products they need on a same day or overnight basis. Our centralized inventory and procurement capabilities allow us to leverage our scale to enable industry leading hub and spoke purchasing, logistics and project expediting capabilities. Our branches are also supported by services provided by the Company's corporate office in Calgary, Alberta including sales, marketing, product expertise, logistics, invoicing, credit and collection and other business services.

The Company's shares trade on the TSX ("CFT") and NASDAQ ("CFK") stock exchanges. Smith International Inc., a major oilfield service company based in the United States, owns approximately 55% of the Company's shares.

    
    Business and Operating Strategy

    The Company is pursuing the following strategies to grow its business
profitably:

    -   Expand the reach and market share serviced by our distribution
        network. We are focusing our sales efforts and product offering on
        servicing complex, multi-site needs of large and emerging customers
        in the energy sector. On June 1, 2009, the Company acquired a western
        Canadian oilfield equipment distributor. The Acquired Business
        operated 23 supply stores across the western Canadian sedimentary
        basin of which 17 locations were proximate to existing CE Franklin
        supply stores and have been integrated. The remaining 6 locations
        extended the market reach of our distribution network. In 2009, our
        Fort St. John and Lloydminster branches moved to larger locations to
        support long term growth. In 2008, we continued to invest in our
        distribution network by opening a branch operation in Red Earth,
        Alberta and by expanding our facilities at five existing branch
        operations. In the spring of 2008, we successfully completed the move
        to our new 153,000 square foot Distribution Centre and nine acre pipe
        yard located in Edmonton, Alberta which positions us to service our
        growing distribution network. Organic growth is expected to be
        complemented by selected acquisitions.

    -   Expand our production equipment service capability to capture more of
        the product life cycle requirements for the equipment we sell such as
        down hole pump repair, oilfield engine maintenance, well optimization
        and on site project management. This will differentiate our service
        offering from our competitors and deepen our relationship with
        customers. In the first quarter of 2009, we opened a valve actuation
        centre at our Distribution Centre, to service our customers' valve
        automation requirements. In the third quarter of 2009, flow control
        and process control products were added to our automation product
        line.

    -   Focus on the oil sands and industrial project and MRO business by
        leveraging our existing supply chain infrastructure, product and
        project expertise. The Company is expanding its product line,
        supplier relationships and expertise to provide the automation,
        instrumentation and other specialty products that these customers
        require.
    

Business Outlook

Natural gas prices continued to deteriorate during the third quarter with North American production capacity and inventory levels dominating demand. The only significant gas capital expenditure activities are focused on the emerging shale gas plays in north eastern British Columbia. Conventional and heavy oil economics are reasonable at current price levels leading to moderate activity in eastern Alberta and south eastern Saskatchewan. Conventional oil and gas industry activity in western Canada, as measured by well completions and the average drilling rig count, is down approximately 60% from the prior year period. These trends are expected to continue to subdue demand for the Company's products for the balance of 2009 and into 2010. Oil sands project announcements are beginning to gain momentum with the recovery in oil prices and capital markets. Approximately 60% of the Company's sales are driven by our customers' capital project expenditures.

The oilfield supply industry continues to struggle with too much inventory complicated by declining revenues. Competitor pricing is erratic, particularly with tubular and line pipe products and is expected to continue to pressure the company's gross profit margins.

For the balance of 2009 and into 2010, sales levels and sales margins are expected to decline compared to 2008. The Company will continue to manage its cost structure to protect profitability while maintaining service capacity and advancing strategy initiatives. Over the medium to longer term, the Company is confident its strong financial and competitive position will enable profitable growth of its distribution network by expanding product lines, supplier relationships and capability to service additional oil and gas and industrial end use markets.

    
    Operating Results

    The following table summarizes CE Franklin's results of operations:

    (in millions of Cdn. dollars except per share data)

                     Three Months Ended              Nine Months Ended
                        September 30                    September 30
              ------------------------------- -------------------------------
                    2009            2008            2009            2008
              --------------- --------------- --------------- ---------------
    Sales     $ 94.1  100.0%  $149.3  100.0%  $344.0  100.0%  $386.2  100.0%
    Cost of
     sales     (76.7) (81.5)% (121.5) (81.4)% (282.7) (82.2)% (312.4) (80.9)%
              ------- ------- ------- ------- ------- ------- ------- -------
    Gross
     profit     17.4   18.5%    27.8   18.6%    61.3   17.8%    73.8   19.1%

    Selling,
     general
     and admin-
     istrative
     expenses  (17.0) (18.1)%  (18.5) (12.4)%  (49.7) (14.4)%  (52.1) (13.5)%
    Foreign
     exchange
     gain
     (loss)      0.1    0.1%    (0.1)  (0.1)%    0.1    0.0%    (0.1)  (0.0)%
              ------- ------- ------- ------- ------- ------- ------- -------
    EBITDA(1)    0.5    0.5%     9.1    6.1%    11.7    3.4%    21.6    5.6%
    Amortiz-
     ation      (0.6)  (0.6)%   (0.6)  (0.4)%   (1.7)  (0.5)%   (1.8)  (0.5)%
    Interest    (0.3)  (0.3)%   (0.2)  (0.1)%   (0.7)  (0.2)%   (0.8)  (0.2)%
              ------- ------- ------- ------- ------- ------- ------- -------
    Income
     (loss)
     before
     taxes      (0.4)  (0.4)%    8.3    5.6%     9.3    2.7%    19.0    4.9%
    Income tax
     (expense)
     recovery    0.6    0.6%    (2.6)  (1.7)%   (2.5)  (0.7)%   (6.0)  (1.6)%
              ------- ------- ------- ------- ------- ------- ------- -------
    Net income   0.2    0.2%     5.7    3.8%     6.8    2.0%    13.0    3.3%
              ------- ------- ------- ------- ------- ------- ------- -------
              ------- ------- ------- ------- ------- ------- ------- -------

    Net income
     per share
      Basic   $ 0.01          $ 0.31          $ 0.38          $ 0.71
      Diluted $ 0.01          $ 0.31          $ 0.38          $ 0.70

    Weighted average number of shares outstanding (000's)
      Basic   17,647          18,254          17,795          18,290
      Diluted 17,908          18,495          18,036          18,674

    (1) EBITDA represents net income before interest, taxes, depreciation and
        amortization. EBITDA is a supplemental non-GAAP financial measure
        used by management, as well as industry analysts, to evaluate
        operations. Management believes that EBITDA, as presented, represents
        a useful means of assessing the performance of the Company's ongoing
        operating activities, as it reflects the Company's earnings trends
        without showing the impact of certain charges. The Company is also
        presenting EBITDA and EBITDA as a percentage of sales because it is
        used by management as supplemental measures of profitability. The use
        of EBITDA by the Company has certain material limitations because it
        excludes the recurring expenditures of interest, income tax, and
        amortization expenses. Interest expense is a necessary component of
        the Company's expenses because the Company borrows money to finance
        its working capital and capital expenditures. Income tax expense is a
        necessary component of the Company's expenses because the Company is
        required to pay cash income taxes. Amortization expense is a
        necessary component of the Company's expenses because the Company
        uses property and equipment to generate sales. Management compensates
        for these limitations to the use of EBITDA by using EBITDA as only a
        supplementary measure of profitability. EBITDA is not used by
        management as an alternative to net income, as an indicator of the
        Company's operating performance, as an alternative to any other
        measure of performance in conformity with generally accepted
        accounting principles or as an alternative to cash flow from
        operating activities as a measure of liquidity. A reconciliation of
        EBITDA to Net income is provided within the table above. Not all
        companies calculate EBITDA in the same manner and EBITDA does not
        have a standardized meaning prescribed by GAAP. Accordingly, EBITDA,
        as the term is used herein, is unlikely to be comparable to EBITDA as
        reported by other entities.
    

Third Quarter Results

Net income for the third quarter of 2009 was $0.2 million, down from $5.7 million in the third quarter of 2008. Third quarter sales were $94.1 million, a decrease of $55.2 million (37%) compared to the third quarter of 2008 as well completions declined 65% and rig counts declined 56% compared to 2008 levels. Capital project business for the third quarter comprised 51% of total sales (2008 - 58%), and decreased $38.2 million (44%) from the prior year period due to declines in conventional oilfield and oil sands activity. Gross profit for the third quarter was down $10.4 million with gross profit margins consistent with the prior year period. Selling, general and administrative expenses decreased by $1.5 million for the quarter compared to the prior year period. Excluding the $0.8 million ($0.2 million after tax) cost associated with the implementation of a cash settlement mechanism for the Company's stock option program in the third quarter and $0.7 million of costs associated with the integration of the second quarter acquisition of an oilfield supply competitor ("the Acquired Business"), selling, general and administrative costs decreased by $3.0 million (16%) compared to the prior year period as compensation, selling and marketing costs have been managed to a lower level in response to the reduced oil and gas industry activity levels. The Acquired Business expanded the Company's store network from 44 to 50 locations adding $14 million of sales and $0.8 million of operating expenses to the third quarter. The weighted average number of shares outstanding during the third quarter decreased by 0.5 million shares (3%) from the prior year period principally due to shares purchased for cancellation pursuant to the Company's normal course issuer bid. Net income per share (basic) was $0.01 in the third quarter of 2009, down $0.30 from that earned in the third quarter 2008.

Year to Date Results

Net income for the first nine months of 2009 was $6.8 million, down $6.2 million from the first nine months of 2008. Sales were $344.0 million, a decrease of $42.2 million (11%) compared to the first nine months of 2008. Capital project business for the first nine months of 2009 comprised 58% of total sales (2008 - 56%), and decreased $17.2 million (8%) from the prior year period due to decreased conventional oilfield sales offset partially by increased oil sands sales. Gross profit for the first nine months was down $12.5 million with margins reducing by 1.3% from the prior year period. The decrease is a result of the increase in lower margin oil sands sales and increased competitive pressure. Selling, general and administrative expenses decreased by $2.5 million for the first nine months compared to the prior year period as compensation, selling and marketing costs have been managed to a lower level in response to the reduced oil and gas industry activity levels offset by increased costs associated with the expansion of the Company's store network resulting from the Acquired Business. Costs to complete the integration of the Acquired Business were $1.5 million. The weighted average number of shares outstanding during the first nine months of the year decreased by 0.5 million shares (3%) from the prior year period principally due to shares purchased in 2009 for cancellation pursuant to the Company's normal course issuer bid. Net income per share (basic) was $0.38 in the first nine months of 2009, down $0.33 (46%) from the first nine months of 2008.

A more detailed discussion of the Company's third quarter results from operations is provided below:

Sales

Sales for the quarter ended September 30, 2009 were $94.1 million, a decrease of $55.2 million (37%) compared to the quarter ended September 30, 2008, as detailed above in the "Third Quarter Results" discussion.

    
    (in millions of Cdn. $)

                       Three months ended Sept 30  Nine months ended Sept 30
                      --------------------------- ---------------------------
                           2009          2008          2009          2008
                      ------------- ------------- ------------- -------------
    End use sales
     demand:             $      %      $      %      $      %      $      %
    Capital projects   48.4     51   86.6     58  199.5     58  216.8     56
    Maintenance,
     repair and
     operating
     supplies (MRO)    45.7     49   62.7     42  144.5     42  169.4     44
                      ------------- ------------- ------------- -------------
    Total sales        94.1    100  149.3    100  344.0    100  386.2    100

    Note: Capital project end use sales are defined by the Company as
    consisting of tubulars and 80% of pipe, flanges and fittings; and valves
    and accessories product sales respectively; MRO Sales are defined by the
    Company as consisting of pumps and production equipment, production
    services; general product and 20% of pipes, flanges and fittings; and
    valves and accessory product sales respectively.
    

The Company uses oil and gas well completions and average rig counts as industry activity measures to assess demand for oilfield equipment used in capital projects. Oil and gas well completions require the products sold by the Company to complete a well and bring production on stream and are a good general indicator of energy industry activity levels. Average drilling rig counts are also used by management to assess industry activity levels as the number of rigs in use ultimately drives well completion requirements. The relative level of oil and gas commodity prices are a key driver of industry capital project activity as product prices directly impact the economic returns realized by oil and gas companies. Well completion, rig count and commodity price information for the three and nine months ended September 30, 2009 and 2008 are provided in the table below.

    
                             Q3 Average                YTD Average
                        -----------------     %    -----------------     %
                           2009     2008   change     2009     2008   change
                        -------- -------- ----------------- -------- --------
    Gas - Cdn. $/gj
     (AECO spot)          $2.97    $7.78     (62%)   $3.79    $8.65     (56%)
    Oil - Cdn. $/bbl
     (Synthetic Crude)   $73.99  $122.84     (40%)  $65.93  $115.65     (43%)

    Average rig count       178      407     (56%)     197      360     (45%)

    Well completions:
      Oil                   822    1,826     (55%)   2,198    4,068     (46%)
      Gas                   646    2,370     (73%)   4,491    7,330     (39%)
                        -------- -------- ----------------- -------- --------
    Total well
     completions          1,468    4,196     (65%)   6,689   11,398     (41%)

    Average statistics are shown except for well completions.

    Sources: Oil and Gas prices - First Energy Capital Corp.; Rig count data
    - CAODC; Well completion data - Daily Oil Bulletin
    

Sales of capital project related products were $48.4 million in the third quarter of 2009, down $38.2 million (44%) from the third quarter of 2008 due to decreased conventional oilfield and oil sands activity. Total well completions decreased by 65% in the third quarter of 2009 and the average working rig count decreased by 56% compared to the prior year period. Gas wells comprised 44% of the total wells completed in western Canada in the third quarter of 2009 compared to 56% in the third quarter of 2008. Spot gas prices ended the third quarter at $3.69 per GJ (AECO) an increase of 24% from the third quarter average price. Oil prices ended the third quarter at $74.91 per bbl (Synthetic Crude) an increase of 1% from the third quarter average price. Continued depressed oil and gas prices are expected to lead to reduced industry cash flow, access to capital and capital expenditure economics, which in turn is expected to decrease demand for the Company's products through the remainder of 2009 and into 2010.

MRO product sales are related to overall oil and gas industry production levels and tend to be more stable than capital project sales. MRO product sales for the quarter ended September 30, 2009 decreased by $17.0 million (27%) to $45.7 million compared to the quarter ended September 30, 2008 and comprised 49% of the Company's total sales (2008 - 42%).

The Company's strategy is to grow profitability by focusing on its core western Canadian oilfield equipment service business, complemented by an increase in the product life cycle services provided to its customers and the focus on the emerging oil sands capital project and MRO sales opportunities. Sales results of these initiatives to date are provided below:

    
                         Q3 2009       Q3 2008       YTD 2009      YTD 2008
                      ------------- ------------- ------------- -------------
    Sales ($millions)    $      %      $      %      $      %      $      %
    Oilfield           87.9     93  126.4     92  282.3     82  349.4     94
    Oil sands           3.4      4   18.8      4   54.4     16   24.9      3
    Production
     services           2.8      3    4.1      4    7.3      2   11.9      3
                      ------------- ------------- ------------- -------------
    Total sales        94.1    100  149.3    100  344.0    100  386.2    100
    

Sales of oilfield products to conventional western Canada oil and gas end use applications were $87.9 million for the third quarter of 2009, down 30% from the third quarter of 2008. This decrease was driven by the 65% decrease in well completions compared to the prior year period. The impact on sales of decreased industry activity was partially offset by $14 million of sales contributed during the quarter by the Acquired Business.

Sales to oil sands end use applications decreased to $3.4 million in the third quarter compared to $18.8 million in the third quarter of 2008. The decrease in sales was mainly due to the reduction in project activity during the third quarter. The Company continues to position its sales focus, Distribution Centre and Fort McMurray branch to penetrate this emerging market for capital project and MRO products.

Production service sales were $2.8 million in the third quarter of 2009 compared to $4.1 million in the third quarter of 2008 as customers deferred maintenance activities in the face of challenging commodity prices.

    
    Gross Profit

                                       Q3 2009   Q3 2008  YTD 2009  YTD 2008
                                      --------- --------- --------- ---------
    Gross profit (millions)              $17.4     $27.8     $61.3     $73.8
    Gross profit margin as a %
     of sales                            18.5%     18.6%     17.8%     19.1%

    Gross profit composition by
     product sales category:
    Tubulars                                3%       18%        6%       11%
    Pipe, flanges and fittings             27%       23%       33%       24%
    Valves and accessories                 20%       14%       19%       18%
    Pumps, production equipment
     and services                          13%       15%       11%       16%
    General                                37%       30%       31%       31%
                                      --------- --------- --------- ---------
    Total gross profit                    100%      100%      100%      100%
    

Gross profit was $17.4 million in the third quarter of 2009, and gross profit margins were 18.5%, a decrease of $10.4 million from the prior year third quarter with margin % consistent quarter over quarter. The most significant change in gross profit composition in the third quarter of 2009 compared to the third quarter of 2008 was the reduction in tubular gross profit contribution. Tubular sales and margins in 2009 have been affected by depressed drilling activity and an excess supply of inventory compared to the third quarter of 2008 when sales and margins were high due to product cost inflation and tight product supply conditions. The increase in general products gross profit composition reflects the increase in MRO end use sales by 7% to 49% of total sales in the quarter, compared to the prior year period.

    
    Selling, General and Administrative ("SG&A") Costs

                         Q3 2009       Q3 2008       YTD 2009      YTD 2008
                      ------------- ------------- ------------- -------------
    ($millions)          $      %      $      %      $      %      $      %
    People costs        9.3     55   10.5     57   28.0     56   29.9     57
    Selling costs       2.4     14    2.7     15    6.0     13    7.0     13
    Facility and
     office costs       3.4     20    3.3     18   10.1     20    9.4     18
    Other               1.9     11    2.0     10    5.6     11    5.8     12
                      ------------- ------------- ------------- -------------
    SG&A costs         17.0    100   18.5    100   49.7    100   52.1    100
    SG&A costs as %
     of sales           18%           12%           14%           14%
    

SG&A costs decreased by $1.5 million (8%) in the third quarter of 2009 compared to the prior year period. Excluding one-time costs of $0.8 million ($0.2 million after tax) associated with the implementation of a cash settlement mechanism to the Company's stock option plan during the quarter and $0.7 million of acquisition integration costs, SG&A costs were down $3.0 million (16%) compared to the prior year period.

The stock option plan cash settlement mechanic was implemented to provide the Company increased flexibility to manage share dilution while resourcing the plan on a tax efficient basis. The cash settlement option requires the Company to record a current obligation equal to the positive difference between the Company's stock price and the stock option exercise price. Stock option obligations were previously recorded as a credit to shareholders' equity - contributed surplus using the Black-Scholes valuation model.

The integration of the Acquired Business was completed at a total integration cost of $1.5 million of which $0.7 million was incurred in the third quarter. The acquisition has increased the Company's store network by 6 locations and employee base by 42. Operating costs associated with the acquired store locations (excluding integration costs) were $0.7 million in the third quarter.

People costs decreased by $1.2 million during the third quarter compared to the prior year period due to a 5% reduction in employees during the quarter (15% year to date) and lower incentive compensation costs, partially offset by the cost of employees added from the Acquired Business. Selling costs were down $0.3 million from the prior year period due to lower commission based sales and discretionary expenses. Facility and office costs increased marginally over the prior year period as higher lease costs associated with the expansion of the Company's store network, were partially offset by lower utility costs.

The Company leases 40 of its 50 branch locations as well as its corporate office in Calgary and Edmonton Distribution Centre. Six branch locations are owned and four are operated by agents. The Company continues to take steps to reduce its variable and fixed costs to adjust to lower industry activity levels while maintaining service capacity and advancing strategic initiatives.

Amortization Expense

Amortization expense of $0.6 million in the third quarter of 2009 was comparable to the third quarter of 2008.

Interest Expense

Interest expense of $0.3 million in the third quarter of 2009 was comparable to the third quarter of 2008.

Foreign Exchange (Gain) Loss

Foreign exchange (gains) and losses were nominal at a $0.1 million gain in the third quarter of 2009 and a $0.1 million loss in the third quarter of 2008. Management of the Company's foreign exchange exposures has contributed to this result despite significant exchange rate volatility experienced in both 2008 and the first nine months of 2009.

Income Tax Expense

The Company's effective tax rate, for the third quarter of 2009 was 146.1%, compared to 31.2% in the third quarter of 2008. The change in effective tax rates reflects the impact of implementing the stock option cash settlement mechanism during the third quarter. Stock option expense was previously non-deductible for income tax purposes. Additionally, non-deductible items had a greater impact on the effective tax rate in the third quarter of 2009 due to the decrease in pre-tax income compared to the prior year period. Substantially all of the Company's tax provision is currently payable.

Summary of Quarterly Financial Data

The selected quarterly financial data presented below is presented in Canadian dollars and in accordance with Canadian GAAP. This information is derived from the Company's unaudited quarterly financial statements.

    
    (in millions of Cdn. dollars except per share data)

    Unaudited     Q4      Q1      Q2      Q3      Q4      Q1      Q2      Q3
                2007    2008    2008    2008    2008    2009    2009    2009
              ------- ------- ------- ------- ------- ------- ------- -------
    Sales     $112.3  $140.6  $ 96.4  $149.3  $161.2  $140.7  $109.1  $ 94.1

    Gross
     profit     20.4    27.1    19.0    27.8    33.9    26.4    17.5    17.4
    Gross
     profit %  18.2%   19.2%   19.7%   18.6%   21.0%   18.8%   16.0%   18.5%

    EBITDA       5.1    10.2     2.3     9.1    14.3     9.5     1.7     0.5
    EBITDA as
     a % of
     sales      4.5%    7.2%    2.4%    6.1%    8.9%    6.8%    1.6%    0.5%

    Net income   2.4     6.3     1.0     5.7     8.8     6.0     0.6     0.2
    Net income
     as a % of
     sales      2.1%    4.5%    1.0%    3.8%    5.5%    4.3%    0.5%    0.2%

    Net income
     per share
      Basic   $ 0.13  $ 0.34  $ 0.05  $ 0.31  $ 0.48  $ 0.33  $ 0.04  $ 0.01
      Diluted $ 0.13  $ 0.34  $ 0.05  $ 0.31  $ 0.47  $ 0.33  $ 0.03  $ 0.01

    Net
     working
     capital
     (1)       134.7   117.4   114.9   123.1   142.8   153.2   137.0   131.1
    Bank
     operating
     loan(1)    44.3    21.8    18.4    20.9    34.9    40.2    25.3    21.3

    Total well
     complet-
     ions      5,026   4,595   2,607   4,392   6,971   3,947   1,274   1,468

    (1) Net working capital and bank operating loan amounts are as at quarter
        end.
    

The Company's sales levels are affected by weather conditions. As warm weather returns in the spring each year, the winter's frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until they have dried out. In addition, many exploration and production areas in northern Canada are accessible only in the winter months when the ground is frozen. As a result, the first and fourth quarters typically represent the busiest time for oil and gas industry activity and the highest sales activity for the Company. Sales levels typically drop dramatically during the second quarter until such time as roads have dried and road bans have been lifted. This typically results in a significant reduction in earnings during the second quarter, as the decline in sales typically out paces the decline in SG&A costs as the majority of the Company's SG&A costs are fixed in nature. Net working capital (defined as current assets less accounts payable and accrued liabilities, income taxes payable and other current liabilities, excluding the bank operating loan) and bank operating loan borrowing levels follow similar seasonal patterns as sales.

Liquidity and Capital Resources

The Company's primary internal source of liquidity is cash flow from operating activities before net changes in non-cash working capital balances. Cash flow from operating activities and the Company's 364-day bank operating facility are used to finance the Company's net working capital, capital expenditures required to maintain its operations, and growth capital expenditures.

As at September 30, 2009, borrowings under the Company's bank operating loan were $21.3 million, a decrease of $13.6 million from December 31, 2008. Borrowing levels have decreased due to the Company generating $10.3 million in cash flow from operating activities, before net changes in non-cash working capital balances and a $19.8 million reduction in net working capital excluding the impact of the cash settled options and inventory additions related to the acquisition of the Acquired Business. This was offset by $2.3 million in capital and other expenditures, $11.3 million related to the acquisition of the oilfield equipment distributor and $2.9 million for the purchase of shares to resource stock compensation obligations and the repurchase of shares under the Company's Normal Course Issuer Bid ("NCIB"). The acquisition post closing adjustments were complete and the final payment was made in the third quarter.

Net working capital was $131.1 million at September 30, 2009, a decrease of $11.7 million from December 31, 2008. Accounts receivable decreased by $36.1 million (36%) to $64.4 million at September 30, 2009 from December 31, 2008 due to the decrease in sales in the third quarter partially offset by an increase in days sales outstanding ("DSO"). DSO in the third quarter of 2009 was 57 days compared to 51 days in the fourth quarter of 2008 and 57 days in the third quarter of 2008. DSO is calculated using average sales per day for the quarter compared to the period end accounts receivable balance. Inventory decreased by $15.0 million at September 30, 2009 from December 31, 2008. Including the $10.5 million of inventory from the Acquired Business inventory was down $25.5 million (21%) from year end levels. Inventory turns for the third quarter of 2009 decreased to 2.9 times compared to 4.2 times in the fourth quarter of 2008 and 5.6 times in the third quarter of 2008. Inventory turns are calculated using cost of goods sold for the quarter on an annualized basis compared to the period end inventory balance. The Company plans to adjust its investment in inventory as the Acquired Business is integrated and to align with anticipated lower industry activity levels and compressed supplier lead times in order to improve inventory turnover efficiency. Accounts payable and accrued liabilities decreased by $41.2 million (50%) to $42.1 million at September 30, 2009 from December 31, 2008, responsive to the decreased activity levels.

Capital expenditures in the third quarter of 2009 were $0.7 million, compared to $0.3 million in the prior year period. The majority of the expenditures in 2009 have been directed towards branch facility expansions.

The Company has a 364 day bank operating loan facility in the amount of $60.0 million arranged with a syndicate of three banks that matures in July 2010. The loan facility bears interest based on floating interest rates and is secured by a general security agreement covering all assets of the Company. The maximum amount available under the facility is subject to a borrowing base formula applied to accounts receivable and inventories, and a covenant restricting the Company's average debt to 3.0 times trailing twelve month EBITDA. As at September 30, 2009, the Company's average debt to EBITDA ratio was 1.1 times (September 30, 2008 - 1.0 times) which provides a maximum borrowing ability of $60 million under the facility. As at September 30, 2009, the ratio of the Company's debt to total capitalization (debt plus equity) was 13% (September 30, 2008 - 14%).

Long term debt was reduced by $0.2 million during the quarter to $0.3 million in consideration for the settlement of a JEN Supply post closing acquisition adjustment.

Contractual Obligations

There have been no material changes in off-balance sheet contractual commitments since December 31, 2008.

Capital Stock

As at September 30, 2009 and 2008, the following shares and securities convertible into shares were outstanding:

    
    (millions)                                   September 30,  September 30,
                                                         2009           2008
                                                       Shares         Shares
                                                -------------- --------------
    Shares outstanding                                   17.6           18.2
    Stock options                                         1.2            1.3
    Share units                                           0.5            0.2
                                                -------------- --------------
    Shares outstanding and issuable                      19.3           19.7
    

The weighted average number of shares outstanding during the third quarter 2009 was 17.6 million, a decrease of 0.6 million shares from the prior year's third quarter due principally to the purchases of common shares under its NCIB and to resource share unit obligations. The diluted weighted average number of shares outstanding was 17.9 million, a decrease of 0.6 million shares from the prior year's third quarter.

The Company has established an independent trust to purchase common shares of the Company on the open market to resource share unit obligations. There were no common shares acquired in the third quarter of 2009. For the nine months ended September 30, 2009 there were 75,000 common shares acquired by the trust at an average cost per share $5.23. (Three and nine months ended September 30, 2008 - 100,095 and 200,095 at an average cost per share of $9.22 and $8.23 respectively). As at September 30, 2009, the trust held 354,683 shares (September 30, 2008 - 243,892 shares).

A stock option cash settlement mechanic was introduced during the third quarter which allows the Company to manage share dilution while resourcing its long term incentive compensation plan on a tax efficient basis. The Company's intention is to settle stock option exercises with cash going forward.

On January 6, 2009, the Company announced a NCIB to purchase for cancellation, up to 900,000 common shares representing approximately 5% of its outstanding common shares. As at September 30, 2009, the Company had purchased 530,587 shares at a cost of $2.7 million ($5.14 per share).

Critical Accounting Estimates

The preparation of the Company's financial statements requires management to adopt accounting policies that involve the use of significant estimates and assumptions. These estimates and assumptions are developed based on the best available information and are believed by management to be reasonable under the existing circumstances. New events or additional information may result in the revision of these estimates over time. A summary of the significant accounting policies can be found in Note 1 to the December 31, 2008 consolidated financial statements.

Change in Accounting Policies

Effective January 1, 2009, the Company adopted section 3064 - Goodwill and Intangible Assets. The standard addresses the accounting treatment of internally developed intangibles and the recognition of such assets. The adoption of this Standard has had no impact on the Company.

Transition to International Financial Reporting Standards (IFRS)

In February 2008, the Canadian Accounting Standards Board ("AcSB") confirmed that the basis for financial reporting by Canadian publicly accountable enterprises will change from Canadian GAAP to IFRS effective for January 1, 2011, including the preparation and reporting of one year of comparative figures. This change is part of a global shift to provide consistency in financial reporting in the global marketplace.

Project Structure and Governance

A Steering Committee has been established to provide leadership and guidance to the project team, assist in developing accounting policy recommendations and ensure there is adequate resources and training available. Management provides status updates to the Audit Committee on a quarterly basis.

Resources and Training

CE Franklin's project team has been assembled and has developed a detailed workplan that includes training, detailed GAAP to IFRS analysis, technical research, policy recommendations and implementation. The project team completed initial training and ongoing training will continue through the project as required. The Company's Leadership Team and the Audit Committee have also participated in IFRS awareness sessions.

IFRS Progress

The project team is currently assessing the differences between Canadian GAAP and IFRS. A risk based approach has been used to identify significant differences based on possible financial impact and complexity. The significant differences have been identified and the impact to financial reporting, information systems and internal controls over financial reporting is being assessed. There are a number of IFRS standards in the process of being amended by the IASB and are expected to continue until the transition date of January 1, 2011. The Company is actively monitoring proposed changes.

At this stage in the project, CE Franklin cannot reasonably determine the full impact that adopting IFRS would have on its financial position and future results.

Controls and Procedures

Internal control over financial reporting ("ICFR") is designed to provide reasonable assurance regarding the reliability of the Company's financial reporting and its compliance with Canadian GAAP in its financial statements. The President and Chief Executive Officer and the Vice President and Chief Financial Officer of the Company have evaluated whether there were changes to its ICFR during the nine months ended September 30, 2009 that have materially affected or are reasonably likely to materially affect the ICFR. No such changes were identified through their evaluation.

Risk Factors

The Company is exposed to certain business and market risks including risks arising from transactions that are entered into the normal course of business, which are primarily related to interest rate changes and fluctuations in foreign exchange rates. During the reporting period, no events or transactions for year ended December 31, 2008 have occurred that would materially change the information disclosed in the Company's Form 20F.

Forward Looking Statements

The information in this MD&A may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, that address activities, events, outcomes and other matters that CE Franklin plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates or anticipates (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements are based on management's current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this MD&A, including those in under the caption "Risk factors".

Forward-looking statements appear in a number of places and include statements with respect to, among other things:

    
    -   forecasted oil and gas industry activity levels in 2009 and 2010;

    -   planned capital expenditures and working capital and availability of
        capital resources to fund capital expenditures and working capital;

    -   the Company's future financial condition or results of operations and
        future revenues and expenses;

    -   the Company's business strategy and other plans and objectives for
        future operations;

    -   fluctuations in worldwide prices and demand for oil and gas;

    -   fluctuations in the demand for the Company's products and services.
    

Should one or more of the risks or uncertainties described above or elsewhere in this MD&A occur, or should underlying assumptions prove incorrect, the Company's actual results and plans could differ materially from those expressed in any forward-looking statements.

All forward-looking statements expressed or implied, included in this MD&A and attributable to CE Franklin are qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that CE Franklin or persons acting on its behalf might issue. CE Franklin does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of filing this MD&A, except as required by law.

    
    Additional Information
    ----------------------
    

Additional information relating to CE Franklin, including its third quarter 2009 Management Discussion and Analysis and interim consolidated financial statements and its Form 20-F/Annual Information Form, is available under the Company's profile on the SEDAR website at www.sedar.com and at www.cefranklin.com

    
    CE Franklin Ltd.
    Interim Consolidated Balance Sheets - Unaudited
    -------------------------------------------------------------------------

                                                   September 30  December 31
    (in thousands of Canadian dollars)                     2009         2008
    -------------------------------------------------------------------------
    Assets

    Current assets
      Accounts receivable                                64,443      100,513
      Inventories                                       104,411      119,459
      Other                                               4,353        9,529
    -------------------------------------------------------------------------
                                                        173,207      229,501

    Property and equipment                               11,000        9,528
    Goodwill                                             20,570       20,570
    Future income taxes (note 5)                          1,684        1,186
    Other                                                   377          649
    -------------------------------------------------------------------------
                                                        206,838      261,434
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities

    Current liabilities
      Bank operating loan                                21,336       34,948
      Accounts payable and accrued liabilities           42,088       83,258
      Income taxes payable (note 5)                           -        3,405
    -------------------------------------------------------------------------
                                                         63,424      121,611

    Long term debt                                          290          500
    -------------------------------------------------------------------------
                                                         63,714      122,111
    -------------------------------------------------------------------------

    Shareholders' Equity
      Capital stock                                      22,826       22,498
      Contributed surplus                                17,523       18,835
      Retained earnings                                 102,775       97,990
    -------------------------------------------------------------------------
                                                        143,124      139,323
    -------------------------------------------------------------------------
                                                        206,838      261,434
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to these interim consolidated financial
    statements.



    CE Franklin Ltd.
    Interim Consolidated Statements of Operations - Unaudited
    -------------------------------------------------------------------------

                                      Three months ended   Nine months Ended
    (in thousands of Canadian        ------------------- --------------------
     dollars except shares and       September September September September
     per share amounts)               30, 2009  30, 2008  30, 2009  30, 2008
    -------------------------------------------------------------------------
    Sales                               94,149   149,256   344,014   386,233
    Cost of sales                       76,702   121,460   282,704   312,423
    -------------------------------------------------------------------------
    Gross profit                        17,447    27,796    61,310    73,810
    -------------------------------------------------------------------------

    Other expenses
      Selling, general and
       administrative expenses          17,017    18,534    49,658    52,144
      Amortization                         635       586     1,776     1,797
      Interest expense                     322       205       670       805
      Foreign exchange (gain)/loss         (71)      119      (100)      109
    -------------------------------------------------------------------------
                                        17,903    19,444    52,004    54,855
    -------------------------------------------------------------------------

    Income/(loss) before income taxes     (456)    8,352     9,306    18,955

    Income tax expense (recovery)
     (note 5)
      Current                             (215)    2,548     2,850     6,131
      Future                              (451)       58      (382)     (155)
    -------------------------------------------------------------------------
                                          (666)    2,606     2,468     5,976
    -------------------------------------------------------------------------

    Net income and comprehensive income    210     5,746     6,838    12,979
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net income per share (note 4(e))
      Basic                               0.01      0.31      0.38      0.71
      Diluted                             0.01      0.31      0.38      0.70
    -------------------------------------------------------------------------

    Weighted average number of
     shares outstanding (000's)
      Basic                             17,647    18,254    17,795    18,290
      Diluted (note 4(e))               17,908    18,495    18,036    18,674
    -------------------------------------------------------------------------
    See accompanying notes to these interim consolidated financial
    statements.



    CE Franklin Ltd.
    Interim Consolidated Statements of Cash Flow - Unaudited
    -------------------------------------------------------------------------

                                      Three months ended   Nine months Ended
                                     -------------------- -------------------
    (in thousands of Canadian            September 30        September  30
     dollars                              2009      2008      2009      2008
    -------------------------------------------------------------------------

    Cash flows from operating
     activities
      Net income for the period            210     5,746     6,838    12,979
      Items not affecting cash -
        Amortization                       635       586     1,776     1,797
        Gain on disposal of assets           -         -       (45)        -
        Future income tax recovery        (451)       58      (382)     (155)
        Stock based compensation
         expense                         1,101       303     2,082     1,149
    -------------------------------------------------------------------------
                                         1,495     6,693    10,269    15,770
    Net change in non-cash working
     capital balances related to
     operations -
      Accounts receivable               (7,325)  (17,008)   36,070   (12,020)
      Inventories                       13,766    (3,451)   25,280        14
      Other current assets              (1,441)   (2,176)    6,277    (3,931)
      Accounts payable and accrued
       liabilities                       2,083    15,597   (43,323)   28,666
      Income taxes payable                (305)     (925)   (4,495)     (793)
    -------------------------------------------------------------------------
                                         8,273    (1,270)   30,078    27,706
    -------------------------------------------------------------------------

    Cash flows (used in)/from
     financing activities
      Decrease in bank operating loan   (3,941)    2,452   (13,621)  (24,158)
      Issuance of capital stock              -         -       248        49
      Purchase of capital stock through
       normal course issuer bid           (465)        -    (2,727)        -
      Purchase of capital stock in
       trust for Share Unit Plans            -      (919)     (394)   (1,642)
    -------------------------------------------------------------------------
                                        (4,406)    1,533   (16,494)  (25,751)
    -------------------------------------------------------------------------

    Cash flows (used in)/from
     investing activities
      Purchase of property and
       equipment                          (706)     (263)   (2,298)   (2,396)
      Business acquisition (note 2)     (3,161)        -   (11,286)      441
    -------------------------------------------------------------------------
                                        (3,867)     (263)  (13,584)   (1,955)
    -------------------------------------------------------------------------

    Change in cash and cash
     equivalents during the period           -         -         -         -

    Cash and cash equivalents -
     Beginning and end of period             -         -         -         -

    -------------------------------------------------------------------------

    Cash paid during the period for:
      Interest on bank operating loan      322       163       670       601
      Income taxes                         450     2,407     7,230     2,570
    -------------------------------------------------------------------------
    See accompanying notes to these interim consolidated financial
    statements.



    CE Franklin Ltd.
    Interim Consolidated Statements of Changes in Shareholders' Equity -
    Unaudited
    -------------------------------------------------------------------------

                               Capital Stock
                             ------------------
    (in thousands of          Number                                  Share-
     Canadian dollars and       of            Contributed  Retained  holders'
     number of shares)        Shares      $      Surplus   Earnings   Equity
    -------------------------------------------------------------------------

    Balance - December 31,
     2007                     18,370    24,306    17,671    76,243   118,220

    Stock based
     compensation expense          -         -     1,149         -     1,149
    Stock options excercised      10        70       (20)        -        50
    Share Units exercised         11       181      (181)        -         -
    Purchase of shares in
     trust for Share Unit
     Plans                      (200)   (1,643)        -         -    (1,643)
    Net income                     -         -         -    12,979    12,979
    -------------------------------------------------------------------------
    Balance - September 30,
     2008                     18,191    22,914    18,619    89,222   130,755
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Balance - December 31,
     2008                     18,094    22,498    18,835    97,990   139,323
    Stock based
     compensation expense          -         -     1,270         -     1,270
    Modification of Stock
     Option plan (Note 4(a))       -         -    (1,329)        -    (1,329)
    Normal Course Issuer Bid    (532)     (693)        -    (2,053)   (2,746)
    Stock options exercised       57       248       (86)        -       162
    Share Units exercised         64     1,167    (1,167)        -         -
    Purchase of shares in
     trust for Share Unit Plans  (75)     (394)        -         -      (394)
    Net income                     -         -         -     6,838     6,838
    -------------------------------------------------------------------------
    Balance - September 30,
     2009                     17,608    22,826    17,523   102,775   143,124
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to these interim consolidated financial
    statements.



    CE Franklin Ltd.
    Notes to Interim Consolidated Financial Statements - Unaudited
    -------------------------------------------------------------------------
    (tabular amounts in thousands of Canadian dollars except share and per
    share amounts)

    Note 1 - Accounting Policies

    These interim consolidated financial statements have been prepared in
    accordance with accounting principles generally accepted in Canada
    applied on a consistent basis with CE Franklin Ltd.'s (the "Company")
    annual consolidated financial statements for the year ended December 31,
    2008, except for the adoption of section 3064, as detailed below. These
    interim consolidated financial statements should be read in conjunction
    with the annual consolidated financial statements and the notes thereto
    for the year ended December 31, 2008, but do not include all disclosures
    required by Generally Accepted Accounting Principles (GAAP) for annual
    financial statements.

    Effective January 1, 2009, the Company adopted CICA section 3064 -
    Goodwill and Intangible Assets. The standard addresses the accounting
    treatment of internally developed intangibles and the recognition of such
    assets. The adoption of this standard has had no impact on the Company.

    These unaudited interim consolidated financial statements reflect all
    adjustments which are, in the opinion of management, necessary for a fair
    presentation of the results for the interim periods presented; all such
    adjustments are of a normal recurring nature.

    The Company's sales typically peak in the first quarter when drilling
    activity is at its highest levels. They then decline through the second
    quarter, rising again in the third and fourth quarters when preparation
    for the new drilling season commences. Similarly, net working capital
    levels are typically at seasonally high levels at the end of the first
    quarter, declining in the second and third quarters, and then rising
    again in the fourth quarter.

    Note 2 - Business Combinations

    On June 1st 2009, the Company acquired a western Canadian oilfield
    equipment distributor, for total consideration of $11.3 million, after
    post closing adjustments of $0.7 million related principally to
    inventory.

    Using the purchase method of accounting for acquisitions, the Company
    consolidated the assets from the acquisition date and allocated the
    consideration paid as follows:

    As at September 30, 2009                                           $'000
    -------------------------------------------------------------------------

    Cash consideration paid                                           11,286
                                                                     --------
                                                                     --------
    Net assets acquired:
    Inventory                                                         10,462
    Property, plant and equipment                                        824
                                                                     --------

                                                                      11,286
                                                                     --------
                                                                     --------


    Note 3 - Inventory

    Inventories consisting primarily of goods purchased for resale are valued
    at the lower of average cost or net realizable value. Inventory
    obsolescence expense was recognized in the three and nine month period
    ending September 30, 2009 of $105,000 and $1,050,000 respectively (2008 -
    $25,000 recovery and $301,000 expense). As at September 30, 2009 and
    December 31, 2008 the Company had recorded inventory valuation reserves
    of $6.5 million and $2.8 million respectively. The year over year
    increase in the reserve resulting from normal business was augmented by a
    $2.9 million increase in the reserve as a result of the acquisition
    detailed in note 2.

    Note 4 - Share Data

    At September 30, 2009, the Company had 17.6 million common shares, 1.2
    million stock options and 0.5 million share units outstanding.

    a)  Stock options

    Option activity for each of the nine month periods ended September 30 was
    as follows:

    000's                                                  2009         2008
    -------------------------------------------------------------------------

    Outstanding at January 1                              1,294        1,262
    Granted                                                   -           75
    Exercised                                               (57)         (10)
    Forfeited                                               (37)          (1)
    -------------------------------------------------------------------------
    Outstanding at September 30                           1,200        1,326
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Exercisable at September 30                             770          667


    There were no options granted during the three and nine month periods
    ended September 30, 2009. A total of 75,588 stock options were granted at
    a weighted average strike price of $6.26 in the nine month period ended
    September 30, 2008 for a fair value of $274,000. The fair value of the
    options granted was estimated as at the grant date using the Black-
    Scholes option pricing model, using the following assumptions:

                                                                        2008
                                                                       ------
    Dividend yield                                                       Nil
    Risk-free interest rate                                            3.88%
    Expected life                                                    5 years
    Expected volatility                                                  50%

    During the quarter ended September 30, 2009, the Company modified its
    stock option plan to include a cash settlement mechanism. As a result,
    the Company's stock option obligations are now classified as current
    obligations (subject to vesting) based on the positive difference between
    the Company's closing stock price at period end and the underlying option
    exercise price. At September 30, 2009, the Company's accrued stock option
    liability was $2,143,000 representing an $814,000 increase in
    compensation expense during the quarter over the equity obligation of
    $1,329,000 previously recorded to shareholders equity (contributed
    surplus) using the Black-Scholes valuation model.

    Total stock option compensation expense recorded in the three and nine
    month periods ended September 30, 2009 was $996,000 (2008 - $170,000) and
    $1,351,000 (2008 - $520,000), respectively and is included in selling,
    general and administrative expenses on the Consolidated Statement of
    Operations.

    b)  Share Unit Plans

    The Company has Restricted Share Unit ("RSU"), Performance Share Unit
    ("PSU") and Deferred Share Unit ("DSU") plans (collectively the "Share
    Unit Plans"), where by RSU's, PSU's and DSU's are granted entitling the
    participant, at the Company's option, to receive either a common share or
    cash equivalent value in exchange for a vested unit. For the PSU plan the
    number of units granted is dependent on the Company meeting certain
    return on net asset ("RONA") performance thresholds during the year of
    grant. The multiplier within the plan ranges from 0% - 200% dependant on
    performance. The vesting period for RSU's and PSU's is three years from
    the grant date. DSU's vest on the date of grant. Compensation expense
    related to the units granted is recognized over the vesting period based
    on the fair value of the units at the date of the grant and is recorded
    to compensation expense and contributed surplus. For PSU grants, the
    compensation expense is based on the estimated RONA performance for the
    year ended December 31, 2009. The contributed surplus balance is reduced
    as the vested units are exchanged for either common shares or cash. Share
    Unit Plan activity for the nine month periods ended September 30 was as
    follows:

    000's                            2009      Total         2008      Total
    -------------------------------------------------------------------------
                               RSU   PSU   DSU         RSU   PSU    DSU

    Outstanding at January 1   161     -    70   231   178     -     37  215
    Granted                    172   161    28   361     1     -     33   34
    Exercised                  (64)    -     -   (64)  (11)    -      -  (11)
    Forfeited                   (4)   (5)    -    (9)    -     -      -    -
    -------------------------------------------------------------------------
    Outstanding at
     September 30              265   156    98   519   168     -     70  238
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Exercisable at
     September 30               75     -    98   173    80     -     70  150

    Share Unit Plan compensation expense recorded in the three and nine month
    periods ended September 30, 2009 were $105,000 (2008- $133,000) and
    $733,000 (2008- $629,000) respectively.

    c)  The Company purchases its common shares on the open market to satisfy
        Share Unit Plan obligations through an independent trust. The trust
        is considered to be a variable interest entity and is consolidated in
        the Company's financial statements with the number and cost of shares
        held in trust, reported as a reduction of capital stock. During the
        three and nine month periods ended September 30, 2009, nil and 75,000
        common shares were acquired, respectively, by the trust (2008 -
        100,095 and 200,095) at a cost of nil for the three month period
        (2008- $922,000) and $394,000 for the nine month period (2008 -
        $1,643,000).

    d)  Normal Course Issuer Bid ("NCIB")

    On January 6, 2009, the Company announced a NCIB to purchase for
    cancellation, up to 900,000 common shares representing approximately 5%
    of its outstanding common shares. During the third quarter, the Company
    purchased 75,739 shares at a cost of $465,000 and since the inception of
    the NCIB, the Company had purchased 530,587 shares at a cost of
    $2,727,000.

    e)  Reconciliation of weighted average number of diluted common shares
        outstanding (in 000's)

    The following table summarizes the common shares in calculating net
    earnings per share.

                                      Three Months Ended   Nine Months Ended
                                     -------------------- -------------------
                                         September 30        September 30
                                          2009      2008      2009      2008
    -------------------------------------------------------------------------

    Weighted average common shares
     outstanding - basic                17,647    18,254    17,795    18,290
    Effect of Stock options and
     Share Unit Plans                      261       241       241       384
    -------------------------------------------------------------------------
    Weighted average common shares
     outstanding - diluted              17,908    18,495    18,036    18,674
    -------------------------------------------------------------------------


    Note 5 - Income taxes

    a)  The difference between the income tax provision recorded and the
        provision obtained by applying the combined federal and provincial
        statutory rates is as follows:

                        Three Months Ended            Nine Months Ended
                           September 30                  September 30
                   2009       %    2008      %    2009      %    2008      %
    -------------------------------------------------------------------------
    Income before
     income taxes  (456)          8,352          9,306         18,955
    -------------------------------------------------------------------------
    Income taxes
     calculated at
     expected
     rates         (134)  (29.4)  2,498   29.9   2,735   29.4   5,670   29.9
    Non-deductible
     items           31     6.8      76    0.9      91    1.0     180    0.9
    Capital taxes    16     3.5      13    0.2      45    0.5      35    0.2
    Share based
     compensation  (324)  (71.1)     46    0.6    (324)  (3.5)    139    0.7
    Adjustments on
     filing returns
     & other       (255)  (55.9)    (27)  (0.3)    (79)  (0.8)    (48)  (0.3)
    -------------------------------------------------------------------------
                   (666) (146.1)  2,606   31.2   2,468   26.5   5,976   31.5
    -------------------------------------------------------------------------
    As at September 30, 2009 included in other current assets are income
    taxes receivable of $975,000 (December 31 2008 - $3,405,000 payable).

    b)  Future income taxes reflect the net effects of temporary differences
        between the carrying amounts of assets and liabilities for financial
        reporting purposes and the amounts used for income tax purposes.
        Significant components of future income tax assets and liabilities
        are as follows:

    As at                                          September 30  December 31
                                                           2009         2008
    -------------------------------------------------------------------------
    Assets
      Property and equipment                                836          855
      Share based compensation                            1,123          289
      Other                                                  99          395
    -------------------------------------------------------------------------
                                                          2,058        1,539

    Liabilities
      Goodwill and other                                    374          353
    -------------------------------------------------------------------------
    Net future income tax asset                           1,684        1,186
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Company believes it is more likely than not that all future income
    tax assets will be realized.

    Note 6 - Capital Management

    The Company's primary source of capital is its shareholders equity and
    cash flow from operating activities before net changes in non-cash
    working capital balances. The Company augments these capital sources with
    a $60 million, 364 day bank operating loan facility which is used to
    finance its net working capital and general corporate requirements. The
    bank operating facility is arranged through a syndicate of three banks
    and matures in July 2010.

    The maximum amount available to borrow under this facility is subject to
    a borrowing base formula applied to accounts receivable and inventories,
    and a covenant restricting the Company's average guaranteed debt to 3.0
    times trailing 12 month earnings before interest, amortization and taxes.
    As at September 30, 2009, this ratio was 1.1 times (December 31, 2008 -
    0.7 times) and the maximum amount available to be borrowed under the
    facility was $60 million. In management's opinion, the Company's
    available borrowing capacity under its bank operating facility and
    ongoing cash flow from operations, are sufficient to resource its
    anticipated contractual commitments. The facility contains certain other
    restrictive covenants, which the Company was in compliance with as at
    September 30, 2009.

    Note 7 - Financial Instruments and Risk Management

    a)  Fair Values

    The Company's financial instruments recognized on the consolidated
    balance sheet consist of accounts receivable, accounts payable and
    accrued liabilities, bank operating loan, long term debt and obligations
    under capital leases. The fair values of these financial instruments,
    excluding the bank operating loan, long term debt and obligations under
    capital leases, approximate their carrying amounts due to their short-
    term maturity. At September 30, 2009, the fair value of the bank
    operating loan and obligations under capital leases approximated their
    carrying values due to their floating interest rate nature and short term
    maturity.

    b)  Credit Risk

    A substantial portion of the Company's accounts receivable balance is
    with customers in the oil and gas industry and is subject to normal
    industry credit risks. The Company follows a program of credit
    evaluations of customers and limits the amount of credit extended when
    deemed necessary.

    The Company maintains provisions for possible credit losses that are
    charged to selling, general and administrative expenses by performing an
    analysis of specific accounts. Movement of the allowance for credit
    losses for the nine month period ended September 30, 2009 and twelve
    months ended December 31, 2008 and the allowance for credit losses for
    the same period deducted from accounts receivables as at September 30 was
    as follows:

    As at                                          September 30  December 31
                                                           2009         2008
    -------------------------------------------------------------------------
    Opening balance                                       2,776        1,454
    Increase during period                                  310        2,306
    Write-offs                                             (425)        (984)
    -------------------------------------------------------------------------
    Closing balance                                       2,661        2,776
    -------------------------------------------------------------------------

    Trade receivables outstanding greater than 90 days were 8% of total trade
    receivables as at September 30, 2009 (2008 - 9%).

    c)  Market Risk

    The Company is exposed to market risk from changes in the Canadian prime
    interest rate which can impact its borrowing costs. The Company purchases
    certain products in US dollars and sells such products to its customers
    typically priced in Canadian dollars, thus leading to accounts receivable
    and accounts payable balances that are subject to foreign exchange gains
    and losses upon translation. As a result, fluctuations in the value of
    the Canadian dollar relative to the US dollar can result in foreign
    exchange gains and losses.

    d)  Risk Management

    From time to time, the Company enters into foreign exchange forward
    contracts to manage its foreign exchange market risk by fixing the value
    of its liabilities and future purchase commitments. The Company's foreign
    exchange risk arises principally from the settlement of United States
    dollar denominated net working capital balances as a result of product
    purchases denominated in United States dollars. As at September 30, 2009,
    the Company had contracted to purchase US$4.9 million at a fixed exchange
    rate with terms not exceeding three months. The fair market value of the
    contract was nominal.

    Note 8 - Related Party Transactions

    Smith International Inc. ("Smith") owns approximately 55% of the
    Company's outstanding shares. The Company is the exclusive distributor in
    Canada of down hole pump production equipment manufactured by Wilson
    Supply, a division of Smith. Purchases of such equipment conducted in the
    normal course on commercial terms were as follows:

                                                      September    September
                                                       30, 2009     30, 2008
    -------------------------------------------------------------------------
    Cost of sales for the three months ended              1,491        2,570

    Cost of sales for the nine months ended               4,773        7,938

    Inventory                                             3,712        4,849

    Accounts payable and accrued liabilities                538          535

    The Company pays facility rental expense to an operations manager in the
    capacity of landlord, reflecting market based rates. For the three and
    nine month period ended September 30, 2009, these costs totaled $157,000
    and $550,000 respectively (2008: $40,000 and $97,000).

    Note 9 - Segmented reporting

    The Company distributes oilfield products principally through its network
    of 50 branches located in western Canada to oil and gas industry
    customers. Accordingly, the Company has determined that it operated
    through a single operating segment and geographic jurisdiction.
    

SOURCE CE Franklin Ltd.

For further information: For further information: Investor Relations, 1-800-345-2858, (403) 531-5604, investor@cefranklin.com

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CE Franklin Ltd.

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