CE Franklin Ltd. announces Net Income of $6.4 million or $0.34 per share (diluted) for the first quarter of 2007



    CALGARY, April 30 /CNW/ - CE FRANKLIN LTD. (TSX.CFT, AMEX.CFK) announced
its results for the first quarter ended March 31, 2007.
    CE Franklin reported net income of $6.4 million or $0.34 per share
(diluted) for the quarter ended March 31, 2007 as compared to net income of
$8.9 million or $0.47 per share (diluted) for the quarter ended March 31,
2006.

    
    Financial Highlights
    --------------------
                                             Three Months Ended   Year Ended
                                                   March 31       December 31
    (millions of Cdn.$                    ----------------------- -----------
     except per share data)                     2007        2006        2006
                                          ----------------------- -----------
                                                 (unaudited)

    Sales                                  $   154.3   $   177.0   $   555.2

    Gross profit                                26.3        32.2       103.5
    Gross profit - %                           17.1%       18.2%       18.6%

    EBITDA(1)                                   11.0        15.1        40.1
    EBITDA(1) as a % of sales                   7.1%        8.5%        7.2%

    Net income                             $     6.4   $     8.9   $    22.9
    Per share
      Basic (Cdn. $)                       $    0.35   $    0.50   $    1.27
      Diluted (Cdn. $)                     $    0.34   $    0.47   $    1.22
    


    Sales decreased 12.8% to $154.3 million for the quarter ended March 31,
2007 as compared to $177.0 million for the quarter ended March 31, 2006. Well
completions (excluding dry and service wells) increased 7.5% to 6,200 wells
for the three months ended March 31, 2007 compared to 5,770 for the three
months ended March 31, 2006. Average rig count for the quarter ended March 31,
2007 decreased 18.2% to 563 rigs compared to 688 rigs for the quarter ended
March 31, 2006. The decline in sales is due to reductions in capital spending
by oil and gas producers as a result of higher drilling costs and increased
gas supplies.
    EBITDA(1) for the quarter ended March 31, 2007 decreased 27.2% to
$11.0 million from $15.1 million for the quarter ended March 31, 2006. EBITDA
as a percentage of sales decreased to 7.1% for the quarter ended March 31,
2007 compared to 8.5% for the quarter ended March 31, 2006.
    "The first quarter of 2007 saw a continued decline in market activity
which began in the latter half of 2006," said Michael West, Chairman,
President and CEO. "CE Franklin is committed to its core strategies. We will
remain disciplined and profitable in all industry activity cycles."

    Outlook
    -------
    The second quarter represents spring breakup in Canada as warm weather
returns and the winter's frost comes out of the ground rendering many
secondary roads incapable of supporting heavy equipment until the roads have
dried out. As a result, activity levels and the Company's revenue are expected
to decline during the second quarter.
    Industry analysts are continuing to forecast lower activity levels in
2007 with estimates ranging from a 10% to 20% decline compared to 2006. Oil
and gas producers continue to reduce capital spending as a result of higher
drilling costs and increased gas supplies. Although industry activity levels
are difficult to forecast, general consensus among industry analysts is that
activity levels will see a recovery in early 2008.
    CE Franklin remains committed to outperforming market activity.

    Conference Call and Webcast Information
    ---------------------------------------
    A conference call to review the quarter ended March 31, 2007, which is
open to the public, will be held on Monday, April 30, 2007 at 11:00 a.m.
Eastern Time (9:00 a.m. Mountain Time).
    Participants may join the call by dialing 1-416-644-3414 in Toronto or
dialing 1-800-733-7571 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 pass code
of 21223923 followed by the pound sign and may be accessed until midnight
Monday, May 7, 2007.
    The call will also be webcast live at:
    http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=1775620 and will
be available on the Company's website at http://www.cefranklin.com.
    Michael West, Chairman, President and Chief Executive Officer will lead
the discussion and will be accompanied by Denise Jones, Controller. The
discussion will be followed by a question and answer period. The call is
scheduled for a maximum of 45 minutes.


    -------------------------------
    (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,
    incremental flow through to EBITDA and EBITDA as a percentage of sales
    because it is used by management as a supplemental measure 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. 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. See page 6 for a reconciliation of net income to EBITDA.


    (All amounts shown in Canadian dollars unless otherwise specified)

    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 under the caption "Risk factors".
    Forward-looking statements appear in a number of places and include
statements with respect to, among other things:
    
        -  the forecasted activity levels for the remainder 2007 and
           into 2008;

        -  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 future gross profit and net profit margins;

        -  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 levels of gas and oil exploration and development
           activities; and

        -  fluctuations in the demand for the Company's products and
           services.
    
    We caution you that these forward-looking statements are subject to risks
and uncertainties, many of which are beyond CE Franklin's control. These risks
include, but are not limited to, economic conditions, seasonality of drilling
activity, commodity price volatility for oil and gas, currency fluctuations,
inflation, regulatory changes and the other risks described under the caption
"Risk factors".
    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 with the Securities
and Exchange Commission, except as required by law.

    Management's Discussion and Analysis as at April 27, 2007

    For the quarter ended March 31, 2007 as compared to the quarter ended
    March 31, 2006.

    (All amounts shown in CDN $ unless otherwise specified)

    The following Management's Discussion and Analysis of Financial Condition
    and Results of Operations ("MD&A") is provided to assist readers in
    understanding CE Franklin's financial performance during the periods
    presented and significant trends that may impact future performance of CE
    Franklin. This discussion should be read in conjunction with the
    Management's Discussion and Analysis and the consolidated financial
    statements and the related notes thereto which are included in the
    Company's December 31, 2006 Annual Report.

    The selected financial data presented below is presented in Canadian
    dollars and in accordance with Canadian generally accepted accounting
    principles ("Canadian GAAP").

    Overview

    CE Franklin distributes pipe, valves, flanges, fittings, production
equipment, tubular products and other general oilfield supplies to producers
of oil and gas in Canada through its 42 branches and selected inventory
stocking points which are situated in towns and cities that serve particular
oil and gas fields of the western Canadian sedimentary basin. In addition, the
Company distributes pipe, valves, flanges and fittings to the oilsands,
refining, heavy oil and petrochemical industries and non-oilfield related
industries such as the forestry and mining industries.
    The Company's 42 branches each warehouse an inventory of products to meet
the day to day needs of customers. A 100,000 square-foot centralized
distribution centre located in Edmonton, Alberta, acts as the hub for its
branch operations. Other inventory, such as pipe or tubular products, may be
sourced from various stocking points located throughout the western Canadian
sedimentary basin and shipped direct to the customers' location. The branches
also have access to a sales force located at the Company's headquarters in
Calgary, Alberta that provides product expertise and logistics to get the
product to the customer.
    The primary driver of the Company's profitability is the level of oil and
gas exploration and production activity, particularly in the western Canadian
sedimentary basin. The price of oil and gas, well completions and rig counts
are common indicators of activity levels in the energy industry. Other drivers
of profitability include activity levels within specific regions, the mix of
products sold and customer mix.
    Activity levels within specific regions will fluctuate due to various
factors including the mix of oil and gas activity within the region and oil
and gas producers entering or leaving the region. The Company responds to
these fluctuations by opening or closing branch locations in order to service
its customer's needs and ensure there is coverage in areas of higher activity.
    The mix of products sold and the customer mix will affect profitability.
Profit margins will vary for different products and the method of sale.
Walk-in business at the branches will generate higher profit margins compared
to bids, which are typically larger orders where the Company can take
advantage of volume discounts and longer lead times. Customer contracts can
affect profit margin where different customers receive different pricing
structures based on factors such as size, service requirements and complexity.

    OPERATING RESULTS

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

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

    For the three months ended March 31                    2007         2006
    -------------------------
    (unaudited)
    Statements of Operations
    Sales                                            $  154,255  $   176,957
    Gross profit                                         26,311       32,247
    Gross profit - %                                      17.1%        18.2%

    Other expenses (income)
    Selling, general and administrative expenses       15,266       17,242
    Amortization                                          759          701
    Interest                                              583          666
    Other                                                  54          (89)
    -------------------------
    16,662       18,520
    -------------------------

    Income before income taxes                            9,649       13,727
    Income tax expense                                    3,276        4,848
    -------------------------
    Net income                                            6,373        8,879
    -------------------------
    -------------------------

    Net income as a % of sales                             4.1%         5.0%

    EBITDA(1)                                            10,991       15,094
    EBITDA as a % of sales                               7.1%         8.5%
    Net income per share
    Basic                                          $     0.35  $      0.50
    Diluted                                        $     0.34  $      0.47


    (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, incremental flow through to EBITDA and EBITDA as a
    percentage of sales because it is used by management as a
    supplemental measure 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. 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.

    
    The following is a reconciliation of net income to EBITDA:

    (in thousands of Cdn. dollars)

    For the three months ended March 31                    2007         2006
                                                    -------------------------
    Net income                                       $    6,373  $     8,879
    Interest expense                                        583          666
    Income tax expense                                    3,276        4,848
    Amortization                                            759          701
                                                    -------------------------
    EBITDA                                           $   10,991  $    15,094
                                                    -------------------------
                                                    -------------------------
    

    Activity Levels

    The price of oil and gas as at March 31, 2007 were U.S. $65.87 per bbl
(West Texas Intermediate) and Cdn. $7.55 per gj (AECO spot) respectively, and
the average price of oil and average price of gas for the quarter ended
March 31, 2007 were U.S. $58.10 per bbl and Cdn. $7.40 per gj respectively.
This compares to U.S. $66.63 per bbl for oil and Cdn. $6.67 per gj for gas as
at March 31, 2006, and an average of U.S. $63.29 per bbl for oil and an
average of Cdn. $7.50 per gj for gas for the quarter ended March 31, 2006.
Overall reductions in capital spending by exploration and production companies
continues as a result of higher drilling costs and increased gas supplies.
    The Company uses oil and gas well completions and average rig counts as
industry activity measures. Oil and gas well completions require the products
sold by the Company and therefore are a good general indicator of market 
activity. Although well completions are a good general indicator of activity
levels, there may be time lags in reporting completions that may impact
quarterly statistics. Average rig counts provide a general indication of
energy industry activity levels.
    For the quarter ended March 31, 2007 the total number of wells completed
(excluding dry and service wells) in western Canada increased 7.5% to 6,200
wells compared to 5,770 wells for the quarter ended March 31, 2006.
    The average rig count for the quarter ended March 31, 2007 decreased
18.2% to 563 average rigs as compared to 688 average rigs for the quarter
ended March 31, 2006.

    Quarter Ended March 31, 2007 Compared to Quarter Ended March 31, 2006

    Sales

    Sales for the quarter ended March 31, 2007 decreased 12.8% or
$22.7 million to $154.3 million from $177.0 million for the quarter ended
March 31, 2006. The decrease in sales is due to lower activity levels as
compared to the first quarter of 2006. The Company's sales are dependent upon
the level of oil and gas exploration and production activity in the western
Canadian sedimentary basin, including the oilsands. This activity is cyclical
and is primarily influenced by worldwide energy prices, but may also be
affected by expectations related to the worldwide supply of and demand for oil
and natural gas, finding and development costs, economic and political events
and uncertainties and environmental concerns.

    Gross Profit

    Gross profit decreased 18.4% to $26.3 million for the quarter ended
March 31, 2007 from $32.2 million for the quarter ended March 31, 2006. Gross
profit margins decreased to 17.1% for the quarter ended March 31, 2007 from
18.2% for the quarter ended March 31, 2006.
    The overall decline in gross profit margins for the quarter ended
March 31, 2007 is due in part to a large oilsands sales order at lower than
normal margins.

    Selling, General and Administrative Costs

    SG&A costs decreased $2.0 million or 11.5% to $15.3 million for the
quarter ended March 31, 2007 from $17.2 million for the quarter ended
March 31, 2006. The decline in SG&A for the quarter related mainly to the
variable components of salaries and benefits and agents fees which vary with
sales levels, coupled with the reduction in agent's fees due to two agencies
being acquired in Q1 2007. Third party consulting costs associated with
continued compliance with the Sarbanes-Oxley Act of 2002 ("SOX") also declined
this quarter as compared to the costs incurred in the first quarter of 2006.
Offsetting this decline were salaries and related costs for new employees and
higher occupancy costs related to new and expanded locations to support future
growth opportunities.
    The total number of employees increased 8.2% to 434 employees as at
March 31, 2007 compared to 401 employees as at March 31, 2006, due in part to
the addition of employees from two agent branches that were acquired this
quarter. Combined with a 12.8% decrease in sales, this resulted in a 19.5%
decrease in average revenue per employee for the quarter ended March 31, 2007
as compared to the first quarter of 2006. Average revenue per employee is a
measure that reflects the standardization of processes and procedures, whereby
all internal processes are performed consistently throughout the Company's
operations resulting in process improvement efficiencies. The quarter over
quarter comparison is affected by the number of employee's added from the
agent branches acquisition.

    EBITDA

    EBITDA for the quarter ended March 31, 2007 decreased $4.1 million or
27.2% to $11.0 million compared to $15.1 million for the quarter ended
March 31, 2006. EBITDA as a percentage of sales was 7.1% for the quarter ended
March 31, 2007 versus 8.5% for the quarter ended March 31, 2006.
    EBITDA is a supplemental non-GAAP financial measure used by management,
as well as industry analysts, to evaluate operations. For a reconciliation of
net income to EBITDA, please see page 6.

    Income Before Income Taxes

    Income before income taxes decreased $4.1 million to $9.6 million for the
quarter ended March 31, 2007 compared to $13.7 million for the quarter ended
March 31, 2006. The decline is a result of the $5.9 million decrease in gross
profit combined with an increase of $118,000 in other costs offset by the
$2.0 million decrease in SG&A. Other costs include amortization, interest
expense and foreign exchange.

    Income Taxes

    The Company's effective tax rate for the quarter ended March 31, 2007 was
34.0%, as compared to an effective tax rate of 35.3% for the quarter ended
March 31, 2006. The Company's combined federal and provincial statutory tax
rate for the quarter ended March 31, 2007 was 32.6%, compared to 34.2% for the
quarter ended March 31, 2006. The reduction in the effective tax rate for the
quarter was due primarily to a reduction to provincial tax rates that took
place in the second quarter and latter half of 2006.

    Net Income

    Net Income for the quarter ended March 31, 2007 was $6.4 million or
$0.34 per share (diluted) as compared to $8.9 million or $0.47 per share
(diluted) for the quarter March 31, 2006.

    SUMMARY OF QUARTERLY FINANCIAL DATA

    The selected quarterly financial data presented below is presented in
Canadian dollars and in accordance with Canadian GAAP.

    
    (in thousands of Cdn. dollars except per share data)
    Unaudited                                           Q2       Q3       Q4
                                                      2005     2005     2005
                                                   -------- -------- --------

    Sales                                           92,169  122,224  141,066

    EBITDA (see page 7)                              5,897    8,300   11,061
    EBITDA as a % of sales                            6.4%     6.8%     7.8%

    Net income                                       2,543    4,214    6,303
    Net income as a % of sales                        2.8%     3.4%     4.5%

    Net income per share
      Basic (Cdn. $)                               $  0.14  $  0.25  $  0.36
      Diluted (Cdn. $)                             $  0.14  $  0.22  $  0.33



                                      Q1       Q2       Q3       Q4       Q1
                                    2006     2006     2006     2006     2007
                                 ------- -------- -------- --------  --------

    Sales                        176,957  115,947  131,675  130,648  154,255

    EBITDA (see page 7)           15,094    7,023    8,386    9,574   10,991
    EBITDA as a % of sales          8.5%     6.1%     6.4%     7.3%     7.1%

    Net income                     8,879    3,914    4,719    5,427    6,373
    Net income as a % of sales      5.0%     3.4%     3.6%     4.2%     4.1%

    Net income per share
      Basic (Cdn. $)             $  0.50  $  0.21  $  0.26  $  0.30  $  0.35
      Diluted (Cdn. $)           $  0.47  $  0.21  $  0.25  $  0.29  $  0.34
    


    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. As a result, the first and fourth
quarters typically represent the busiest time and highest sales activity for
the Company. Sales levels drop significantly during the second quarter until
such time as the roads have dried and road bans have been lifted. This
typically results in a significant reduction in earnings during the second
quarter as the Company does not reduce its SG&A expenses during the second
quarter to offset the reduction in sales.
    Sales for the quarter ended March 31, 2007 increased 18.1% to $154.3
million from $130.6 million for the quarter ended December 31, 2006. EBITDA
for the first quarter of 2007 increased to $11.0 million or 14.8% from $9.6
million for the quarter ended December 31, 2006. The $23.6 million increase in
sales resulted in a 6.0% incremental flow through to EBITDA. Net income was
$6.4 million or $0.34 per share (diluted) for the quarter ended March 31, 2007
compared to $5.4 million or $0.29 per share (diluted) for the quarter ended
December 31, 2006.

    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 working capital, capital
expenditures and potential acquisitions. Working capital is primarily
comprised of accounts receivable, inventories and other current assets, net of
accounts payable and accrued liabilities, income taxes payable and other
current liabilities.
    For the three months ended March 31, 2007, the Company generated
$7.8 million in cash flow from operating activities, before net change in
non-cash working capital balances and $214,000 in the issuance of capital
stock from the exercise of employee stock options. Cash used during the
quarter consisted of a $14.7 million increase in working capital (excluding
the bank operating loan), $2.4 million related to business acquisitions,
$286,000 on repayment of long term debt, $173,000 for the purchase of shares
held in trust for the PSU plan, $406,000 in capital and other expenditures,
and $54,000 in repayments on capital leases. These activities resulted in a
$10.0 million increase in the bank operating loan.
    For the three months ended March 31, 2006, the Company generated
$9.4 million in cash flow from operating activities, before net change in
non-cash working capital balances, and $361,000 in the issuance of capital
stock from the exercise of employee stock options. Cash used during the
quarter consisted of a $29.7 million increase in working capital (excluding
the bank operating loan), $2.3 million used to purchase a two branch
distribution operation, $887,000 in capital and other expenditures and $56,000
in repayments on capital leases. These activities resulted in a $23.1 million
increase in the bank operating loan.
    For the three months ended March 31, 2007, accounts receivable increased
$18.3 million or 20.9% to $105.8 million from $87.5 million as at December 31,
2006. The increase in accounts receivable reflects a 18.1% increase in sales
to $154.3 million during the first quarter of 2007 as compared to
$130.6 million for the fourth quarter of 2006. Average day's sales outstanding
("DSO") for the quarter ended March 31, 2007 was 54.6 days as compared to
57.7 days for the quarter ended December 31, 2006 and 58.7 for the quarter
ended March 31, 2006. The improvement in DSO for the quarter reflects in part
a gradual catch up in the approval and processing of transactions by both the
Company and its customers.
    Accounts receivable greater than 90 days old was 4.5% of trade accounts
receivable as at March 31, 2007 versus 4.2% as at December 31, 2006 and 4.2%
as at March 31, 2006. Trade accounts receivable is tightly managed by the
Company with daily calls to customers to solve payment issues. In addition,
the Company's accounts receivable team works closely with customers to help
simplify payment and approval processes. Bad debt expense for the quarter
ended March 31, 2007 was $74,000 (0.0% of sales) compared to $100,000 (0.1% of
sales) for the quarter ended March 31, 2006. Although accounts receivable
greater than 90 days old increased as compared to the previous year, bad debt
expense remained consistent with historic levels.
    Total inventory for the Company decreased 6.8% to $90.7 million as at
March 31, 2007 as compared to $97.3 million as at December 31, 2006. Due to
the longer order lead times experienced in the first half of 2006, product
arrived in the latter part of 2006 as activity levels began to decline. The
reduction in inventory levels has been gradual. The Company will continue to
adjust its investment in inventory to align with both current activity levels
and future growth objectives.
    The Company measures inventory efficiency by using an inventory turns
calculation, because the higher the inventory turns, the better the Company's
inventory is managed. Inventory turns are calculated by taking cost of sales
for the year divided by average inventory. Inventory turned 5.4 times
(annualized) in the quarter ended March 31, 2007, compared to 7.1 times
(annualized) in the first quarter of 2006 and 4.3 times (annualized) for the
fourth quarter of 2006. CE Franklin targets inventory turns of 5.0 times. The
Company monitors its inventory on a daily basis in order to reduce surplus,
improve turns and reduce obsolescence.
    Accounts payable, accrued liabilities and bank overdraft have increased
$2.5 million to $76.1 million as at March 31, 2007 as compared to
$73.6 million as at December 31, 2006. The increase partially reflects an
increase to inventory purchases to support the 18.1% increase in sales in the
first quarter of 2007 as compared to the fourth quarter of 2006.
    Property and equipment increased 2.8% to $5.7 million as at March 31,
2007 from $5.5 million as at December 31, 2006. This increase reflects capital
expenditures of $406,000, $339,000 in net additions to rental equipment assets
and $145,000 in other capital additions as a result of an acquisition. The
additions were offset by amortization expense of $732,000.
    During the first quarter of 2007 the Company purchased agency operations
at two of the Company's branch locations, for net cash consideration of
$2.167 million. This acquisition is expected to enhance the Company's net
income. See note 2a to the interim consolidated financial statements of the
Company for further details.
    Effective July 27, 2006, the Company implemented a $75.0 million 364-day
bank operating facility. There was an increase in borrowing to $37.2 million
as at March 31, 2007 compared to $27.2 million as at December 31, 2006. As at
March 31, 2007 the Company was well within its covenant compliance thresholds
and had undrawn capacity available up to $75.0 million against its bank
operating loan based on the borrowing base formula.
    As at March 31, 2007 the Company's total capitalization (financed debt
plus equity) was comprised of debt of 25.9% and equity of 74.1% compared to
21.8% debt and 78.2% equity as at December 31, 2006.

    Contractual Obligations

    In July 2006, the Company entered into a lease commitment with a 15 year
initial term pertaining to the construction of a new distribution centre in
Edmonton, Alberta. In April 2007, the lease commitment was amended to include
updated construction costs and estimated completion date. Construction of the
property is now anticipated to be completed by mid 2008.
    The following table outlines the contractual obligations based on the
revised anticipated completion date:

    
                                                   Operating   Long-
                                  Capital Lease        Lease   term
    Period Due                      Obligations  Commitments   Debt    Total
    ------------------------------------------- ------------ ------- --------
    (thousands of Canadian dollars)
    2007                                    163     4,764        -     4,927
    2008                                    202     4,786      574     5,562
    2009                                     84     5,030        -     5,114
    2010                                      -     4,581        -     4,581
    2011                                      -     3,803        -     3,803
    thereafter                                -    32,856        -    32,856
                                     ---------- ------------ ------- --------
                                            449    55,822      574    56,845
    

    There have been no other material changes in any contractual obligations
since the year ended December 31, 2006.

    Off-Balance Sheet Arrangements

    The Company has not engaged in off-balance sheet financing arrangements
through special purpose entities.

    Related party transactions

    Messrs. Douglas L. Rock and John J. Kennedy, directors of the
Corporation, are directors or officers of, or otherwise interested in, Smith
International, Inc. ("Smith"), which owns approximately 52% of the Company's
outstanding shares.
    The Company is the exclusive distributor of bottom hole pump production
equipment manufactured by Dura, a division of Wilson Supply which is a
wholly-owned subsidiary of Smith. The transactions are in the normal course of
business and at commercial rates.

    Quantitative and Qualitative Disclosures about Market Risk

    The Company is exposed to market risks from changes in interest rates and
foreign exchange rates. The Company will, from time to time, enter into
foreign currency forward exchange contracts with financial institutions to fix
the value of liabilities on future commitments. These foreign currency
exchange contracts are not designated as hedges for accounting purposes. The
value of the contract is marked to market and the change in value is
recognized in the Company's Statements of Operations. The Company entered into
such contracts in 2007, the impact of which was not material, and no such
contracts were outstanding as at March 31, 2007.
    The Company has exposure to interest rate fluctuations on its demand bank
operating loan. The Company has, in the past, entered into interest rate
contracts to hedge its interest rate risk associated with the demand bank
operating loan. No such contracts were in place for 2007 or 2006. The Company
does not use financial instruments for speculative purposes.
    As at March 31, 2007 there were no unrecognized gains or losses
associated with the above instruments.

    Critical Accounting Estimates

    There have been no material changes since the year ended December 31,
2006.

    Change in Accounting Policies

    The Company adopted CICA Handbook Section 1530 - Comprehensive Income,
Section 3855 - Financial Instrument Recognition and Measurement, Section 3861
- Financial Instruments Disclosure and Presentation, and Section 3865 - Hedges
in accordance with the transitional provisions in each respective section. The
adoption of these provisions did not have a material impact on the financial
statements of the Company and did not result in any adjustments for the
recognition, de-recognition or measurement of financial instruments as
compared to the financial statements for periods prior to adoption of these
sections.

    OTHER ITEMS

    The Company's Form 20-F is available on SEDAR at www.sedar.com.
    CE Franklin has authorized an unlimited number of common shares with no
par value. As at March 31, 2007 the Company had 18,280,603 common shares
outstanding.
    As at March 31, 2007 options to purchase 849,853 common shares were
outstanding at an average exercise price of $4.55 per common share. Under the
Company's existing stock option plan the Board of Directors may grant an
additional 238,743 options to purchase common shares.

    Internal control over financial reporting

    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 Controller of the Company
have evaluated whether there were changes to its ICFR during the three months
ended March 31, 2007 that have materially affected or are reasonably likely to
materially affect the ICFR. No such changes were identified through their
evaluation.

    Risk factors

    In addition to the information set forth elsewhere in this MD&A, the
    following factors should be carefully considered when evaluating
    CE Franklin.

    Fluctuations in oil and gas prices could affect the demand for
CE Franklin's products and services and, therefore, CE Franklin's sales, cash
flows and profitability. CE Franklin's operations are materially dependent
upon the level of activity in oil and gas exploration, development and
production. Both short-term and long-term trends in oil and gas prices affect
the level of such activity. Oil and gas prices and, therefore, the level of
drilling, exploration and production activity can be volatile. Factors that
can cause price fluctuations include:

    
        -  relatively minor changes in, or threats to, the worldwide supply
           of and demand for oil and natural gas;

        -  the ability of the members of the Organization of Petroleum
           Exporting Countries ("OPEC") to maintain price stability through
           voluntary production limits;

        -  the level of production by non-OPEC countries;

        -  North American demand for gas;

        -  the movement of the Canadian dollar relative to its U.S.
           counterpart (crude oil and natural gas exports are generally
           traded in U.S. dollars);

        -  general economic and political conditions in North America and
           worldwide; and

        -  the presence or absence of drilling incentives such as Canadian
           provincial royalty holidays, availability of new leases and
           concessions and government regulations regarding, among other
           things, export controls, environmental protection, taxation, price
           controls and product allocation.
    

    CE Franklin believes that any prolonged reduction in oil and gas prices
would depress the level of exploration and production activity. This would
likely result in a corresponding decline in the demand for CE Franklin's
products and services and could have a material adverse effect on CE
Franklin's sales, cash flows and profitability. There can be no assurance as
to the future level of demand for CE Franklin's products and services or
future conditions in the oil and gas and oilfield supply industries.

    Unusual weather conditions could decrease the demand for CE Franklin's
products and services. CE Franklin's financial performance is tied closely to
the seasonality of drilling activity. Higher drilling activity in Canada is
generally experienced in the winter months. In the spring and early summer,
drilling activity slows due to the difficulty in moving equipment during the
spring thaws. To the extent that unseasonable weather conditions such as
excessive rain or unusually warm winters affect the ability of CE Franklin's
customers to access their oil and gas wells, then the demand for CE Franklin's
products and services would temporarily decrease and the Company's sales, cash
flows and profitability would be adversely affected.

    CE Franklin operates in a highly competitive industry, which may
adversely affect CE Franklin's sales, cash flows and profitability. The
Canadian oilfield supply industry in which CE Franklin operates is very
competitive. The Company believes that its future profitability is partially
influenced by competitive factors beyond its control, including:

    
        -  the ability of some customers to purchase pipe, valves, flanges,
           fittings, production equipment, tubular products and other general
           oilfield supplies directly from the manufacturer rather than from
           the Company;

        -  the ability of new brokers and distributors to enter the market if
           the oil and gas industry were to experience significant growth;

        -  price competition among major supply companies;

        -  cost of goods being subject to rising or declining commodity
           prices, such as the price of steel, and the inability of
           CE Franklin to pass these price increases on to customers, or the
           risk CE Franklin may have higher-cost inventory during declining
           commodity prices resulting in a deterioration in gross profit
           margins.
    

    CE Franklin and its largest competitors generally operate at low profit
margins due to price competition. Price competition is due in part to customer
price pressure, in addition to the major supply companies competing for the
same business.

    The loss of CE Franklin's major suppliers for tubular and valve products
could adversely affect the Company's sales and gross profit. A portion of
CE Franklin's business are sales where product is primarily obtained from two
suppliers. Although the Company believes that it has historically had and
continues to have a good relationship with these suppliers, there can be no
assurance that such relationship will continue. In the event the Company is
unable to source products from its existing suppliers, then CE Franklin would
need to search for an alternate supplier of these goods. There can be no
assurance that a suitable alternate supplier for such goods would be found.

    Labour shortages could adversely affect the Company's ability to service
its customers. In a highly competitive labour market, the Company faces the
challenge of attracting and retaining qualified employees. The Company may
experience periods of high employee turnover that could result in higher
training costs or reduced levels of service to customers. The Company may also
experience wage inflation. These could result in increased costs or the loss
of customers and market share.

    During periods of high demand for products and services, the Company may
experience product shortages. The frequency and duration of the shortages may
impact the financial performance of the Company. Product shortages may impact
profit margins or could result in the loss of customers.

    The Company is exposed to market risks from changes in the Canadian prime
interest rate and foreign exchange rates with respect to the Canadian dollar
and the U.S. dollar for products it purchases outside Canada. The Company may
enter into foreign currency forward exchange contracts and interest rate
contracts as an economic hedge against risks associated with foreign currency
and interest rate fluctuations. Gain or losses with respect to such economic
hedge contracts may materially affect net income.

    The majority of the Company's sales are generated from customers in the
energy sector. This includes major multinational and independent oil
companies, pipeline companies and contract drilling companies operating in
Canada. In addition, for the year ended December 31, 2006 11% of sales (2005 -
11%) were derived from sales to one customer. No other customer accounted for
more than 10% of the Company's sales.

    The Company may experience a financial loss if its significant customers
fail to pay CE Franklin for its products or services. The Company's ability to
collect the proceeds from the sale of its products and services from its
customers depends on the payment ability of its customer base.

    Significant downtime at the Company's 100,000 square foot centralized
distribution centre located in Edmonton, Alberta could materially impact net
income and cash flow from operations. The Company operates a hub and spoke
distribution model with the distribution centre strategically located within
reasonable proximity to a majority of its vendors. In addition, the
distribution centre acts as a hub for its 42 branches. Significant downtime at
this facility would impact the Company's gross profit margins net income and
cash flow from operations.

    A substantial portion of the Company's sales to customers will depend on
written contracts that are cancelable at any time, or are based on verbal
agreements. The key factors which will determine whether a customer will
continue to use the Company are pricing, service quality and availability,
strategically located service centers and technical knowledge and experience.
There can be no assurance that the Company's relationships with its customers
will continue, and a significant reduction or total loss of business from
these customers, if not offset by increased sales to new or existing
customers, could have a material adverse effect on the Company's net income or
cash flow from operations.

    If the Company is unable to successfully address potential material
weakness in its internal controls, or any other control deficiencies, its
ability to report its financial results on a timely and accurate basis and to
comply with disclosure and other requirements may be adversely affected. The
Company has complied with Section 404 of the Sarbanes-Oxley Act of 2002, and
is therefore required to make an assessment of the effectiveness of its
internal controls over financial reporting for that purpose. A material
weakness is defined as a significant deficiency, or a combination of
significant deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not
be prevented or detected.
    CE Franklin will continue to monitor the effectiveness of these and other
processes, procedures and controls and will make any further changes
management determines appropriate, including to effect compliance with
Section 404 of the Sarbanes-Oxley Act of 2002. The steps CE Franklin has taken
and will take in the future may not remediate any potential material weakness.
In addition, the Company may identify material weaknesses or other
deficiencies in our internal controls in the future.
    Any material weaknesses or other deficiencies in the Company's control
systems may affect its ability to comply with reporting requirements and stock
exchange listing standards or cause its financial statements to contain
material misstatements, which could negatively affect the market price and
trading liquidity of its common stock, cause investors to lose confidence in
the Company's reported financial information, as well as subject CE Franklin
to civil or criminal investigations and penalties.

    There are inherent limitations in all control systems, and misstatements
due to error or fraud may occur and not be detected. While CE Franklin has
taken actions designed to address compliance with the internal control,
disclosure control and other requirements of the Sarbanes-Oxley Act of 2002
and the rules and regulations promulgated by the SEC implementing these
requirements, there are inherent limitations in the Company's ability to
control all circumstances. Management does not expect that the Company's
internal controls and disclosure controls will prevent all error or all fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. In addition, the design of a control system must reflect the fact
that there are resource constraints and the benefit of controls must be
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, in the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
errors or mistakes. Further, controls can be circumvented by individual acts
of some persons, by collusion of two or more persons, or by management
override of the controls. The design of any system of controls also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, a control may be
inadequate because of changes in conditions, such as growth of the Company or
increased transaction volume, or the degree of compliance with the policies or
procedures may deteriorate. Because of inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected.

    If the Company loses key management and technical personnel, its business
may suffer. CE Franklin relies upon a relatively small group of key management
and technical personnel. Mr. West, in particular, has extensive experience in
oilfield supply and distribution. The Company does not maintain any key man
insurance and it cannot assure that these individuals will remain with the
Company in the future. An unexpected partial or total loss of their services
may harm the Company's business.
    The Company's major shareholder may influence the Company's affairs. The
Company's share ownership is highly concentrated and, as a result, CE
Franklin's principal shareholder effectively controls the Company's business.
As at the date of this MD&A, CE Franklin's largest shareholder, Smith
International Inc., owned approximately 52% of the Company's common
outstanding shares. As a result, Smith International Inc. has the voting power
to significantly influence the Company's policies, business and affairs and
the outcome of any corporate transaction or other matter, including mergers,
consolidations and the sale of all, or substantially all, of the Company's
assets.
    In addition, the concentration of the Company's ownership may have the
effect of delaying; deterring or preventing a change in control that otherwise
could result in a premium in the price of the Company's common shares.

    The Company's operations are subject to hazards. The Company is at risk
for certain operating hazards. CE Franklin's operations are subject to hazards
present in the oil and natural gas industry which can cause personal injury
and damage to property or the environment. Litigation arising from an accident
at a location where its products or services are used or provided may cause
the Company to be named as a defendant in lawsuits asserting potentially large
claims. CE Franklin has insurance coverage against operating hazards, which
the Company believes is customary in the industry. This insurance has
deductibles and contains certain coverage exclusions and limitations. The
Company's insurance premiums can be increased or decreased based on the claims
it makes on its insurance policies. Results of operations could be adversely
affected by unexpected claims not covered.



    
    CE Franklin Ltd.
    Interim Consolidated Statements of Operations
    (Unaudited)

    Three months ended March 31
    (in thousands of Canadian dollars,
     except per share data)                                2007         2006
    -------------------------------------------------------------------------

    Sales                                               154,255      176,957
    Cost of sales                                       127,944      144,710
    -------------------------------------------------------------------------
    Gross profit                                         26,311       32,247
    -------------------------------------------------------------------------

    Other expenses (income)
    Selling, general and administrative expenses         15,266       17,242
    Amortization                                            759          701
    Interest expense                                        583          666
    Foreign exchange loss (gain)                             54          (51)
    Other income                                              -          (38)
    -------------------------------------------------------------------------
                                                         16,662       18,520
    -------------------------------------------------------------------------

    Income before income taxes                            9,649       13,727
    -------------------------------------------------------------------------
    Income tax expense (recovery) (note 4)
    Current                                               3,227        4,949
    Future                                                   49         (101)
    -------------------------------------------------------------------------
                                                          3,276        4,848
    -------------------------------------------------------------------------

    Net and Comprehensive income for the period           6,373        8,879
    -------------------------------------------------------------------------

    Net income per share (note 3)
      Basic                                                0.35         0.50
      Diluted                                              0.34         0.47
    Weighted average number of shares outstanding
      Basic                                          18,235,358   17,854,137
      Diluted                                        18,734,644   18,837,284
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CE Franklin Ltd.
    Interim Consolidated Balance Sheets
    (Unaudited)


                                                       March 31  December 31
    (in thousands of Canadian dollars)                     2007         2006
    -------------------------------------------------------------------------

    ASSETS
    Current assets
    Cash                                                  3,571            -
    Accounts receivable                                 105,807       87,530
    Inventories                                          90,657       97,275
    Other                                                 3,773        2,965
    -------------------------------------------------------------------------
                                                        203,808      187,770
    Property and equipment                                5,704        5,546
    Goodwill                                             12,689       10,479
    Future income taxes (note 4)                          1,111        1,160
    Other                                                   427          454
    -------------------------------------------------------------------------
                                                        223,739      205,409
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    LIABILITIES
    Current liabilities
    Bank overdraft                                            -        6,832
    Bank operating loan                                  37,216       27,176
    Accounts payable                                     51,156       36,252
    Accrued liabilities                                  24,964       30,492
    Income taxes payable                                    105          819
    Current portion of obligations under capital lease      221          217
    Current portion of long term debt                       574          300
    -------------------------------------------------------------------------
                                                        114,236      102,088
    Obligations under capital lease                         228          286
    Long term debt                                            -          560
    -------------------------------------------------------------------------
                                                        114,464      102,934
    -------------------------------------------------------------------------
    SHAREHOLDERS' EQUITY
    Capital stock                                        23,920       23,586
    Contributed surplus                                  16,306       16,213
    Retained earnings                                    69,049       62,676
    -------------------------------------------------------------------------
                                                        109,275      102,475
    -------------------------------------------------------------------------
                                                        223,739      205,409
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CE Franklin Ltd.
    Interim Consolidated Statements of Cash Flows
    (Unaudited)


    Three months ended March 31
    (in thousands of Canadian dollars)                     2007         2006
    -------------------------------------------------------------------------

    Cash flows from operating activities
    Net income for the period                             6,373        8,879
    Items not affecting cash -
      Amortization                                          759          701
      Gain on disposal of property and equipment              -          (38)
      Future income tax expense (recovery)                   49         (101)
      Stock based compensation expense                      386          132
      Other                                                 280         (152)
    -------------------------------------------------------------------------
                                                          7,847        9,421
    Net change in non-cash working capital balances
     related to operations -

      Accounts receivable                               (18,277)     (33,241)
      Inventories                                         5,999         (713)
      Other current assets                                 (786)         259
      Accounts payable                                   14,904        7,387
      Accrued liabilities                                (5,528)      12,706
      Income taxes payable                                 (714)      (3,912)
    -------------------------------------------------------------------------
                                                          3,445       (8,093)
    -------------------------------------------------------------------------
    Cash flows from financing activities
    Issuance of capital stock                               214          361
    Purchase of capital stock in trust for PSU plan        (173)           -
    Increase in bank operating loan                      10,040       23,102
    Decrease in bank overdraft                           (6,832)     (12,164)
    Decrease in obligations under capital leases            (54)         (56)
    Decrease in long term debt                             (286)           -
    -------------------------------------------------------------------------
                                                          2,909       11,243
    -------------------------------------------------------------------------
    Cash flows from investing activities
    Purchase of property and equipment                     (406)        (925)
    Proceeds on disposal of property and equipment            -           38
    Acquisition of distribution operations (note 2a)     (2,167)      (2,263)
    Contingent payment (note 2b)                           (210)           -
    -------------------------------------------------------------------------
                                                         (2,783)      (3,150)
    -------------------------------------------------------------------------
    Change in cash and cash equivalents during
     the period                                           3,571            -
    Cash and cash equivalents - Beginning of period           -            -
    -------------------------------------------------------------------------
    Cash and cash equivalents - End of period             3,571            -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cash paid during the period for:
      Interest on bank operating loan                       575          654
      Interest on obligations under capital leases            8           12
      Income taxes                                        3,941        8,862
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CE Franklin Ltd.
    Interim Consolidated Statements of Changes in Shareholders' Equity
    (Unaudited)
                                  Capital Stock
                             ---------------------
    (in thousands of                               Contri-             Share-
     Canadian dollars,         Number of             buted Retained  holders'
     except share amounts)        Shares        $  surplus earnings   equity
    -------------------------------------------------------------------------

    Balance -
     December 31, 2005        17,804,554   21,914   14,281   39,737   75,932
    Stock based compensation
     expense                           -        -      132        -      132
    Stock options exercised       74,486      405      (44)       -      361
    Net income                         -        -        -    8,879    8,879
    -------------------------------------------------------------------------
    Balance -
     March 31, 2006           17,879,040   22,319   14,369   48,616   85,304
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Balance -
     December 31, 2006        18,223,013   23,586   16,213   62,676  102,475
    Stock based compensation
     expense                           -        -      386        -      386
    Stock options exercised       62,600      305      (91)       -      214
    Performance share units
     (PSU) exercised              10,190      202     (202)       -        -
    Purchase of shares in
     trust for PSU plan          (15,200)    (173)       -        -     (173)
    Net income                         -        -        -    6,373    6,373
    -------------------------------------------------------------------------
    Balance - March 31, 2007  18,280,603   23,920   16,306   69,049  109,275
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CE Franklin Ltd.
    Notes to Consolidated Financial Statements (Unaudited)
    -------------------------------------------------------------------------


    Note 1 - Accounting policies

    These interim consolidated financial statements are prepared following
    accounting policies consistent with the Company's financial statements
    for the years ended December 31, 2006 and 2005. These consolidated
    financial statements are in accordance with generally accepted accounting
    principles in Canada.

    The disclosures provided below are incremental to those included in the
    annual audited financial statements. The interim consolidated financial
    statements should be read in conjunction with the annual audited
    financial statements and the notes thereto for the year ended
    December 31, 2006.

    The Company adopted Section 1530 - Comprehensive Income, Section 3855 -
    Financial Instrument Recognition and Measurement, Section 3861 -
    Financial Instruments Disclosure and Presentation, and Section 3865 -
    Hedges of the CICA Handbook in accordance with the transitional
    provisions in each respective section.

    The adoption of Sections 1530, 3855 and 3861 did not have a material
    impact on the financial statements of the Company and did not result in
    any adjustments for the recognition, de-recognition or measurement of
    financial instruments as compared to the financial statements for periods
    prior to the adoption of these sections. In addition, since the Company
    currently does not utilise hedges or other derivative financial
    instruments in its operations the adoption of Section 3865 currently has
    no material impact on the financial statements of the Company.

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

    Note 2 - Business Acquisitions

    (a) On January 31, 2007, the Company purchased the assets of an agent
    that operated two of the Company's branch locations, for a net cash
    consideration of $2.167 million. The investment is accounted for using
    the purchase method and the results of operations have been included in
    these financial statements from the date of acquisition. Details of the
    acquisition are as follows:

        (in thousands of Canadian dollars)
        --------------------------------------------
        Assets
          Property, equipment and other         167
          Goodwill                            2,000
        --------------------------------------------

        Net cash consideration                2,167
        --------------------------------------------
        --------------------------------------------

    (b) On February 1, 2006 the Company purchased the outstanding shares of
    an agent that operated two of the Company's branch locations, for a net
    cash consideration of $2.263 million. In accordance with the purchase
    agreement, an additional $210,000 was paid in the first quarter of 2007.
    This amount was contingent on reaching certain performance conditions and
    is accounted for under the purchase method as an addition to goodwill.

    Note 3 - Share data

    At March 31, 2007 the Company had 18,280,603 common shares outstanding
    and 849,853 options to acquire common shares at a weighted average
    exercise price of $4.55 per common share. 629,411 of those options were
    vested and exercisable at a weighted average exercise price of $3.43 per
    common share.

    Effective January 1, 2003, the Company adopted prospectively, the fair
    value method of accounting for common share options granted. Under this
    method, the Company recognizes compensation expense based on the fair
    value of the options on the date of grant which is determined by using
    the Black-Scholes options-pricing model. The fair value of the options is
    recognized over the vesting period of the options granted as compensation
    expense and contributed surplus. The contributed surplus balance is
    reduced as options are exercised and the amount initially recorded for
    the options in contributed surplus is credited to capital stock.

    A total of 109,671 common share options were granted in the first quarter
    of 2007. The fair value of the common share options granted in the first
    quarter was $521,000. The fair value of common share options granted is
    estimated as at the grant date using the Black-Scholes option pricing
    model, using the following assumptions:

        Dividend yield                nil
        Risk-free interest rate     4.23%
        Expected life             5 years
        Expected volatility           50%

    The compensation expense recorded in the first quarter of 2007 for common
    share options granted subsequent to December 31, 2002 was $118,280. The
    compensation expense recorded for the comparative quarter ended
    March 31, 2006 was $132,000.

    A total of 65,230 performance share units (PSU's) were granted in the
    first quarter of 2007. The fair value of the grant was $668,000. The
    compensation expense recorded in the first quarter of 2007 was $268,000
    (2006 - nil).

    Note 4 - 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
                                        -------------------------------------
                                         March 31          March 31
    (in thousands of Canadian dollars)       2007              2006
    -------------------------------------------------------------------------

    Income before income taxes              9,649            13,727
    -------------------------------------------------------------------------
    Incomes taxes calculated at
     expected rates                         3,147    32.6%    4,693    34.2%
    Non-deductible items                      135     1.4%       97     0.7%
    Capital and large corporations taxes       11     0.1%       19     0.1%
    Other                                     (17)   -0.1%       39     0.3%
    -------------------------------------------------------------------------
                                            3,276    34.0%    4,848    35.3%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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:


                                         March 31       December 31
    (in thousands of Canadian dollars)       2007              2006
    ----------------------------------------------------------------

    Assets
      Financing and investment charges        254               263
      Property and equipment                  913               610
      Other                                   427               785
    ----------------------------------------------------------------
                                            1,594             1,658
    ----------------------------------------------------------------

    Liabilities
      Goodwill                                483               498
    ----------------------------------------------------------------
                                              483               498
    ----------------------------------------------------------------

    Net future income tax asset             1,111             1,160
    ----------------------------------------------------------------
    ----------------------------------------------------------------

    Realization of future income tax assets is dependent on generating
    sufficient taxable income during the period in which the temporary
    differences are deductible. Although realization is not assured,
    management believes it is more likely than not that all future income tax
    assets will be realized based on projected operating results and tax
    planning strategies available.

    Note 5 - Segmented reporting

    The company operates its business as one operating segment in one
    geographical location, the Western Canadian sedimentary basin.
    





For further information:

For further information: Michael West, Chairman, President and CEO,
(403) 531-5602; Denise Jones, Controller, (403) 531-5611

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