Deepwell announces annual and quarterly results



    /NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN
    THE UNITED STATES/

    CALGARY, March 28 /CNW/ - Deepwell Energy Services Trust ("Deepwell" or
the "Trust") is pleased to release its financial and operating results for the
three-month period and year ended December 31, 2007.

    
    Highlights for the reporting periods:
    -   Quarterly revenue of $3.7 million ($0.51 per unit), a decrease of
        10 percent from the fourth quarter of 2006 due to weaker industry
        activity levels;
    -   Full-year revenue of $14.1 million ($2.54 per unit) (Deepwell's
        operations commenced on April 27, 2006 and no full-year comparisons
        are possible);
    -   Gross margin of 53 percent of revenue for the year;
    -   Quarterly earnings before interest, taxes, depreciation and
        amortization (EBITDA) of $0.9 million ($0.12 per unit), and full-year
        EBITDA of $5.0 million ($0.89 per unit);
    -   Long-term debt of $4.8 million at year-end, down substantially from
        $11.5 million at year-end 2006;
    -   Total 2007 distributions of $4.4 million or $0.80 per unit. From
        inception to March 2007, Deepwell paid distributions of $0.0958;
        since March 2007 Deepwell has maintained a monthly distribution rate
        of $0.06 per unit.
    

    Subsequent to the fiscal year-end, on February 19, 2008 Deepwell
officially opened an oilfield waste management facility near Claresholm,
Alberta, the Trust's first new greenfield plant. The Claresholm facility
positions Deepwell in an expansive region of active oil and natural gas
production not locally served by any other third-party waste management
provider, increases Deepwell's overall waste management throughput capacity by
more than one-third and is expected to contribute to substantial
year-over-year growth in waste management activity, revenue and EBITDA.
    In March 2008 Deepwell The Alberta Energy Resources Conservation Board
(formerly the Alberta Energy and Utilities Board) upgraded the Rycroft
facility approval to include the acceptance of the full range of Class Ib
waste fluids and for custom treating third-party crude oil emulsions. The
approval allows the Rycroft facility to earn additional revenues from treating
a variety of Class Ib liquid waste streams and custom treating.
    "We are proud of Deepwell's waste management facilities' safety and
operating performance throughout 2007. Our financial results, while weaker
than anticipated, reflected the overall weakness in the oil and gas service
industry. Given our new Claresholm facility, the increased range of service
offerings at Rycroft, and other growth initiatives, we are excited about our
future prospects," stated Robert Dodds, Deepwell's President and CEO.

    Deepwell is a Calgary, Alberta-based income trust focused exclusively on
providing waste treatment and disposal services to the oil and natural gas
industry in western Canada.


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    MANAGEMENT'S DISCUSSION AND ANALYSIS

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    The following Management's Discussion and Analysis (MD&A) of Deepwell
Energy Services Trust (the "Trust") has been prepared taking into
consideration information available to March 26, 2008 and should be read in
conjunction with the Trust's audited consolidated financial statements as at
and for the year ended December 31, 2007. This MD&A discusses operations and
events for the year ended December 31, 2007. Unless otherwise noted,
references to "2007" or the "year" in this MD&A refer to the year ended
December 31, 2007, references to "2006" refer to the 247-day period ended
December 31, 2006, references to "Q4/2007" or the "quarter" in this MD&A refer
to the three months ended December 31, 2007, and references to "Q4/2006" refer
to the three months ended December 31, 2006.
    The Trust is an unincorporated investment trust governed by the laws of
the Province of Alberta. The business of the Trust is conducted through its
direct and indirect wholly owned subsidiaries, Deepwell Energy Services
Commercial Trust, Deepwell Energy Services Ltd., and Deepwell Energy Services
LP ("Deepwell LP"). The Trust and its subsidiaries (collectively "Deepwell")
are based in Calgary, Alberta and were established to acquire and operate
businesses that engage in oilfield waste management services. The principal
undertaking of Deepwell is to provide a variety of services to oil and natural
gas exploration and production companies in western Canada.

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    Forward-looking statements
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    Certain statements in this MD&A constitute "forward-looking" statements
that involve known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the Trust or Deepwell
LP, or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. When used in this MD&A, such statements use such words as "may",
"will", "intend", "should", "expect", "believe", "plan", "anticipate",
"estimate", "predict", "potential", "continue" or the negative of these terms
or other similar terminology. These statements reflect current expectations
regarding future events and operating performance and speak only as of the
date of this MD&A.
    Forward-looking statements involve significant risks and uncertainties,
should not be read as guarantees of future performance or results, and will
not necessarily be accurate indications of whether such results will be
achieved. A number of factors could cause actual results to differ materially
from the results discussed in the forward-looking statements.
    Although the forward-looking statements contained in this MD&A are based
upon what management believes are reasonable assumptions, the Trust cannot
assure investors that actual results will be consistent with these
forward-looking statements. These forward-looking statements are made as of
the date of this MD&A. The Trust does not assume any obligation to update or
revise them to reflect new events or circumstances, except as required by
applicable securities legislation.

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    Non-GAAP measures
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    The MD&A has been prepared in accordance with Canadian generally accepted
accounting principles (GAAP). Certain supplementary information and measures
not recognized under GAAP are also provided where management believes they
assist the reader in understanding the Trust's results. These measures
include:

    
    -   Earnings before interest, taxes, depreciation and amortization
        (EBITDA); and
    -   Funds from operations, which refers to cash flow from operating
        activities before changes in non-cash working capital.
    

    These measures are identified and presented, where appropriate, together
with reconciliations to the equivalent GAAP measure. However, they should not
be used as an alternative to GAAP, because they may not be consistent with the
calculations of other companies or Trusts.

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    2007 overview
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    For Deepwell, 2007 was characterized by achievement of positive operating
cash flow during a significant downturn for the energy services industry in
Alberta. Exploration and production companies curtailed drilling activity in
the Western Canada Sedimentary Basin (WCSB) in response to low natural gas
prices, low oil prices in the early part of the year, the significant
strengthening of the Canadian dollar and uncertainty around the proposed
royalty structure announced by the Government of Alberta in October 2007. In
addition, the second quarter of 2007 saw a prolonged spring break-up in the
WCSB, which was followed by unusually inclement weather - both of which led to
more road bans than are typical.
    Because the Trust's cash flow is more dependent on activity in the
production of oil and natural gas (as opposed to exploration), Deepwell
suffered a lesser impact than many energy services companies. During these
challenging circumstances, Deepwell generated positive cash flow from
operating activities, and executed several key growth initiatives in 2007.

    Key growth initiatives:

    
    -   In June 2007, Deepwell received approval from the Alberta Energy and
        Utilities Board (EUB, subsequently restructured and re-named the
        Energy Resources Conservation Board (ERCB)) to construct and operate
        the Trust's first greenfield oilfield waste management facility. This
        facility is located near Claresholm, Alberta. Construction commenced
        in July 2007 and the facility was completed and commenced revenue-
        generating operations in late February 2008.
    -   The Trust completed a rights offering and private placement during
        the second quarter of 2007, with total gross proceeds of $16,604,891,
        positioning the Trust with a strong balance sheet to support future
        growth.
    -   Deepwell added a second disposal well at its Rycroft facility in the
        second quarter of 2007. This addition, coupled with Deepwell's
        initiatives to enhance performance of the first well, have
        significantly improved disposal capacity at Rycroft. During 2007,
        Deepwell also made application for approval of Rycroft as an oilfield
        waste management facility (WM). Rycroft was previously approved as an
        injection facility (IF). Under the IF approval, Rycroft's services
        were limited to disposal of produced water; as a WM facility Rycroft
        will also be permitted to accept other, higher-margin waste streams
        and will be permitted to offer custom treating of oil emulsions. The
        ERCB approved Rycroft as a WM facility on March 17, 2008.

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    Strategy
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    Deepwell is committed to building value for its Unitholders through
disciplined management and the implementation of its long-term strategy. The
key aspects of Deepwell's strategy are summarized below.

    -   Focus on oilfield waste management: Deepwell currently operates
        exclusively in the oilfield waste management business, and intends to
        continue that focus. The oilfield waste management business in
        Alberta has significant barriers to entry, which support the long-
        term cash flow of current and future facilities.
    -   Growth: Deepwell is primarily focused on organic growth through
        adding new facilities and increasing capacity and services provided
        at existing facilities. Deepwell added capacity and services at
        existing facilities in 2007, and completed a new oilfield waste
        management facility near Claresholm, Alberta in the first quarter of
        2008.
    -   Operational efficiency: Another key objective is to attain and
        maintain efficient operations and a high standard of customer service
        within a safe working environment. Deepwell received its provincial
        Certificate of Recognition for health and safety in 2007 and had no
        lost time incidents during the year.
    -   Environmental stewardship: Deepwell intends to meet or exceed
        regulatory requirements and industry standards. Deepwell's facilities
        are audited annually by regulatory bodies, and Deepwell has developed
        innovations to enhance environmental stewardship at new and existing
        facilities.


    Selected financial information

    The following is a summary of selected financial information that has been
derived from, and should be read in conjunction with, the consolidated
financial statements of the Trust.

    Financial Highlights                              For the        For the
                                                twelve months    period from
                                                        ended    April 27 to
                                                 Dec 31, 2007   Dec 31, 2006
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    Revenue                                      $ 14,124,051   $  9,647,020
    Operating                                       6,635,001      4,594,714
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    Gross Margin                                    7,489,050      5,052,306
    Selling and administrative                      2,518,213      1,409,031
    -------------------------------------------------------------------------

    EBITDA                                          4,970,837      3,643,275
    Depreciation, accretion and amortization        3,574,937      2,186,578
    Financing fees                                    114,043              -
    Unit-based compensation                           815,117        251,432
    Interest                                          590,491        359,740
    (Gain) loss on sale of property and equipment      (8,773)        34,295
    Loss on write-off of property and equipment       367,702              -
    Fire-related expenses                             162,119              -
    Future income tax recovery                        (87,201)       (47,799)
    -------------------------------------------------------------------------
    Net (loss) income                                (557,598)       859,029
    Add:
    Depreciation, amortization and accretion        3,574,937      2,186,578
    Unit-based compensation                           815,117        251,432
    (Gain) loss on sale of property and equipment      (8,773)        34,295
    Loss on write-off of property and equipment       746,332              -
    Future income tax recovery                        (87,201)       (47,799)
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    Funds from operations                        $  4,482,814   $  3,283,535
    Changes in non-cash working capital              (685,719)       575,718
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    Cash flow from operating activities          $  3,797,095   $  3,859,253
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    Net (loss) income                               ($557,598)  $    859,029
    Per unit, basic                                     (0.10)          0.20
    Per unit, diluted                                   (0.10)          0.20
    -------------------------------------------------------------------------
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    EBITDA                                       $  4,970,837   $  3,643,275
    Per unit, basic                                      0.89           0.84
    Per unit, diluted                                    0.89           0.84
    -------------------------------------------------------------------------
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    Funds from operations                        $  4,482,814   $  3,283,535
    Per unit, basic                                      0.80           0.75
    Per unit, diluted                                    0.80           0.75
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    Distributions to Unitholders                 $  4,440,462   $  2,949,088
    Per unit, basic                                      0.80           0.68
    Per unit, diluted                                    0.80           0.68
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    Gross margin as a percentage of revenue               53%            52%
    Selling and administrative as a percentage
     of revenue                                           18%            15%
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    Capital expenditures                         $ 11,199,255   $  6,808,996
    Total assets, end of period                  $ 60,246,358   $ 54,491,681
    Long-term debt, end of period                $  4,800,000   $ 11,500,000
    Total long-term liabilities, end of period   $  4,883,116   $ 12,300,945
    Trust units, end of period                   $ 56,229,626   $ 40,490,377
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    Weighted average Trust units, basic             5,569,288      4,356,000
    Weighted average Trust units, diluted           5,570,403      4,357,187
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    Revenues for the year were $14,124,051, with a gross margin of $7,489,050
(53 percent of revenue), EBITDA of $4,970,837 (35 percent of revenue) and a
net loss of $557,598. Revenues for the quarter were $3,650,736, with a gross
margin of $1,709,520 (47 percent of revenue), EBITDA of $867,072 (24 percent
of revenue) and a net loss of $270,611.
    Net loss for the year was $0.10 per unit basic and diluted (2006 - net
income per unit of $0.20 basic and diluted) and funds from operations for the
year was $0.80 per unit basic and diluted (2006 - $0.75 basic and diluted).
Distributions paid to unitholders for the year, including distributions to
participants under the Trust's Distribution Reinvestment Plan (DRIP), were
$4,440,462 or $0.80 per unit (2006 - $0.68 per unit).
    In general, demand in the oilfield waste management business was weaker
than previously, particularly in the most recent three quarters.

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    Results of operations
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    Due to the difficulty in comparing periods of different lengths, Deepwell
has not compared the nominal differences in results between the 2007 and 2006
years, but has analyzed results on a percentage basis as appropriate.

    Revenue

    Revenues for the year were $14,124,051 (Q4/2007 - $3,650,736) comprised
approximately 68 percent of processing and disposal fees and 32 percent of
revenue from the sale of recovered oil (Q4/2007 - 64 percent and 36 percent,
respectively). In 2007 oil sales as a percentage of total revenue declined
from 40 percent in 2006 (Q4/2006 - 43 percent) due to reduced drilling
activity, with a higher proportion of revenue coming from less oily
production-related waste streams.
    Revenue in the quarter was reduced from the same period in 2006 due to
reduced industry activity. While the fourth quarter is traditionally strong,
Q4/2007 remained softer with no improvement in revenue over the third quarter
of 2007. Although more of Deepwell's volumes come from production-based
activity, a portion of revenues is still sensitive to drilling and
completion-related activity, which declined by 20 percent from Q4/2006 to
Q4/2007. Factors in the decline in activity include weak prices for natural
gas coupled with high exchange rates, the caution associated with this trend,
and the overhang following the Government of Alberta's announcement on October
25, 2007 to increase royalties beginning in 2009.
    During the first four months of the year, the Grande Cache facility's
operating capabilities were limited due to required repairs as a result of the
December 7, 2006 fire at the facility's waste receiving area. From the time
the facility reopened, one week after the incident, until February 1, 2007,
the facility was only capable of receiving waste transported in tanker trucks
which could be offloaded directly into Deepwell's receiving tanks. On
February 1, 2007 Deepwell resumed receiving waste loads from vacuum trucks,
and used a temporary vacuum truck offloading system until the end of April
2007.
    During the second and third quarters of 2007, Deepwell's revenues were
negatively impacted by an unusually long period of spring breakup, followed by
higher than normal rainfall. Other than the above noted limitations in the
first four months at Grande Cache, all facilities operated effectively during
2007 and operational improvements and capital investments led to efficiencies
and capacity increases which helped to offset industry weakness during the
year.

    Expenses

    Operating expenses

    Operating expenses were $6,635,001 for the year, and the relationship to
revenues was generally consistent with management's expectations, with an
operating margin of 53 percent for the year, compared with 52 percent in 2006.
Operating expenses include $1,202,849 in oil credits repaid to customers
($380,504 for the quarter), which mitigates the impact of oil prices on
Deepwell's revenues. Certain expenses, such as oil credits, trucking, and
landfill expenses are activity-driven; however, a significant portion of
expenses can be considered fixed.

    Selling and administrative

    Selling and administrative costs, which represent primarily the costs
associated with the Trust's head office, senior management and public company
costs, were $2,518,213 or 18 percent of revenue for the year (2006 -
15 percent). The increase in costs was due to higher public company, legal and
consulting costs. The increased costs relate to the initial completion of
annual regulatory requirements, internal activities related to the Trust's
rights offering, internal staffing requirements as the Trust developed a
proprietary revenue accounting system, staff vacancies in 2006 as the Trust
recruited the full staff complement, and accrual of cash bonuses to senior
management in 2007, as 2006 senior management bonuses were made in the form of
unit options and included in unit-based compensation expense disclosed
separately. A portion of the costs related to implementation of the revenue
accounting system and initial completion of annual regulatory requirements are
one-time costs, or higher than might be expected in future years.

    Depreciation, amortization and accretion

    Depreciation and accretion expense was $3,246,002 for the year (2006 -
$1,911,783) and consisted of depreciation of fixed assets of $3,184,186 (2006
- $1,873,801) and accretion of $61,816 (2006 - $37,982). In 2007, amortization
of intangible assets totalled $328,935 (2006 - $218,963) and consisted of the
amortization of completions and contracts, customer relationships, and
non-competition agreements.

    Interest

    Total cash interest expense for the year was $590,491 (2006 - $359,740),
comprised of interest on long-term debt of $551,611 and interest on the
Trust's operating loan of $38,880. Interest rates are floating, with a range
from 0.125 percent to 1.4 percent over the lender's prime rate, depending on
the Trust's ratio of consolidated funded debt to earnings before interest,
taxes, depreciation, amortization, accretion, and unit-based compensation.
Actual interest rates during the year ranged from 0.125 percent to 1.4 percent
over the lender's prime rate.

    Gain on sale of assets

    During the year, Deepwell realized an $8,773 gain on the sale of railcar
tanks, a plant truck and recovered insurance proceeds from an injection pump.

    Fire-related expenses and losses

    On December 7, 2006, a fire at the Grande Cache facility damaged the
waste receiving area. The facility was shut down for one week until regulatory
approval to re-open was received, and operations were limited until
February 1, 2007 when a temporary waste receiving system was implemented. The
facility operated to the end of April 2007 using the temporary system, while a
new permanent receiving system was installed. The damaged equipment has been
dismantled and removed and reconstruction is complete. Assets damaged in the
incident include the waste receiving pit, solids treatment pad, a conveyor
system used for waste separation, and miscellaneous piping and electrical
components. During the process of restoring the facility to its full operating
condition and subsequent to the release of the December 31, 2006 financial
statements it was determined that efforts to restore the damaged assets were
more extensive than anticipated and had taken on the nature of a replacement
rather than a repair. As a result of the change in the nature of the
restoration, the net book value of assets valued at $746,332 was written off,
net of an accrued provision for insurance proceeds of $378,630.
    Direct fire-related expenses of $162,119 were incurred primarily for
emergency services, legal expenses, and other professional fees and these were
recognized as expenses in the first quarter of 2007. No provision has been
made for recovery of these direct fire-related costs through insurance
although Deepwell is pursuing a claim. In the December 31, 2006 financial
statements, all fire-related expenses incurred to date were reflected as
insurance proceeds receivable. Subsequent to the December 31, 2006 financial
statement date, indications from the insurer indicated less certainty as to
the amount collectible, and in recognition of the decreased certainty of the
amount collectible the full amount of costs have been applied to the current
period as a change in estimate and any future insurance proceeds will be
recorded against these expenses when the amounts have been received or
collection is reasonably certain and estimable.

    Income taxes

    On June 22, 2007, the Specified Investment Flow-Through (SIFT) tax
included in the Government of Canada's Bill C-52, received Royal Assent,
creating a new 31.5 percent tax to be applied to distributions from certain
income trusts and partnerships, including Deepwell, effective January 1, 2011.
With the rate of reduction enacted on December 14, 2007, the new tax is to be
applied to distributions at the tax rates of 29.5 percent and 28.0 percent
effective January 1, 2011 and 2012 respectively.
    Based on the amount of the Trust's existing temporary differences that
are anticipated to reverse after January 1, 2011, the Trust expects a future
income tax asset as at January 1, 2011. However, the future income tax asset
is fully offset by a valuation allowance. The anticipated amount and timing of
reversals of temporary differences will be dependent on the Trust's actual
results, distributions and actual acquisition and disposition of assets and
liabilities. As a result, a change in estimates or assumptions could
materially affect the estimate of the future tax asset.

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    Distributions to Unitholders
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    Distributions paid to unitholders for the year, including distributions
to participants under the DRIP, were $4,440,462 (2006 - $2,949,088). Actual
cash distributions paid were $4,176,279 excluding non-cash distributions to
participants in the DRIP. During 2007, upon review of Deepwell's opportunities
for growth, the Trustees concluded that retention of more cash to provide
capital for growth would be most appropriate and that a reduction in the cash
distribution would provide greater financial flexibility to exploit Deepwell's
high-return growth opportunities. As such, on March 19, 2007 announced that
distributions would be changed to $0.06 per Trust unit per month (previously
it was $0.0958 per Trust unit per month).

    
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                                                         2007           2006
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    Cash flows from operating activities         $  3,797,095   $  3,859,253
    Net (loss) income                                (557,598)       859,029
    Actual cash distributions paid during
     the period                                     4,176,279      2,949,088
    -------------------------------------------------------------------------

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    (Shortfall) excess of cash flows from
     operating activities over cash
     distributions paid                              (379,184)       910,165
    Shortfall of net (loss) income over cash
     distributions paid                            (4,733,877)    (2,090,059)
    -------------------------------------------------------------------------
    

    While the cash distributions to unitholders exceeded cash flows from
operating activities in 2007, and exceeded net income in 2006 and 2007, the
Trust does not believe that the distributions should be regarded as an
economic return of capital, as the distributions were only slightly higher
than cash flows from operating activities in 2007 and the distributions
increased significantly in the last two quarters of 2007 as a result of units
issued to fund the construction of Deepwell's Claresholm facility, and other
growth initiatives. The Claresholm facility was not completed until
February 19, 2008 and returns from this investment were not yet available to
fund distributions in 2007. Deepwell's distributions have generally not been
based upon net income, as net income includes a number of non-cash items such
as depreciation, amortization, accretion, and unit-based compensation that do
not affect the Trust's ability to make distributions to unitholders. Due to
the addition of the Claresholm facility and other growth initiatives, the
Trust does not anticipate that distributions will continue to exceed cash flow
from operations for the foreseeable future. While the Trust does not currently
anticipate that there will be a need to suspend distributions in the
foreseeable future, the actual amounts of distributions paid by the Trust to
the Unitholder will depend upon numerous factors, including profitability of
operations, debt covenants and obligations, the availability and cost of
acquisitions, fluctuations in working capital, the timing and amount of
capital expenditures, applicable law and other factors beyond the control of
Deepwell.

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    Investing activities
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    Net cash used in investing activities during the year was $9,015,279.

    Capital expenditures

    The Trust's capital expenditures for purchase of property and equipment
for the year were $11,199,255.
    During 2007, Deepwell invested $7,018,106 in the construction of a new
oilfield waste management facility near Claresholm, Alberta. The Claresholm
facility was completed in the first quarter of 2008 and opened for business on
February 19, 2008. The Trust invested $1,094,283 to restore assets damaged in
the December 2006 fire at Grande Cache including certain improvements which
add to efficiency and vapour control at the waste receiving area. A further
$1,075,308 was spent in adding a second well, and increased pump capacity at
Deepwell's Rycroft facility. At Mayerthorpe, a total of $742,035 was invested
in a new injection pumping system, filtration system, and increased tankage.
The improvements are expected to reduce maintenance requirements, increase
injection capacity, and improve oil recovery. The balance of costs relate
primarily to investments in processing equipment, mobile equipment, future
sites, IT and corporate capital costs.

    Financial security deposits

    During the year, letters of guarantee were secured to replace $1,433,474
in financial security deposits previously held by the EUB as security for
abandonment and reclamation of oilfield waste management facilities.

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    Unitholders' equity
    -------------------------------------------------------------------------

    Rights offering and private placement

    On July 9, 2007 Deepwell closed a private placement of 582,362 units for
gross proceeds of $3,499,996. On July 31, 2007 the Trust completed a rights
offering and issued 2,180,515 units for gross proceeds of $13,104,895.
Combined gross proceeds of the offerings were $16,604,891 with expenses of
$1,075,866 for total net proceeds of $15,475,066. The party to the private
placement also agreed to provide a standby commitment to the rights offering;
however, as a result of the strong response under the basic and additional
subscriptions to the rights offering, no units were available for subscription
by the standby purchaser under the standby commitment.
    Proceeds were initially used to repay outstanding debt, which could be
redrawn. The purposes of the offerings were to fund the estimated $9,000,000
construction cost of the oilfield waste management facility near Claresholm,
Alberta, to fund improvements and expansions at existing facilities, to fund
preliminary costs of future facilities and for general corporate purposes.

    Trust unit option plan

    As at December 31, 2007, a total of 506,971 options issued pursuant to
the Trust's incentive unit option plan ("Option Plan") were outstanding. The
options carry a five year term and, except for 73,800 options issued to
executives during 2007 in lieu of a cash bonus for 2006 (vesting immediately),
vest equally over a period of three years from the date of grant, The exercise
price of each option is based upon the weighted average trading price for a
period prior to the date of grant. The exercise price is adjusted downwards by
100% of the amount of distributions paid on outstanding Trust Units.
    The fair value of options issued during the period was $2.71 (2006 -
$3.81) and estimated using the Black-Scholes pricing model with the following
assumptions: risk free interest rate of 4.25% (2006 - 4.25%); volatility of
35% to September 2007 and 45% to the end of the period (2006 - 35%). The
impact of monthly distributions and corresponding changes in exercise price
during the life of the options are assumed to be equal and offsetting, and so
no provision is made in the pricing model for either factor.

    

                                   December 31, 2007       December 31, 2006
                               ----------------------  ----------------------
                                            Weighted                Weighted
                                             average                 average
                               Number of    exercise   Number of    exercise
                                 options       price     options       price
                               ----------  ----------  ----------  ----------

    Balance, beginning
     of period                   303,500   $    8.81           -   $       -
    Granted                      208,971        6.12     304,000        9.63
    Expired/Cancelled             (5,500)       9.27        (500)      10.26
    Exercised                          -           -           -           -
    -------------------------------------------------------------------------
    Balance, end of period       506,971   $    7.70     303,500   $    9.63
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As such, the opening weighted average exercise prices has been adjusted by
$0.82 (2006 - $nil) to reflect the decrease in exercise price for distribution
over the year.

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

                          Options outstanding           Options exercisable
                   ----------------------------------  ----------------------
                                Weighted    Weighted                Weighted
                                 average     average                 average
    Exercise       Number of  contractual   exercise   Number of    exercise
     price           options        life       price     options       price
    ----------     ---------- -----------  ----------  ----------  ----------

    $    6.12        206,971        4.64   $    6.12      73,800   $    6.12
    $    6.32          2,000        4.36        6.32           -           -
    $    8.79        282,500        3.64        8.79      94,167        8.79
    $    9.10         14,500        3.76        9.10       4,833        9.10
    $    9.44          1,000        3.73        9.44         333        9.44
    -------------------------------------------------------------------------
                     506,971        4.04   $    7.70     173,133   $    7.66
    -------------------------------------------------------------------------
    

    The Trust recorded unit-based compensation expense and contributed
surplus of $815,117 during the period (2006 - $251,432).

    -------------------------------------------------------------------------
    Liquidity
    -------------------------------------------------------------------------

    Net cash provided by financing activities for the year was $5,148,787.
The Trust realized $15,475,066 in net proceeds of its private placement and
rights offering in July 2007. The Trust paid distributions to unitholders of
$4,440,462 during the year of which $264,183 was realized in proceeds from its
distribution reinvestment plan. During 2007, the Trust reduced its amount
outstanding under long term debt by $6,700,000.

    Credit facilities

    The Trust renewed its existing credit facilities on May 31, 2007 with a
Canadian chartered bank (the "credit facilities"), which consist of the
following:

    Demand loan

    Under the credit facilities, the Trust has a $2,000,000 demand revolving
operating loan. During the year interest ranged from the lender's prime rate
plus 0.125 percent to 1.4 percent and this rate is dependent on the funded
debt to EBITDA ratio. As of December 31, 2007 the borrowing base for the
demand loan was at $1,212,863 and the amount drawn was $550,000.

    Long-term debt

    Under the credit facilities, the Trust has a $15,500,000, 364-day
extendible revolving term loan committed to May 29, 2008. No set principal
repayment has been established and the Trust has the ability to repay, borrow
and repay again until the 364-day term expires. Interest ranges from the
lender's prime rate plus 0.125 percent to 1.4 percent per annum. Interest is
calculated monthly and paid in arrears. As at December 31, 2007 an aggregate
of $4,800,000 is outstanding of which $933,333 (2006 - $nil) is current. The
revolving period extends to May 29, 2008, at which time the credit facility is
eligible for renewal. Should this renewal not be extended, the credit facility
reverts to a three-year term with the monthly principal repayments commencing
on June 26, 2008.
    As security for the credit facilities, Deepwell LP granted lenders a
security interest over all of its assets. In addition, the Trust and its
subsidiaries guaranteed the indebtedness of Deepwell LP under the credit
facilities with such guarantee being secured by all of the assets of each such
guarantor. In respect of any proceeds resulting from the enforcement of the
credit facilities or the aforementioned guarantees, the lenders, as creditors,
will have a prior ranking claim relative to the Unitholders.

    Interest rate risk

    The operating loan and the extendible revolving term loan bear interest
at a floating interest rate. Therefore, to the extent that the Trust borrows
under these facilities the Trust is at risk to rising interest rates.

    Contractual obligations, commitments and contingencies

    The following table shows future contractual obligations by period:

    
    -------------------------------------------------------------------------
    Payments by period     Total       2008  2009-2010  2011-2012 Thereafter
    -------------------------------------------------------------------------

    Long-term debt    $4,800,000 $  933,333 $3,200,000 $  666,667 $        -
    Commitments          559,267    164,577    302,986     91,704          -
    -------------------------------------------------------------------------
    Total contractual
     obligations      $5,359,267 $1,097,910 $3,502,986 $  758,371 $        -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    In addition to contractual obligations, the Trust's estimated costs of
completion of the Claresholm Facility are $1,981,894 at December 31, 2007. The
facility opened for business on February 19, 2008. The Trust has letters of
guarantee in the amount of $2,126,896 (2006 - $nil) available, none of which
have been drawn as of December 31, 2007.

    -------------------------------------------------------------------------
    Quarterly information
    -------------------------------------------------------------------------

                              Quarter      Quarter      Quarter      Quarter
                                ended        ended        ended        ended
                             Dec 2007     Sep 2007    June 2007   March 2007
    -------------------------------------------------------------------------
    Revenue               $ 3,650,736  $ 3,513,654  $ 2,532,151  $ 4,427,510
    Operating               1,941,216    1,584,126    1,190,437    1,919,222
    -------------------------------------------------------------------------
    Gross Margin            1,709,520    1,929,528    1,341,714    2,508,288
    Selling and
     administrative           842,448      520,373      558,848      596,544
    -------------------------------------------------------------------------

    EBITDA                    867,072    1,409,155      782,866    1,911,744

    Depreciation,
     amortization and
     accretion                838,528      915,875      897,865      922,669
    Financing fees            114,043            -            -            -
    Unit-based compensation   138,706      141,372      359,902      175,137
    Interest                   44,639      110,841      229,450      205,561
    Loss (gain) on sale of
     property and equipment     1,466            -      (17,500)       7,261
    Loss on write-off of
     property and equipment         -            -            -      367,702
    Fire-related expenses           -            -            -      162,119
    Future income tax
     recovery                       -            -      (62,651)     (24,550)
    -------------------------------------------------------------------------
    Net (loss) income     $  (270,310) $   241,067  $  (624,200) $    95,845
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net (loss) income
     per Trust unit:
      Basic                    ($0.04) $      0.04       ($0.14) $      0.02
      Diluted                  ($0.04) $      0.04       ($0.14) $      0.02
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Weighted average
     number of Trust units
     outstanding
      Basic                 7,154,344    6,324,139    4,357,724    4,356,000
      Diluted               7,154,344    6,327,260    4,357,744    4,356,000
    -------------------------------------------------------------------------


                              Quarter      Quarter      64 days
                                ended        ended        ended
                             Dec 2006     Sep 2006    June 2006
    ------------------------------------------------------------
    Revenue               $ 4,059,296  $ 3,808,795  $ 1,778,929
    Operating               1,605,492    2,040,285      948,937
    ------------------------------------------------------------
    Gross Margin            2,453,804    1,768,510      829,992
    Selling and
     administrative           730,354      448,788      229,889
    ------------------------------------------------------------

    EBITDA                  1,723,450    1,319,722      600,103

    Depreciation,
     amortization and
     accretion                993,621      697,052      480,317
    Financing fees                  -       15,588            -
    Unit-based compensation   197,812       53,620            -
    Interest                  149,325      102,469      107,946
    Loss (gain) on sale of
     property and equipment    34,295            -            -
    Loss on write-off of
     property and equipment         -            -            -
    Fire-related expenses           -            -            -
    Future income tax
     recovery                 (47,799)           -            -
    ------------------------------------------------------------
    Net (loss) income     $   396,196  $   450,993  $    11,840
    ------------------------------------------------------------
    ------------------------------------------------------------

    Net (loss) income
     per Trust unit:
      Basic               $      0.09  $      0.10  $      0.00
      Diluted             $      0.09  $      0.10  $      0.00
    ------------------------------------------------------------
    ------------------------------------------------------------

    Weighted average
     number of Trust units
     outstanding
      Basic                 4,356,000    4,356,000    4,356,000
      Diluted               4,357,187    4,477,793    4,356,000
    ------------------------------------------------------------
    

    The Trust's business is seasonal with the first and fourth quarters
traditionally being the two strongest quarters for the industry and the second
quarter being the weakest. The underlying causes of the seasonality are
variations in prevailing weather conditions, which in turn have effects on the
ability to carry out field operations. While Deepwell's facilities remain open
and accessible throughout the year, its customers are, at times, restricted
from moving waste due to spring breakup or periods of rainfall. In the Grande
Cache region restrictions also occur at certain times of the year in
designated wildlife areas.

    -------------------------------------------------------------------------
    Financial instruments
    -------------------------------------------------------------------------

    All of the Trust's financial instruments as at December 31, 2007 relate
to standard working capital and credit facility items. There are no
significant differences between the carrying value of these financial
instruments and their estimated fair values. There are no unusual off-balance
sheet arrangements and the Trust does not use any financial instruments such
as derivatives. Of the Trust's financial instruments, only accounts receivable
represent credit risk, and management views the credit risk related to
accounts receivable as minimal. The operating loan and the extendible
revolving term loan bear interest at a floating interest rate. Therefore, to
the extent that the Trust borrows under these facilities, the Trust is at risk
to rising interest rates.

    -------------------------------------------------------------------------
    Outlook
    -------------------------------------------------------------------------
    In general Deepwell expects an improved year of business for the Trust
amid another relatively weak year in the service/supply and
exploration/production sectors of the oil and natural gas industry. Industry
forecasts are almost unanimous in calling for flat to slightly lower industry
capital expenditures (excluding the oil sands) and overall field activities in
2008. In addition some producers have announced they will redeploy capital
outside Alberta in response to the provincial government's plan to increase
oil and natural gas royalties in 2009. The first quarter of 2008 appears to
have exceeded initial pessimistic forecasts, with higher rates of drilling and
field activities amid natural gas prices at times exceeding US$9 per mmbtu on
the Nymex and crude oil prices exceeding US$100 per bbl WTI. However, the
balance of the year is still forecast to be relatively weak in the industry.
    Within this industry context Deepwell foresees the opportunity to
increase its annual revenue and EBITDA over 2007. Growth prospects are
promising with the Claresholm facility now on-stream, a full year of increased
injection well capacity at Rycroft, the anticipated approval to upgrade
Rycroft to a waste management facility, which will enable the plant to process
a higher-margin waste stream, and other initiatives for increasing capacities
and improving efficiencies at existing plants. All of these point to higher
waste management activity, revenue and EBITDA year-over-year. In furtherance
of its long-term strategy for growth, Deepwell is pursuing approvals for a
location to construct a new facility in 2009.

    -------------------------------------------------------------------------
    Critical accounting estimates
    -------------------------------------------------------------------------
    Management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the periods. The most significant
estimates relate to depreciation, amortization, asset retirement obligations,
accretion, income taxes, unit-based compensation and recoverability of
goodwill and intangibles. Actual results could differ from those estimates.
The consolidated financial statements have, in management's opinion, been
properly prepared using careful judgment with reasonable limits of materiality
and within the framework of the Trust's accounting policies as disclosed in
the Trust's consolidated financial statements.

    -------------------------------------------------------------------------
    Risks and uncertainties
    -------------------------------------------------------------------------

    Cyclicality of the oil and natural gas industry

    The demand for oilfield services is largely dependent on the activity
levels of oil and natural gas exploration and development companies. Industry
conditions are influenced by numerous factors over which the Trust has no
control, including: the level of oil and natural gas prices and production;
expectations about future oil and natural gas prices; the cost of exploring
for, producing and delivering oil and natural gas; the expected rates of
declining production from maturing basins; the discovery of new oil and
natural gas reserves; available pipeline and other oil and natural gas
transportation capacity; weather conditions; global political stability,
military actions, regulatory and economic conditions; the ability of oil and
natural gas companies to raise capital; fuel conservation measures,
alternative fuel requirements, increasing consumer demand for alternatives to
oil and natural gas; and technological advances in fuel economy and energy
generation devices.

    Oil and natural gas prices

    The revenue, cash flow and earnings of the Trust are substantially
dependent upon and affected by the level of activity associated with oil and
natural gas exploration and production. Both short-term and long-term trends
in oil and natural gas prices affect the level of such activity. Worldwide
military, political and economic events, including initiatives by the
Organization of Petroleum Exporting Countries, may affect both the demand for
and the supply of oil and natural gas. Weather conditions, governmental
regulation, levels of consumer demand, the availability of pipeline capacity
and other factors beyond Deepwell's control may also affect the supply of and
demand for oil and natural gas, leading to future price volatility.

    Seasonal weather

    In Canada, the level of activity in the oil and natural gas industry is
influenced by seasonal weather patterns. Spring break-up during the second
quarter of each year leaves many secondary roads temporarily incapable of
supporting the weight of heavy equipment, which results in severe restrictions
on the provision of energy services. The timing and duration of spring
break-up are dependent on weather patterns and the duration of this period
will have an impact on the level of business of the Trust.

    Dependence on key personnel

    The success of the Trust will likely continue to be dependent on the
skills and expertise of the officers of the Trust. Deepwell does not currently
carry "key man" insurance that would compensate the Trust for the loss of any
senior executives.

    Competition for human resources

    During periods of high activity related to oil and natural gas
exploration and development, demand for experienced and skilled employees
increases. The success of the Trust is dependent upon the ability to retain
the services of experienced and skilled employees and the ability to recruit
and retain other key employees.

    Reliance on major customers

    It is estimated that the top 10 customers of Deepwell accounted for
approximately 53 percent of revenue for the year, the largest customer
accounting for 16 percent. Deepwell does not generally enter into long-term
contracts with its customers and there can be no assurance that the current
customers will continue their relationships with Deepwell.

    Competition

    Deepwell faces competition from a variety of competitors. Many of these
competitors have strong financial, marketing and other resources. There can be
no assurance that such competitors will not substantially increase the
resources devoted to the development and marketing of oilfield services that
compete with those of Deepwell or that new competitors will not enter the
various markets in which Deepwell is active.

    Operating risks and insurance

    The business of Deepwell will be subject to hazards inherent in the oil
and natural gas industry, such as equipment defects, malfunction and failures;
accidental release; natural disasters which result in fires; vehicle accidents
and explosions that can cause personal injury; loss of life; suspension of
operations; damage to formations; damage to facilities; business interruption;
and damage to or destruction of property, equipment and the environment. These
risks could expose Deepwell LP to substantial liability for personal injury,
wrongful death, property damage, pollution, and other environmental damages.
The frequency and severity of such incidents will affect operating costs,
insurability and relationships with customers, employees and regulators.
    Management will monitor the activities of Deepwell LP for quality control
and safety. However, there are no assurances that Deepwell LP's safety
procedures will always prevent such damages. Although Deepwell maintains
insurance coverage that management believes to be adequate and customary in
the industry, there can be no assurance that such insurance will be adequate
to cover such liabilities.

    Environmental risks

    The Canadian oil and natural gas industry is regulated by a number of
federal and provincial governmental bodies and agencies under a variety of
complex federal and provincial legislation that sets forth numerous
prohibitions and requirements with respect to planning and approval processes
related to land use, sustainable resource management, waste management,
responsibility for the release of presumed hazardous materials, protection of
wildlife and the environment and the health and safety of workers. Legislation
provides for restrictions and prohibitions on the transport of dangerous goods
and the release or emission of various substances, including substances used
and produced in association with certain oil and natural gas industry
operations. The legislation addresses various permits required for drilling,
access road construction, camp construction, well completion, installation of
surface equipment, air monitoring, surface and ground water monitoring in
connection with these activities, waste management and access to remote or
environmentally sensitive areas.
    Deepwell is subject to a complex and increasingly stringent array of
legal requirements and potential liabilities, including with respect to the
ownership and management of property, the need to obtain and comply with
permits and approvals, the health and safety of employees, and the handling,
use, storage, disposal, intentional or accidental release, and transportation
of certain substances, including hazardous materials and dangerous goods.
Failure to comply with these requirements could expose Deepwell to substantial
potential penalties. There can be no assurance that Deepwell will not be
required, at some future date, to incur significant costs to comply with
environmental laws, or that its operations, business, assets or cash flow will
not be materially adversely affected by existing conditions or by the
requirements or potential liability under current or future environmental
laws.

    Credit risk

    All of the accounts receivable of Deepwell are with customers involved in
the oil and natural gas industry whose revenues may be impacted by
fluctuations in commodity prices. Collection of these receivables could be
negatively influenced by any prolonged substantial reduction in oil and/or
natural gas prices, which could have a material adverse effect on the
financial results and cash flows of Deepwell.

    Access to additional financing

    Deepwell may find it necessary in the future to obtain additional debt or
equity financing to support ongoing operations of Deepwell, to undertake
capital expenditures or to undertake acquisitions or other business
combination transactions. There can be no assurance that additional financing
will be available to Deepwell when needed or on terms acceptable to Deepwell.
The inability to raise financing to support ongoing operations or to fund
capital expenditures or acquisitions could limit Deepwell's growth and may
have a material adverse effect on the financial results and cash flows of
Deepwell.

    Capital expenditures

    The timing and amount of capital expenditures by Deepwell will directly
affect the amount of cash generated from operating activities. The cost of
labour and equipment has escalated over the past several years.

    Leverage and restrictive covenants

    Deepwell has credit facilities which contain a number of financial
covenants that require Deepwell to meet certain financial ratios and financial
condition tests. Failure to comply with the obligations in the credit
facilities could result in a default which, if not cured or waived, could
result in a termination of distributions by Deepwell and would permit
acceleration of the relevant indebtedness. If the indebtedness under the
credit facilities were to be accelerated, there can be no assurance that the
assets of Deepwell would be able to repay in full that indebtedness, which
could result in the lenders realizing on the assets of Deepwell. There is no
assurance that Deepwell will be able to refinance any or all of the credit
facilities at their maturity dates on acceptable terms, or on any basis.

    Uncertainty of cash distributions

    The actual amounts of distributions paid by the Trust to the Unitholders
will depend upon numerous factors, including profitability of operations, debt
covenants and obligations, the availability and cost of acquisitions,
fluctuations in working capital, the timing and amount of capital
expenditures, applicable law and other factors beyond the control of Deepwell.

    Government regulations

    The Trust's operations are subject to a variety of Canadian federal,
provincial and local laws, regulations and guidelines, including laws and
regulations relating to health and safety, the protection of the environment,
and taxation.
    The planned changes in the structure of oil and natural gas royalties
payable to the Province of Alberta, intended to commence in 2009, could impact
the exploration and development activities of E&P companies and lower the
demand for Deepwell's services.

    -------------------------------------------------------------------------
    Related-party transactions
    -------------------------------------------------------------------------
    There were no payments made to related parties in the 12 months ended
December 31, 2007. During 2006, the Trust made payments in the amount of
$318,954 for legal expenses to a partnership of which one of the Directors of
the General Partner is a partner. These transactions were conducted in the
normal course of operations, on commercial terms established and agreed to by
the parties. As at December 31, 2006, $6,176 was outstanding in accounts
payable and accrued liabilities.
    On April 27, 2006, the Trust purchased all of the issued and outstanding
shares of Deepwell Disposal Services Inc. (DDSI) in exchange for 356,000 Class
B Trust Units valued at $3,560,000. Due to common management and directors,
the Trust and DDSI were related parties at the time of the acquisition. The
exchange amount was used for financial reporting purposes because the change
in the ownership interests in the assets transferred was substantive, and
estimated fair values of property, plant and equipment, intangibles and
goodwill for both acquisitions were provided by an independent evaluator.

    -------------------------------------------------------------------------
    Accounting changes and pronouncements
    -------------------------------------------------------------------------
    On January 1, 2007, the Trust adopted the Canadian Institute of Chartered
Accountants ("CICA") Handbook Sections 1530 "Comprehensive Income", Section
3251 "Equity", Section 3855 "Financial Instruments - Recognition and
Measurement", Section 3865 "Hedges", and Section 3861 "Financial Instruments -
Disclosure and Presentation".
    Comprehensive Income - Section 1530 describes reporting and disclosure
recommendations with respect to comprehensive income and its components.
Comprehensive income is the change in Unitholders equity, which results from
transactions and events from sources other than the Trust's Unitholders. These
transactions and events include unrealized gains and losses resulting from
changes in fair value of certain financial instruments. The adoption of this
Section had no impact on the Trust as there have been no transactions
resulting in other comprehensive income.
    Equity and Comprehensive Income - On January 1, 2007, the Trust adopted
Section 3251 of the CICA Handbook, "Equity", replacing Section 3250 "Surplus".
It describes standards for the presentation of equity and changes in equity
for a reporting period as a result of the application of Section 1530,
"Comprehensive Income". The adoption of this Section had no impact on the
Trust as there have been no transactions resulting in other comprehensive
income.
    Financial Instruments - Section 3855 prescribes when a financial asset,
financial liability or non-financial derivative instrument is to be recognized
on the balance sheet and at what amount, requiring fair value or cost-based
measures under different circumstances. Under Section 3855, financial
instruments must be classified into one of the following five categories:
held-for-trading, held-to-maturity, loans and receivables, available-for-sale
financial assets or other financial liabilities. All financial instruments,
including derivatives, are measured in the balance sheet at fair value except
for loans and receivables, held-to-maturity investments and other financial
liabilities which are measured at amortized cost. Subsequent measurement and
changes in fair value will depend on their initial classification, as follows:
held-for-trading financial assets are measured at fair value and changes in
fair value are recognized in net earnings; available-for-sale financial assets
are measured at fair value with changes in fair value recorded in other
comprehensive income until the investment is de-recognized or impaired at
which time the amounts would be recorded in net earnings.
    Under adoption of these new standards, the Trust designated its accounts
receivable as loans and receivables, which are measured at amortized cost. The
Trust's bank indebtedness, accounts payable and accrued liabilities, and
long-term debt are classified as other financial liabilities, which are
measured at amortized cost. The Trust has chosen to expense its debt
transaction costs in the period incurred. For the year ended December 31,
2007, $114,043 of transaction costs were expensed. Other than these changes
the adoption of the standard had no material impact on the Trust's
consolidated financial statements.
    Non-financial derivative instruments, including embedded derivatives, are
to be recorded in the statement of income at fair value unless exempted
because they are a part of normal purchase and sale activities. All changes in
their fair value are recorded in earnings unless cash flow hedge accounting is
used, in which case changes in fair value are recorded in other comprehensive
income. The Trust applied this accounting treatment for all embedded
derivatives in host contracts active as of January 1, 2007. The Trust has
determined it currently has no derivative or embedded derivative instruments
and as such is not impacted by the change in accounting policy.
    Hedges - Section 3855 expands the guidelines required by Accounting
Guideline 13 (AcG-13) "Hedging Relationships". This Section describes when and
how hedge accounting can be applied as well as the disclosure requirements.
The adoption of this Section had no impact on the Trust as the Trust does not
follow hedge accounting at this time.
    Financial instruments - disclosure and presentation - Section 3861
requires entities to provide disclosures in their financial statements that
enable users to evaluate the significance of financial instruments on the
entity's financial position, performance and cash flows. Also this section
enables users through disclosure to evaluate the nature and extent of our use
of financial instruments, the business purposes they serve and the risks
associated with the instruments and management policies for mitigating and
managing those risks.
    Capital disclosures, financial instruments disclosures and presentation -
New CICA Handbook Sections have been issued which will require additional
disclosure in the Trust's consolidated financial statements commencing January
1, 2008. Sections 1535 "Capital Disclosures" requires the disclosure of
qualitative and quantitative information about the Trust's objectives,
policies and processes for managing capital. Sections 3862 "Financial
Instruments - Disclosures" and 3863 "Financial Instruments - Presentation"
will replace Section 3861 to prescribe the requirements for presentation and
disclosure of financial instruments. Handbook section 3031 "Inventories",
which prescribes the recognitions, measurement, disclosure and presentation
issues related to inventories, will become effective January 1, 2008. The
Trust believes that the adoption of these standards will not have a material
impact on the consolidated financial statements.
    International financial reporting standards - The CICA plans to converge
Canadian GAAP for public companies with International Financial Reporting
Standards (IFRS) over a transition period with full convergence expected by
January 1, 2011. The impact of the transition to IFRS on the Trusts'
consolidated financial statements has not yet been determined.

    -------------------------------------------------------------------------
    Disclosure and internal controls
    -------------------------------------------------------------------------
    The Chief Executive Officer and the Chief Financial Officer evaluated the
effectiveness of Deepwell's disclosure controls and procedures for the period
ending December 31, 2007. This evaluation considered the functions performed
by its Disclosure Committee, the review and oversight of all executive
officers and the Board of Directors, as well as the process and systems in
place for filing regulatory and public information. Deepwell's established
review process and disclosure controls are designed to ensure that all
required information, reports and filings required under Canadian securities
legislation are properly submitted and recorded in accordance with those
requirements over financial reporting as of December 31, 2007 pursuant to the
requirements of Multilateral Instrument 52-109 of the Canadian Securities
Administrators. The Trust engaged third-party consultants to assist with the
design, documentation, and testing of original internal control systems, new
proposed improvements, interim measures during the conversion and planned
implementation on completion of the conversion. In light of management's
review, and the results of findings by third-party consultants, Deepwell has
concluded that the following weakness existed in the design of internal
controls over financial reporting:

    
        Entity controls

        While the CEO and CFO of the Trust informally confirm with other
        members of management that they have designed and implemented
        adequate controls, no formal sub-certification process is in place.
        Management has indicated their intent to implement a formal sub-
        certification process for all direct reports to the CEO and the CFO
        to be performed at least quarterly.

        While the Trust has an insider trading and reporting policy, there is
        no disclosure controls and procedures policy to ensure that all
        disclosure obligations are met. The Board of Directors have indicated
        their intent to adopt a disclosure controls and procedure policy to
        be reviewed at least on an annual basis.
    

    Notwithstanding the weaknesses identified, based on the evaluation
performed, the CEO and CFO concluded that the design and operation of the
Trust's disclosure controls and procedures were effective as at December 31,
2007 to ensure that information required to be disclosed by the Trust in
reports filed under Canadian securities laws is gathered, recorded, processed,
summarized and reported within the times specified under Canadian securities
laws and is accumulated and communicated to management, including the CEO and
CFO, to allow timely decisions regarding required disclosure as required under
Canadian securities laws. Further, based on the Trust's mitigating procedures,
the CEO and the CFO have satisfied themselves that the weaknesses identified
have not resulted in material errors in the financial statements. Management
and the Board of Directors are committed to transparency and completeness of
financial reporting and disclosure.
    The existence of the identified control weakness need not be interpreted
as evidence of a lack of integrity, of unsound business practices or of
unacceptable risks to an entity's shareholders and related parties. It should
be noted that while Deepwell's principal executive officer and principal
financial officer believe that Deepwell's disclosure controls and procedures
provide a reasonable level of assurance that they are effective, they do not
expect that Deepwell's disclosure controls and procedures or internal control
over financial reporting will prevent all errors and fraud. A control system,
no matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
Internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.



    
    CONSOLIDATED FINANCIAL STATEMENTS OF

    DEEPWELL ENERGY SERVICES TRUST

    AS AT AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2007, AND AS AT AND
    FOR THE PERIOD FROM APRIL 27, 2006 TO DECEMBER 31, 2006



    DEEPWELL ENERGY SERVICES TRUST
    CONSOLIDATED BALANCE SHEETS

    December 31,                                         2007           2006
    -------------------------------------------------------------------------

    Assets
    Current assets:
      Cash                                       $          -   $     28,861
      Accounts receivable                           2,746,918      2,729,106
      Inventory                                       219,991         80,205
      Prepaid expenses and deposits                   214,920        242,990
    -------------------------------------------------------------------------
                                                    3,181,829      3,081,162

    Property and equipment (Note 4)                46,982,025     39,565,606
    Intangible assets (Note 5)                      2,925,102      3,254,037
    Goodwill                                        7,157,402      7,157,402
    Financial security deposits                             -      1,433,474
    -------------------------------------------------------------------------
                                                 $ 60,246,358   $ 54,491,681
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities
    Current liabilities:
      Bank indebtedness                          $     40,537   $          -
      Demand loan (Note 8a)                           550,000              -
      Accounts payable and accrued liabilities      3,631,316      3,538,986
      Distributions payable                           429,792        417,305
      Current portion of long-term debt (Note 8)      933,333              -
    -------------------------------------------------------------------------
                                                    5,584,978      3,956,291

    Long-term debt (Note 8)                         3,866,667     11,500,000
    Future income taxes (Note 7)                            -         87,201
    Asset retirement obligations (Note 9)           1,016,449        713,744
    -------------------------------------------------------------------------
                                                   10,468,094     16,257,236
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Unitholders' Equity
    Trust units (Note 6)                           56,229,626     40,490,377
    Contributed surplus (Note 6)                    1,066,549        251,432
    Deficit                                        (7,517,911)    (2,507,364)
    -------------------------------------------------------------------------
                                                   49,778,264     38,234,445

    -------------------------------------------------------------------------
                                                 $ 60,246,358   $ 54,491,681
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Commitments and contingencies (Note 12)

    See accompanying notes to the consolidated financial statements.



    DEEPWELL ENERGY SERVICES TRUST
    CONSOLIDATED STATEMENTS OF (LOSS) INCOME, OTHER COMPREHENSIVE INCOME
    AND ACCUMULATED DEFICIT

                                                      For the        For the
                                                       twelve    period from
                                                 months ended    April 27 to
                                                  December 31,   December 31,
                                                         2007           2006
    -------------------------------------------------------------------------

    Revenues                                     $ 14,124,051   $  9,647,020
    -------------------------------------------------------------------------

    Expenses
      Operating                                     6,635,001      4,594,714
      Selling and administrative                    2,518,213      1,409,031
      Depreciation and accretion                    3,246,002      1,911,783
      Amortization of intangible assets (Note 5)      328,935        218,963
      Unit-based compensation (Note 6)                815,117        251,432
      Interest on short-term debt                      38,880         18,365
      Interest on long-term debt                      551,611        341,375
      Amortization of deferred financing costs              -         55,832
      Financing fees                                  114,043              -
      (Gain) loss on sale of
       property and equipment                          (8,773)        34,295
      Loss on write-off of property and equipment
        (net of accrued insurance
         proceeds) (Note 11)                          367,702              -
      Fire-related expenses (Note 11)                 162,119              -
    -------------------------------------------------------------------------
                                                   14,768,850      8,835,790

    (Loss) income before taxes                       (644,799)       811,230

    Future income tax recovery (Note 7)               (87,201)       (47,799)

    -------------------------------------------------------------------------
    Net (loss) income being comprehensive loss       (557,598)       859,029

    Deficit, beginning of period                 $ (2,507,364)  $          -
      Distributions to unitholders (Note 6)        (4,452,949)    (3,366,393)
    -------------------------------------------------------------------------
    Deficit, end of period                       $ (7,517,911)  $ (2,507,364)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net (loss) income per trust unit:
      Basic                                      $      (0.10)  $       0.20
      Diluted                                    $      (0.10)  $       0.20
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Weighted average number
     of trust units outstanding:
      Basic (Note 6)                                5,569,288      4,356,000
      Diluted (Note 6)                              5,570,403      4,357,187
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    DEEPWELL ENERGY SERVICES TRUST
    CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                      For the        For the
                                                       twelve    period from
                                                 months ended    April 27 to
                                                  December 31,   December 31,
                                                         2007           2006
    -------------------------------------------------------------------------

    Operating activities
      Net (loss) income                          $   (557,598)  $    859,029

      Non-cash items:
        Depreciation and accretion                  3,246,002      1,911,783
        Amortization of financing fees                      -         55,832
        Amortization of intangible assets             328,935        218,963
        Future income tax recovery (Note 7)           (87,201)       (47,799)
        Unit-based compensation (Note 6)              815,117        251,432
        (Gain) loss on sale of
         property and equipment                        (8,773)        34,295
        Loss on write-off of property
         and equipment (Note 11)                      746,332              -
        Change in non-cash working capital           (685,719)       575,718
    -------------------------------------------------------------------------
    Cash flow from operating activities             3,797,095      3,859,253
    -------------------------------------------------------------------------

    Investing activities
        Financial security deposits                 1,433,474     (1,408,120)
        Business acquisitions
         (net of cash of $259,925) (Note 3)                 -    (42,792,931)
        Purchase of property and equipment        (11,199,255)    (6,808,996)
        Proceeds on sale of
         property and equipment                       101,980         55,500
        Change in non-cash
         investing working capital                    648,521      1,738,578
    -------------------------------------------------------------------------
    Cash flow from investing activities            (9,015,280)   (49,215,969)
    -------------------------------------------------------------------------

    Financing activities
        Net proceeds from issuance of units        15,475,066     36,930,377
        (Repayments to) proceeds
         from long-term debt                       (6,700,000)    11,500,000
        Proceeds from demand loan                     550,000              -
        Distributions paid to unitholders          (4,176,279)    (2,949,088)
        Financing fees                                      -        (95,712)
    -------------------------------------------------------------------------
    Cash flow from financing activities             5,148,787     45,385,577
    -------------------------------------------------------------------------

    (Decrease) increase in cash                       (69,398)        28,861

    Cash, beginning of period                          28,861              -

    -------------------------------------------------------------------------
    (Bank indebtedness) cash, end of period      $    (40,537)  $     28,861
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary information
        Interest paid in cash                    $    590,491   $    359,740
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    DEEPWELL ENERGY SERVICES TRUST
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE PERIOD FROM JANUARY 1, 2007 TO DECEMBER 31, 2007
    AND THE PERIOD FROM APRIL 27, 2006 TO DECEMBER 31, 2006

    1.  Nature of the Organization

        Deepwell Energy Services Trust (the "Trust" or "Deepwell") is an open
        ended un-incorporated investment trust governed by the laws of the
        Province of Alberta and created pursuant to a Declaration of Trust
        dated April 21, 2006. The principal undertaking of the Trust is to
        engage in the oilfield waste management business indirectly through
        its wholly owned subsidiary, Deepwell Energy Services LP ("Deepwell
        LP") and its subsidiaries Deepwell Energy Services Commercial Trust
        and Deepwell Energy Services Ltd. Deepwell LP provides oilfield waste
        management services, including treating, processing and disposing of
        oilfield wastes and custom treating of oil/water emulsions.

    2.  Significant Accounting Policies

    (a) Basis of presentation

        The consolidated financial statements have been prepared by
        management in accordance with Canadian generally accepted accounting
        principles and are reported in Canadian dollars. Management is
        required to make estimates and assumptions that affect the reported
        amounts of assets and liabilities and disclosure of contingent assets
        and liabilities at the date of the financial statements and the
        reported amounts of revenue and expenses during the period. The most
        significant estimates relate to depreciation, amortization, asset
        retirement obligations, accretion, income taxes, unit-based
        compensation and recoverability of goodwill and intangibles. Actual
        results could differ from those estimates. The financial statements
        have, in management's opinion, been properly prepared using careful
        judgment with reasonable limits of materiality and within the
        framework of the Trust's accounting policies as summarized below.

    (b) Changes in Accounting Policies

        On January 1, 2007, the Trust adopted the Canadian Institute of
        Chartered Accountants ("CICA") Handbook Sections 1530 "Comprehensive
        Income", Section 3251 "Equity", Section 3855 "Financial Instruments -
        Recognition and Measurement", Section 3865 "Hedges", and Section 3861
        "Financial Instruments - Disclosure and Presentation".

        i.    Comprehensive Income - Section 1530 describes reporting and
              disclosure recommendations with respect to comprehensive income
              and its components. Comprehensive income is the change in
              Unitholders equity, which results from transactions and events
              from sources other than the Trust's Unitholders. These
              transactions and events include unrealized gains and losses
              resulting from changes in fair value of certain financial
              instruments. The adoption of this Section had no impact on the
              Trust as there have been no transactions resulting in other
              comprehensive income.

        ii.   Equity and Comprehensive Income - On January 1, 2007, the Trust
              adopted Section 3251 of the CICA Handbook, "Equity", replacing
              Section 3250 "Surplus". It describes standards for the
              presentation of equity and changes in equity for a reporting
              period as a result of the application of Section 1530,
              "Comprehensive Income". The adoption of this Section had no
              impact on the Trust as there have been no transactions
              resulting in other comprehensive income.

        iii.  Financial Instruments - Section 3855 prescribes when a
              financial asset, financial liability or non-financial
              derivative instrument is to be recognized on the balance sheet
              and at what amount, requiring fair value or cost-based measures
              under different circumstances. Under Section 3855, financial
              instruments must be classified into one of the following five
              categories: held-for-trading, held-to-maturity, loans and
              receivables, available-for-sale financial assets or other
              financial liabilities. All financial instruments, including
              derivatives, are measured in the balance sheet at fair value
              except for loans and receivables, held-to-maturity investments
              and other financial liabilities which are measured at amortized
              cost. Subsequent measurement and changes in fair value will
              depend on their initial classification, as follows: held-for-
              trading financial assets are measured at fair value and changes
              in fair value are recognized in net earnings; available-for-
              sale financial assets are measured at fair value with changes
              in fair value recorded in other comprehensive income until the
              investment is de-recognized or impaired at which time the
              amounts would be recorded in net earnings.

              Under adoption of these new standards, the Trust designated its
              accounts receivable as loans and receivables, which are
              measured at amortized cost. The Trust's bank indebtedness,
              accounts payable and accrued liabilities, and long-term debt
              are classified as other financial liabilities, which are
              measured at amortized cost. The Trust has chosen to expense its
              debt transaction costs in the period incurred. For the year
              ended December 31, 2007, $114,043 of transaction costs were
              expensed. Other than these changes the adoption of the standard
              had no material impact on the Trust's consolidated financial
              statements.

              Non-financial derivative instruments, including embedded
              derivatives, are to be recorded in the statement of income at
              fair value unless exempted because they are a part of normal
              purchase and sale activities. All changes in their fair value
              are recorded in earnings unless cash flow hedge accounting is
              used, in which case changes in fair value are recorded in other
              comprehensive income. The Trust applied this accounting
              treatment for all embedded derivatives in host contracts active
              as of January 1, 2007. The Trust has determined it currently
              has no derivative or embedded derivative instruments and as
              such is not impacted by the change in accounting policy.

        iv.   Hedges - Section 3855 expands the guidelines required by
              Accounting Guideline 13 (AcG-13) "Hedging Relationships". This
              Section describes when and how hedge accounting can be applied
              as well as the disclosure requirements. The adoption of this
              Section had no impact on the Trust as the Trust does not follow
              hedge accounting at this time.

        v.    Financial instruments - disclosure and presentation - Section
              3861 requires entities to provide disclosures in their
              financial statements that enable users to evaluate the
              significance of financial instruments on the entity's financial
              position, performance and cash flows. Also this section enables
              users through disclosure to evaluate the nature and extent of
              our use of financial instruments, the business purposes they
              serve and the risks associated with the instruments and
              management policies for mitigating and managing those risks.

        vi.   Capital disclosures, financial instruments disclosures and
              presentation - New CICA Handbook Sections have been issued
              which will require additional disclosure in the Trust's
              consolidated financial statements commencing January 1, 2008.
              Sections 1535 "Capital Disclosures" requires the disclosure of
              qualitative and quantitative information about the Trust's
              objectives, policies and processes for managing capital.
              Sections 3862 "Financial Instruments - Disclosures" and 3863
              "Financial Instruments - Presentation" will replace Section
              3861 to prescribe the requirements for presentation and
              disclosure of financial instruments. Handbook section 3031
              "Inventories", which prescribes the recognitions, measurement,
              disclosure and presentation issues related to inventories, will
              become effective January 1, 2008. The Trust believes that the
              adoption of these standards will not have a material impact on
              the consolidated financial statements.

        vii.  International financial reporting standards - The CICA plans to
              converge Canadian GAAP for public companies with International
              Financial Reporting Standards (IFRS) over a transition period
              with full convergence expected by January 1, 2011. The impact
              of the transition to IFRS on the Trusts' consolidated financial
              statements has not yet been determined.

    (c) Principles of consolidation

        The consolidated financial statements include the accounts of the
        Trust and its wholly owned subsidiaries: Deepwell Energy Services
        Commercial Trust, Deepwell Energy Services Ltd. and Deepwell Energy
        Services LP. All subsidiaries are directly or indirectly wholly owned
        and their operations are fully reflected in the consolidated
        financial statements. All inter-company transactions and balances
        have been eliminated.

    (d) Capitalization of costs

        The Trust capitalizes all costs directly relating to plant
        construction including carrying costs such as property taxes and
        insurance specifically related to the project, and other direct
        costs.

    (e) Cash

        Cash includes cash on hand, balances with banks including overdraft,
        and cash held in trust.

    (f) Inventory

        Inventory consists of drilling fluids, oilfield supplies and crude
        oil, all of which are valued at the lower of weighted average cost
        and net realizable value. As of January 1, 2008, Deepwell will
        replace the existing inventory accounting policy. The new policy
        requires inventory to be valued on a first-in, first-out or weighted
        average basis. The application of this standard is not expected to
        have a material impact on the Trust's consolidated financial
        statements.

    (g) Property and equipment

        Property and equipment is recorded at cost. Depreciation on additions
        and disposals is prorated from the subsequent month of purchase or
        disposal. Depreciation is provided at the following rates:

           Assets                        Method                  Rate
           ------                        ------                  ----
           Buildings                     Declining balance       4%
           Tanks                         Declining balance       4%
           Oilfield services equipment   Declining balance       20%
           Vehicles                      Declining balance       20%
           Disposal wells                Straight-line           5-20 years
           Site improvements             Declining balance       8%
           Pipelines                     Declining balance       5%
           Furniture and fixtures        Declining balance       20%
           Computer equipment            Declining balance       30%
           Leasehold improvements        Straight-line           5 years

    (h) Long lived assets

        Management assesses the carrying value of long lived assets for
        impairment when events or circumstances indicate that the carrying
        value of those assets may not be recoverable. Such events or
        circumstances include items such as an ongoing lack of profitability
        and significant changes in technology. When an indication of
        impairment is present the Trust tests for impairment by comparing the
        carrying value of the asset to its net recoverable amount. Impairment
        is recognized if the carrying value of the asset exceeds the sum of
        the undiscounted cash flows expected to result from that asset. If
        the carrying amount is greater than the net recoverable amount, the
        asset is written down to its estimated fair value.

    (i) Intangible assets

        Intangible assets are comprised of values attributable to customer
        relationships, certificates of approval or completion, and non-
        competition agreements. The carrying value of these assets will be
        assessed whenever an event or changes in circumstances indicate their
        carrying value may not be recoverable. Amortization is provided at
        the following annual rates:
           Completions and contracts  (5% - Straight line)
           Non competition agreements (33% - Straight line)
           Customer relationships     (17% - Straight line)

    (j) Goodwill

        Goodwill is recognized when the total purchase price of a business
        acquisition exceeds the fair value of the net identifiable assets
        acquired and liabilities assumed of the acquired business. The
        goodwill balance is assessed for impairment annually at year end or
        as events occur that may result in impairment. To assess impairment,
        the fair value of the Trust is compared to the respective book value.
        If the fair value is less than the book value a second test is
        performed to determine the amount of impairment. The amount of
        impairment is measured by allocating the fair value of identifiable
        assets and liabilities as if they had been acquired in a business
        combination for a purchase price equal to their fair value to
        determine the implied fair value of goodwill. If the goodwill
        determined in this manner is less than the carrying value of
        goodwill, an impairment loss is recognized in the period in which it
        occurs. Goodwill is stated at cost less impairment and is not
        amortized.

    (k) Asset retirement obligation

        The Trust recognizes as a liability the estimated fair value of the
        future retirement obligations associated with property and equipment.
        The fair value is capitalized and amortized over the same period as
        the underlying asset. The Trust estimates the liability based on the
        estimated costs to abandon and reclaim its ownership interest in all
        wells and facilities and the estimated timing of the costs to be
        incurred in future periods. This estimate is evaluated on a periodic
        basis and any adjustment to the estimate is prospectively applied. As
        time passes, the change in net present value of the future retirement
        obligation is expensed through accretion. Retirement obligations
        settled during the period reduce the future retirement liability.

    (l) Revenue recognition

        The Trust's services include the processing and separation of
        oilfield waste, the disposal of oilfield waste water and the custom
        treating of oil. Revenue is recorded in the period when treatment
        services are provided or performed and when collection is reasonably
        assured. Processing and disposal revenue are recorded at the time of
        sale. Oil sales are recorded at the time of sale.

    (m) Income taxes

        The Trust is a taxable entity for purposes of the Income Tax Act
        (Canada), and is only subject to statutory income taxes on taxable
        income not distributed to unitholders. Bill C-52 Budget
        Implementation Act, 2007 ("Bill C-52") was substantively enacted by
        the Canadian government in June of 2007 and imposes a tax on certain
        distributions from publicly traded specified income flow-through
        trusts ("SIFT") and will apply to distributions made by the Trust to
        its unitholders. The SIFT tax measures take effect January 1, 2011,
        or earlier if the Trust exceeds certain permitted growth guidelines
        established by the Canadian Department of Finance.

        As a result of Bill C-52, the Trust must now recognize (on a
        prospective basis) future income tax assets or liabilities on
        "temporary differences" (differences between the accounting basis and
        the tax basis of the assets and liabilities) in the Trust, unless
        those temporary differences are expected to reverse before the SIFT
        tax comes into effect.

        The Trust is subject to certain provincial capital taxes and
        corporate income taxes and follows the liability method of accounting
        for income taxes. Under the liability method, future income tax
        assets and liabilities are determined based on "temporary
        differences", and are measured using the currently enacted, or
        substantively enacted, tax rates and laws expected to apply when
        these differences reverse. Income tax expense is the sum of the
        Trust's provision for current income taxes and the difference between
        opening and ending balances of the future income tax assets and
        liabilities.

    (n) Unit based compensation

        The Trust has established a unit option plan for trustees, directors,
        officers, employees and consultants. The Trust recognizes unit-based
        compensation expense in the Consolidated Statement of Income for all
        unit options granted based upon their fair value at the time of
        grant. The fair value is determined using an accepted option pricing
        model, with total compensation expense recognized over the period the
        options vest. Consideration paid by the option-holder upon the
        exercise of the options, together with the amount previously
        recognized in contributed surplus, is recognized as an increase in
        Trust Units.

    (o) Income per unit

        Basic net income per Trust Unit is computed by dividing net income by
        the weighted average number of Trust Units outstanding during each
        reporting period. Trust Units issued during the year and Trust Units
        reacquired during the year are weighted for the portion of the year
        that they were outstanding. Diluted net income per Trust Unit is
        calculated using the treasury stock method.

    3.  Business acquisitions

        On April 27, 2006, the Trust purchased all of the issued and
        outstanding shares of Deepwell Disposal Services Inc. ("DDSI") in
        exchange for 356,000 Class B Trust Units valued at $3,560,000.

        On April 28, 2006, the Trust purchased the oilfield waste management
        assets of Producers Disposal Services Ltd. ("PDS") and Rycroft
        Disposal Well Inc. ("Rycroft") for cash consideration of $42,754,509.
        The Trust acquired all of the assets of PDS and Rycroft excluding
        security deposits held by the Alberta Energy and Utilities Board. The
        Trust assumed the asset retirement obligations of PDS and Rycroft;
        however the Trust was only responsible for those operating
        liabilities accruing to PDS and Rycroft subsequent to March 31, 2006.

        ---------------------------------------------------------------------
        Purchase Price               PDS/Rycroft          DDSI         Total
        ---------------------------------------------------------------------
          Cash                      $ 42,754,509  $          -  $ 42,754,509
          Transaction costs              241,279        57,068       298,347
        ---------------------------------------------------------------------
                                      42,995,788        57,068    43,052,856
          Trust Units issued                   -     3,560,000     3,560,000
        ---------------------------------------------------------------------
                                    $ 42,995,788  $  3,617,068  $ 46,612,856
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The consolidated financial statements have been prepared using the
        estimated fair values of assets and liabilities. Due to common
        management and directors, the Trust and DDSI were related parties at
        the time of the acquisition. The transaction was not in the normal
        course of business and the exchange amount being that agreed to by
        the parties, was used for financial reporting purposes because the
        change in the ownership interests in the assets transferred is
        substantive, and estimated fair values of property, plant and
        equipment, intangibles and goodwill for both acquisitions were
        provided by an independent evaluator.

        Allocation of
        Purchase Price               PDS/Rycroft          DDSI         Total
        ---------------------------------------------------------------------
          Cash                      $          -  $    259,925  $    259,925
          Working capital              1,823,356       (35,625)    1,787,731
          Property and equipment      34,547,000       175,000    34,722,000
          Intangible assets            3,160,500       312,500     3,473,000
          Goodwill                     4,135,200     3,022,202     7,157,402
          Deposits                             -        25,354        25,354
          Future income taxes                  -      (135,000)     (135,000)
          Asset retirement
           obligations                  (670,268)       (7,288)     (677,556)
        ---------------------------------------------------------------------
                                    $ 42,995,788  $  3,617,068  $ 46,612,856
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    4.  Property and equipment

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

                                                   Accumulated           Net
    December 31, 2007                       Cost  depreciation    book value
    -------------------------------------------------------------------------
    Disposal wells                  $ 28,705,932  $  3,341,134  $ 25,364,798
    Pipelines                          3,458,236       230,977     3,227,259
    Tanks                              2,865,351       168,349     2,697,002
    Oilfield service equipment         3,064,749       663,976     2,400,773
    Site improvements                  2,608,276       245,837     2,362,439
    Future sites                       8,258,067             -     8,258,067
    Buildings                          1,927,341        69,048     1,858,293
    Computer equipment                   597,051       113,101       483,950
    Vehicles                             297,658        68,488       229,170
    Furniture and fixtures               118,073        27,301        90,772
    Leasehold improvements                12,784         3,282         9,502
    -------------------------------------------------------------------------
                                    $ 51,913,518  $  4,931,493  $ 46,982,025
    -------------------------------------------------------------------------

                                                   Accumulated           Net
    December 31, 2006                      Cost   depreciation    book value
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Disposal wells                  $ 28,122,383  $  1,240,536  $ 26,881,847
    Pipelines                          3,152,585       103,490     3,049,095
    Tanks                              2,685,586        62,499     2,623,087
    Oilfield service equipment         2,630,147       290,086     2,340,061
    Site improvements                  2,270,902        81,218     2,189,684
    Future sites                       1,009,241             -     1,009,241
    Buildings                            963,750        26,193       937,557
    Computer equipment                   246,023        25,303       220,720
    Vehicles                             229,411        25,385       204,026
    Furniture and fixtures               106,185         7,775        98,410
    Leasehold improvements                12,784           906        11,878
    -------------------------------------------------------------------------
                                    $ 41,428,997  $  1,863,391  $ 39,565,606
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Included in future sites, are $8,222,166 (2006 - $1,009,241) in
    capitalized costs for the Claresholm plant construction which have not
    been subject to depreciation. Included in disposal wells, are $181,000
    (2006 - $175,000) for the acquisition of the disposal wells which have
    not been subject to depreciation. Depreciation and amortization will be
    provided on these assets once the construction has been completed.

    5.  Intangible assets

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                   Accumulated           Net
    December 31, 2007                       Cost  amortization    book value
    -------------------------------------------------------------------------
    Completions and contracts       $  2,115,000  $    150,208  $  1,964,792
    Customer relationships             1,310,000       371,023       938,977
    Non competition agreements            48,000        26,667        21,333
    -------------------------------------------------------------------------
                                    $  3,473,000  $    547,898  $  2,925,102
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                                   Accumulated           Net
    December 31, 2006                       Cost  amortization    book value
    -------------------------------------------------------------------------
    Completions and contracts       $  2,115,000  $     68,750  $  2,046,250
    Non competition agreements            48,000         9,460        38,540
    Customer relationships             1,310,000       140,753     1,169,247
    -------------------------------------------------------------------------
                                    $  3,473,000  $    218,963  $  3,254,037
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Included in completion and contracts is $312,500 (2006 - $312,500) which
    is not subject to amortization as the Claresholm facility is not yet
    complete.

    6.  Unitholder's equity

    (a) Class B Trust Units

    The Trust is authorized to issue an unlimited number of Class B Trust
    Units.

    On April 27, 2006, the Trust issued 4,000,000 Class B Trust Units at a
    price of $10.00 per Unit by way of private placement for gross proceeds
    of $40,000,000. An aggregate of 161,670 Class B Trust Units were issued
    to trustees of the Trust or, directors or officers of subsidiaries of the
    Trust, directly or indirectly for proceeds of $1,616,700.

    On April 27, 2006, the Trust acquired all the issued and outstanding
    shares of Deepwell Disposal Services Inc. Consideration of $3,560,000 was
    paid by the issuance of 356,000 Class B Trust Units at an ascribed value
    of $10.00 per Unit.

    Each Class B Unit was exchangeable into one Trust Unit on the earlier of
    one day from the date of issuance of a receipt for a final prospectus
    filed by the Trust on a public stock exchange, and August 28, 2006. If
    The Trust's Units were not listed on a public stock exchange by
    August 25, 2006, the Trust agreed to issue to each holder of Class B
    Units an additional 0.10 of a regular Trust Unit. Pursuant to the Trust's
    prospectus dated August 18, 2006, the Trust exchanged all outstanding
    Class B Trust units on a one for one basis for Units of Deepwell Energy
    Services Trust. Subsequent to the exchange of units, the Trust received
    approval to list the Units for trading on the TSX, and the Units
    commenced trading on the TSX on August 24, 2006 and the 0.10 of a regular
    Trust Unit penalty was not made.

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                        Number        Amount
    -------------------------------------------------------------------------
    Issued to settlor of the Trust                           1  $         10
    Cancelled                                               (1)          (10)
    Issued on business acquisition                     356,000     3,560,000
    Issued on private placement                      4,000,000    40,000,000
    Redemption of Class B Trust Units               (4,356,000)  (43,560,000)
    -------------------------------------------------------------------------
    December 31, 2006                                        -  $          -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    There are no Class B units outstanding at December 31, 2007.

    (b) Regular Trust Units

    The Trust is authorized to issue an unlimited number of Regular Trust
    Units.

    On August 22, 2006, the Trust exchanged each outstanding Class B Trust
    Unit on a one-for-one basis with regular Trust Units.

    Trust Units are redeemable at any time at the option of the unitholder.
    The redemption price is equal to the lesser of 90% of the average market
    price for the 10 days immediately prior to the date the units were
    tendered for redemption and the closing market price on the date the
    units were tendered for redemption.

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                             December 31, 2007           December 31, 2006
                            Number        Amount        Number        Amount
    -------------------------------------------------------------------------
    Balance, beginning
     of period           4,356,000  $ 40,490,377             -  $          -

    Issued on redemption
     of Class B units            -             -     4,356,000    43,560,000
    Issued upon rights
     offering July 9,
     2007                2,180,515    13,104,895             -             -
    Issued upon private
     placement July 31,
     2007                  582,362     3,499,996             -             -
    Issued from
     Distribution
     Reinvestment Plan
     (DRIP)                 44,323       264,184             -             -
    Trust unit issue
     costs                       -    (1,129,826)            -    (3,069,623)

    -------------------------------------------------------------------------
    Balance, end of
     period              7,163,200  $ 56,229,626     4,356,000  $ 40,490,377
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (c) Special Voting Rights

    The Trust is authorized to issue an unlimited number of Special Voting
    Units, which will enable the Trust to provide voting rights to holders of
    any exchangeable shares that may be issued by any direct or indirect
    subsidiaries of the Trust. Except for the right to vote, the Special
    Voting Units do not confer any other rights. No Special Voting Units have
    been issued since inception of the Trust.

    (d) Trust Unit Options

    The options carry a five year term and vest equally over a period of
    three years from the date of grant. The exercise price of each option is
    based upon the weighted average trading price for a period prior to the
    date of grant. The exercise price is adjusted downwards by 100% of the
    amount of distributions paid on outstanding Trust Units.

    The fair value of options issued during the period was $2.71 (2006 -
    $3.81) and estimated using the Black-Scholes pricing model with the
    following assumptions: risk free interest rate of 4.25% (2006 - 4.25%);
    volatility of 35% to September 2007 and 45% to the end of the period
    (2006 - 35%). The impact of monthly distributions and corresponding
    changes in exercise price during the life of the options are assumed to
    be equal and offsetting, and so no provision is made in the pricing model
    for either factor.


                               December 31, 2007           December 31, 2006
                      --------------------------- ---------------------------
                                        Weighted                    Weighted
                         Number of  average exer-    Number of  average exer-
                           options    cise price       options    cise price
                           -------  ------------       -------  -------------
    Balance, beginning
     of period             303,500  $       8.81             -  $          -
    Granted                208,971          6.12       304,000          9.63
    Expired/Cancelled       (5,500)         9.27          (500)        10.26
    Exercised                    -             -             -             -
    -------------------------------------------------------------------------
    Balance, end of
     period                506,971  $       7.70       303,500  $       9.63
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As such, the opening weighted average exercise prices have been adjusted
    by $0.82 (2006 - $nil) to reflect the decrease in exercise price for
    distribution over the year.

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

                              Options outstanding        Options exercisable
                         ------------------------------ ---------------------
                                    Weighted   Weighted             Weighted
                          Number     average    average     Number   average
                              of     contrac-  exercise         of  exercise
    Exercise price       options   tual life      price    options     price
    --------------       -------   ---------   --------    -------  ---------
    $   6.12             206,971        4.64   $   6.12     73,800  $   6.12
    $   6.32               2,000        4.36       6.32          -
    $   8.79             282,500        3.64       8.79     94,167      8.79
    $   9.10              14,500        3.76       9.10      4,833      9.10
    $   9.44               1,000        3.73       9.44        333      9.44
    -------------------------------------------------------------------------
                         506,971        4.04   $   7.70    173,133  $   7.66
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (e) Contributed surplus

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    December 31,                                          2007          2006
    -------------------------------------------------------------------------
    Balance, beginning of period                  $    251,432  $          -
    Fair value attributed to unit-based
     compensation                                      815,117       251,432
    -------------------------------------------------------------------------
    Balance, end of period                        $  1,066,549  $    251,432
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (f) Distributions to unitholders

    The Trust declares monthly distributions of cash to Unitholders of record
    as at the close of business on each Distribution Record Date. Pursuant to
    the declaration of trust, the Trust is required to pay to Unitholders the
    net income of the trust determined pursuant to the provisions of the
    Income Tax Act (Canada). Such distributions are recorded as reductions of
    equity upon declaration of the distribution. During the period, the Trust
    declared and paid distributions to the Unitholders in accordance with the
    following schedules:

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                  Distribution
                            Record       Payment           per
    Period                    date          date    Trust unit        Amount
    -------------------------------------------------------------------------
    Jan 2007          Jan 31, 2007  Feb 15, 2007  $     0.0958  $    417,304
    Feb 2007          Feb 28, 2007  Mar 15, 2007        0.0958       417,304
    Mar 2007          Mar 31, 2007  Apr 13, 2007        0.0600       261,360
    Apr 2007          Apr 30, 2007  May 15, 2007        0.0600       261,360
    May 2007          May 31, 2007  Jun 15, 2007        0.0600       261,523
    Jun 2007          Jun 30, 2007  Jul 14, 2007        0.0600       261,662
    Jul 2007          Jul 31, 2007  Aug 15, 2007        0.0600       427,655
    Aug 2007          Aug 31, 2007  Sep 14, 2007        0.0600       427,952
    Sep 2007          Sep 30, 2007  Oct 15, 2007        0.0600       428,485
    Oct 2007          Oct 31, 2007  Nov 15, 2007        0.0600       429,119
    Nov 2007          Nov 30, 2007  Dec 15, 2007        0.0600       429,433
    Dec 2007          Dec 31, 2007  Jan 15, 2008        0.0600       429,792
    -------------------------------------------------------------------------
    Distributions declared to unitholders during 2007           $  4,452,949
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                                  Distribution
                            Record       Payment           per
    Period                    date          date    Trust unit        Amount
    -------------------------------------------------------------------------
    Apr 28-30,2006    Apr 30, 2006  May 15, 2006  $     0.0064  $     27,953
    May 2006          May 30, 2006  Jun 15, 2006        0.0958       417,305
    Jun 2006           Jul 6, 2006  Jul 14, 2006        0.0958       417,305
    Jul 2006          Jul 28, 2006  Aug 15, 2006        0.0958       417,305
    Aug 2006          Aug 31, 2006  Sep 15, 2006        0.0958       417,305
    Sep 2006         Sept 29, 2006  Oct 13, 2006        0.0958       417,305
    Oct 2006          Oct 31, 2006  Nov 15, 2006        0.0958       417,305
    Nov 2006          Nov 30, 2006  Dec 15, 2006        0.0958       417,305
    Dec 2006          Dec 29, 2006  Jan 15, 2007        0.0958       417,305
    -------------------------------------------------------------------------
    Distributions declared to unitholders during 2006           $  3,366,393
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (g) Weighted average Trust units outstanding

    December 31,                                          2007          2006
    -------------------------------------------------------------------------
    Basic                                            5,569,288     4,356,000
    Diluted                                          5,570,403     4,357,187
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    In calculating diluted unit amounts for the year ended December 31, 2007,
    the Trust excluded 303,000 (2006 - 16,000) options because the exercise
    price was greater than the average market price during the year.

    (h) Dividend re-investment plan

    On April 10, 2007, the Trust adopted a distribution reinvestment plan
    (the "DRIP"). The DRIP, to the extent that Unitholders participate, will
    provide the Trust with additional cash for growth. The DRIP allows
    eligible Unitholders of the Trust to direct that their cash distributions
    be reinvested in additional Trust units. The cash distributions will be
    re-invested at the discretion of Deepwell Energy Services Ltd.'s
    management either by acquiring Trust units issued from treasury at
    95 percent of the average market price (as defined in the DRIP) or by
    acquiring Trust units at prevailing market prices.

    7.  Income taxes

    On June 22, 2007, the Specified Investment Flow-Through (SIFT) tax
    included in the Government of Canada's Bill C-52, received Royal Assent,
    creating a new 31.5 percent tax to be applied to distributions from
    certain income trusts and partnerships, including Deepwell, effective
    January 1, 2011. With the rate of reduction enacted on December 14, 2007,
    the new tax is to be applied to distributions at the tax rates of
    29.5 percent and 28.0 percent effective January 1, 2011 and 2012
    respectively.

    Based on the amount of the Trust's existing temporary differences that
    are anticipated to reverse after January 1, 2011, the Trust expects a
    future income tax asset as at January 1, 2011. However, the future income
    tax asset is fully offset by a valuation allowance. The anticipated
    amount and timing of reversals of temporary differences will be dependent
    on the Trust's actual results, distributions and actual acquisition and
    disposition of assets and liabilities. As a result, a change in estimates
    or assumptions could materially affect the estimate of the future tax
    asset.

    Future income tax recovery:

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    December 31,                                          2007          2006
    -------------------------------------------------------------------------
    (Loss) income before taxes                    $   (644,799) $    811,230
    Combined federal and provincial income
     tax rate                                           32.12%        32.49%
    -------------------------------------------------------------------------
                                                      (207,109)      263,569
    Increase (decrease) in income taxes resulting
     from:
      Change in tax status with enactment of
       Bill C-52                                    (2,622,368)            -
      Non-taxable portion of Trust income             (168,841)     (313,509)
      Changes in tax rate                                    -        (1,303)
      Non-deductible items and other                   100,933         3,444
      Valuation allowance                            2,810,184             -
    -------------------------------------------------------------------------
    Future income tax recovery                    $    (87,201) $    (47,799)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Future income tax liability:

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    December 31,                                          2007          2006
    -------------------------------------------------------------------------

    Future income tax assets:
    -------------------------
    Difference in tax and book value of the
     Trust assets                                 $  2,215,677  $          -
    Asset retirement obligation                        284,661         1,593
    Unit issuance costs                                123,624             -
    Operating losses of the subsidiary                 315,130        46,399
    -------------------------------------------------------------------------
                                                     2,939,091        47,992
    Future income tax liabilities:
    ------------------------------
    Difference in tax and book value of the
     subsidiary's assets                              (128,907)     (135,193)
    Valuation allowance                             (2,810,184)            -
    -------------------------------------------------------------------------
    Future income tax liability, end of period    $          -  $    (87,201)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Trust has non-capital loss carry forwards from its subsidiary of
    approximately $1,003,000. The expiration of the losses is as follows:

           2013                                   $    111,000
           2014                                        229,000
           2025                                        168,000
           2026                                        178,000
           2027                                        317,000

    8.  Credit facilities

    The Trust renewed its existing credit facilities on May 31, 2007 with a
    Canadian chartered bank (the "credit facilities") which consist of the
    following:

    (a) Demand loan

    Under the credit facilities, the Trust has a $2,000,000 demand revolving
    operating loan. During the period, interest ranged from the lender's
    prime rate plus 0.125% to 1.400% and is dependent on the funded debt to
    EBITDA ratio. As of December 31, 2007 the borrowing base for the demand
    loan was at $1,212,863 (2006 - $1,808,000) and the amount drawn was
    $550,000 (2006 - $nil).

    (b) Long term debt

    Under the credit facilities, the Trust has a $15,500,000, 364 day
    extendible revolving term loan committed to May 29, 2008. No set
    principal repayment has been established and the Trust has the ability to
    repay, borrow and repay again until the 364 day term expires. Interest
    ranges from the lender's prime rate plus 0.125% to 1.400% per annum.
    Interest is calculated monthly and paid in arrears. As at December 31,
    2007 an aggregate of $4,800,000 (2006 - $11,500,000) was outstanding of
    which $933,333 (2006 - $nil) is current. The revolving period extends to
    May 29, 2008, at which time the credit facility is eligible for renewal.
    Should this renewal not be extended, the credit facility reverts to
    three-year term with the monthly principal repayments commencing on
    June 26, 2008.

    As security for the credit facilities, Deepwell LP granted lenders a
    security interest over all of its assets. In addition, the Trust and its
    subsidiaries guaranteed the indebtedness of Deepwell LP under the credit
    facilities with such guarantee being secured by all of the assets of each
    such guarantor. In respect of any proceeds resulting from the enforcement
    of the credit facilities or the above mentioned guarantees, the lenders,
    as creditors, will have a prior ranking claim relative to the
    Unitholders.

    9.  Asset retirement obligation

    It is management's estimate that the remaining lives of the disposal
    sites are approximately 20 years, at which time the cost to close and
    reclamate the disposal sites will approximate $3,430,000. The discounted
    cash flows required to retire the assets was determined using a credit
    adjusted rate of 8.50% and an inflation rate of 2%. The accrued liability
    for closure of the disposal sites is recognized over the estimated
    remaining life of the assets. The associated asset retirement costs are
    capitalized as part of the carrying amount of the long-lived assets and
    are depreciated over their estimated useful lives.

    Changes in the asset retirement obligation balance are summarized below:

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    December 31,                                          2007          2006
    -------------------------------------------------------------------------
    Asset retirement obligation, beginning
     of period                                    $    713,744  $          -
    Asset retirement obligation, upon acquisition            -       675,762
    New obligations                                    240,889             -
    Accretion                                           61,816        37,982
    -------------------------------------------------------------------------
    Asset retirement obligation, end of period    $  1,016,449  $    713,744
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    10. Financial Instruments

    All significant financial assets and financial liabilities of the Trust
    are either recognized or disclosed in the financial statements together
    with other information relevant for making a reasonable assessment of
    future cash flows, interest rate risk and credit risk.

    (a) Fair value of financial instruments

    The carrying values of the Trust's bank indebtedness, accounts
    receivable, accounts payable and accrued liabilities approximate their
    respective fair values due to their short term maturity. As the Trust's
    revolving credit facility and long term debt bear interest at floating
    market rates, the respective carrying values approximate fair value.

    (b) Credit concentration

    The Trust has a concentration of credit risk because substantially all
    oil revenues are accumulated by the marketer, and paid in full the month
    following receipt. The Trust manages this risk by entering into sales
    contracts with credit worthy counterparties, reviewing its exposure to
    individual entities on a regular basis, and delaying repayment of oil
    credits beyond the settlement date.

    (c) Interest rate risk

    Interest rate risk is the risk that the value of a financial instrument
    might be adversely affected by a change in the interest rates. Changes in
    market interest rates may have an effect on the cash flows associated
    with some financial assets and liabilities, known as cash flow risk, and
    on the fair value of other financial assets or liabilities, known as
    price risk. The Trust is exposed to interest rate risk with respect to
    the utilization of floating rate credit facilities to finance operations.
    The Trust has the option to renew these loans annually.

    11. Fire-related expenses and losses

    On December 7, 2006, a fire at the Grande Cache facility damaged the
    waste receiving area. The facility was shut down for one week until
    regulatory approval to re-open was received, and operations were limited
    until February 1, 2007 when a temporary waste receiving system was
    implemented. The facility operated to the end of April 2007 using the
    temporary system, while a new permanent receiving system was installed.
    The damaged equipment has been dismantled and removed and reconstruction
    is complete. Assets damaged in the incident include the waste receiving
    pit, solids treatment pad, a conveyor system used for waste separation,
    and miscellaneous piping and electrical components. During the process of
    restoring the facility to its full operating condition and subsequent to
    the release of the December 31, 2006 financial statements it was
    determined that efforts to restore the damaged assets were more extensive
    than anticipated and had taken on the nature of a replacement rather than
    a repair. As a result of the change in the nature of the restoration, the
    net book value of assets valued at $746,332 was written off, net of an
    accrued provision for insurance proceeds of $378,630.

    Direct fire-related expenses of $162,119 were incurred primarily for
    emergency services, legal expenses, and other professional fees and these
    were recognized as expenses in the first quarter of 2007. No provision
    has been made for recovery of these direct fire-related costs through
    insurance although Deepwell is pursuing a claim. In the December 31, 2006
    financial statements, all fire-related expenses incurred to date were
    reflected as insurance proceeds receivable. Subsequent to the
    December 31, 2006 financial statement date, indications from the insurer
    indicated less certainty as to the amount collectible, and in recognition
    of the decreased certainty of the amount collectible the full amount of
    costs have been applied to the current period as a change in estimate and
    any future insurance proceeds will be recorded against these expenses
    when the amounts have been received or collection is reasonably certain
    and estimable.

    12. Commitments and contingencies

    The Trust is committed to the following future minimum payments under
    lease contracts for office space and two vehicles with varying expiration
    dates.

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    2008                                                        $    164,577
    2009                                                             163,024
    2010                                                             139,962
    2011                                                              91,704
    Thereafter                                                             -
    -------------------------------------------------------------------------
                                                                $    559,267
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Trust has letters of guarantee in the amount of $2,126,896 (2006 -
    $nil) available, none of which have been drawn as of year end.

    13. Related party transactions

    There were no transactions with related parties for the twelve months
    ended December 31, 2007. During 2006, the Trust made payments in the
    amount of $318,954 for legal expenses to a Partnership of which one of
    the Trustees is a Partner. These transactions were conducted in the
    normal course of operations, on commercial terms established and agreed
    to by the parties. As at December 31, 2006, $6,176 was outstanding in
    accounts payable and accrued liabilities.

    Also see Note 3 for the Trust's purchase of all the issued and
    outstanding shares of DDSI.

    14. Subsequent events

    The Trust declared a cash distribution for the period January 1, 2008 to
    January 31, 2008 at $0.06 per unit to be paid on February 15, 2008.

    The Trust declared a cash distribution for the period February 1, 2008 to
    February 29, 2008 at $0.06 per unit to be paid on March 15, 2008.

    15. Comparative figures

    Certain of the comparative figures have been reclassified to conform to
    the current year's financial statement presentation.
    

    -------------------------------------------------------------------------
    Additional information about the Trust is available at www.sedar.com and
on the Trust's website at www.deepwellenergy.com

    Certain statements in this press release constitute "forward- looking"
statements that involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or achievements of the
Trust or Deepwell LP, or industry results, to be materially different from any
future results, performance or achievements expressed or implied by such
forward looking statements. Forward-looking statements involve significant
risks and uncertainties, should not be read as guarantees of future
performance or results, and will not necessarily be accurate indications of
whether or not such results will be achieved. A number of factors, including
those discussed above, could cause actual results to differ materially from
the results discussed in the forward-looking statements. Deepwell's
forward-looking statements are expressly qualified in their entirety by this
cautionary statement. Unless otherwise required by applicable securities laws,
Deepwell does not intend nor does it undertake any obligation to update or
review any forward-looking statements to reflect subsequent information,
events, results or circumstances or otherwise.





For further information:

For further information: Robert Dodds, President and CEO, Deepwell
Energy Services Trust, (403) 508-6001; Or: Scott Gerecke, Vice-President
Finance and CFO, Deepwell Energy Services Trust, (403) 508-6005, Email:
investing@deepwellenergy.com

Organization Profile

DEEPWELL ENERGY SERVICES TRUST

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