Deepwell Energy Services Trust announces financial results



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

    CALGARY, March 30 /CNW/ - Deepwell Energy Services Trust (the "Trust")
(TSX:DWL.UN) is pleased to announce financial results for the fourth quarter
and period ended December 31, 2006. Deepwell posted positive income and cash
flow from operations for the quarter, and for its first 247 days of operation.

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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 30, 2007 and should be read in
conjunction with the Trust's audited consolidated financial statements as at
and for the 247 days ended December 31, 2006. This MD&A discusses operations
and events for the 247 day period ended December 31, 2006. Unless otherwise
noted, references to the "year" in this MD&A refer to the 247 day period ended
December 31, 2006, and references to the "quarter" in this MD&A refer to the
three months ended December 31, 2006.

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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
calculations of other companies or Trusts.

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    Deepwell overview
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    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.
    On April 27, 2006, Deepwell completed its private placement which raised
$40,000,000 in gross proceeds. On April 28, 2006, Deepwell closed the
acquisition of the oilfield waste management businesses operated by Producers
Oilfield Services Inc. for cash consideration of approximately $43,000,000.
The acquisition was funded with approximately $37,000,000 in net proceeds from
the April 27, 2006 private placement, and approximately $6,000,000 drawn from
the Trust's credit facilities. The acquisition included three operating
facilities in Alberta located at Grande Cache, Mayerthorpe, and Rycroft.
    The Mayerthorpe and Grande Cache facilities are oilfield waste management
facilities and are operated in association with Class 1B disposal wells. These
facilities are designed to receive, treat and separate oilfield wastes into
recoverable oil and disposable water and solids. Recovered oil is shipped from
the facility and sold into the oil market at prevailing market rates. The
solids are transported and disposed of in a landfill approved by the Alberta
Energy and Utilities Board (EUB) and the water is injected into a Deepwell LP
Class 1B disposal well. Deepwell LP's facilities can also receive, treat and
separate oil/water emulsions to obtain pipeline specification crude oil.
Treated oil is then shipped from the facility and sold into the oil market at
prevailing market rates and credited back to the customer and the separated
water is injected into a Deepwell LP Class 1B disposal well.
    The Rycroft facility is a water injection facility operated in
association with a Class 1B disposal well. This facility is designed to
receive and treat produced water to recover residual amounts of oil. The
residual oil is shipped from the facility and then sold into the oil market at
prevailing market rates. The water is disposed of in the Deepwell LP Class 1B
disposal well at Rycroft.

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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:

    
    -   Focus on oilfield waste management: Deepwell currently operates
        exclusively in the oilfield waste management business, and intends to
        continue that focus;
    -   Growth: Deepwell is primarily focused on organic growth through
        adding new facilities, and increasing capacity and services provided
        at existing facilities;
    -   Operational efficiency: Attain and maintain efficient operations and
        a high standard of customer service within a safe working
        environment; and
    -   Environmental stewardship: Meet or exceed regulatory requirements and
        industry standards.
    

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    Selected financial information
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    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.

    
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                                                 For the three   For the 247
                                                  months ended    days ended
    Financial Highlights                          Dec 31, 2006  Dec 31, 2006
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    Revenue                                       $  4,059,296  $  9,647,020
    Operating costs                                  1,605,492     4,594,714
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    Gross Margin                                     2,453,804     5,052,306
    Selling and administrative                         730,354     1,409,031
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    Earnings before interest, taxes
     depreciation & amortization (EBITDA)            1,723,450     3,643,275

    Depreciation, accretion and amortization           993,621     2,186,578
    Unit-based compensation                            197,812       251,432
    Interest                                           149,325       359,740
    Loss on sale of assets                              34,295        34,295
    Future income taxes                                (47,799)      (47,799)
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    Net income                                         396,196       859,029
    Add:
    Depreciation, accretion and amortization           993,621     2,186,578
    Unit based compensation expense                    197,812       251,432
    Loss on sale of property and equipment              34,295        34,295
    Future income taxes                                (47,799)      (47,799)
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    Funds from operations                         $  1,574,125  $  3,283,535
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    Net income                                    $    647,628  $    859,029
    Per unit, basic                                       0.15          0.25
    Per unit, diluted                                     0.15          0.25
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    EBITDA                                        $  1,723,450  $  3,643,275
    Per unit, basic                                       0.40          0.84
    Per unit, diluted                                     0.40          0.84
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    Funds from operations                         $  1,574,125  $  3,283,535
    Per unit, basic                                       0.36          0.81
    Per unit, diluted                                     0.36          0.81
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    Cash distributions paid to unitholders        $  1,251,915  $  2,949,085
    Per unit, basic                                       0.29          0.68
    Per unit, diluted                                     0.29          0.68
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    Gross margin as a percentage of revenue                60%           52%
    Selling and administrative as a
     percentage of revenue                                 17%           15%
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    Capital expenditures                          $  3,416,125  $  6,808,996
    Total assets                                                $ 54,491,681
    Long-term debt - ending                                     $ 11,500,000
    Total long-term liabilities                                 $ 12,300,945
    Unitholders' capital - ending                               $ 40,490,377
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    Weighted average Trust units, basic              4,356,000     4,356,000
    Weighted average Trust units, diluted            4,356,000     4,357,187
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    Revenues for the year were $9,647,020, with a gross margin of $5,052,306
(52 percent of revenue), EBITDA of $3,643,275 (38 percent of revenue) and net
income of $859,029 (9 percent of revenue). Revenues for the quarter were
$4,059,296, with a gross margin of $2,453,804 (60 percent of revenue), EBITDA
of $1,723,450 (42 percent of revenue) and net earnings of $396,196 (10 percent
of revenue). Revenues improved for the quarter, relative to results in the
prior quarters due to seasonally higher levels of activity in the fourth
quarter in the industry, partially offset by lower prices on the sale of
recovered oil compared to the second and third quarters of 2006.
    On a basic and diluted per unit basis, earnings for the year were
$0.20 per unit ($0.09 per unit for the quarter), and funds from operations for
the year was $0.75 per unit ($0.36 per unit for the quarter). Basic and
diluted distributions declared to unitholders for the year were $3,366,393 or
$0.77 per unit ($0.29 per unit for the quarter). Distributions paid for the
year were $2,949,085, or $0.68 cents per unit, basic and diluted ($0.29 per
unit for the quarter).
    In general, demand in the oilfield waste management business was strong
for the year, although as is typically the case, seasonal fluctuations and
weather conditions had an impact on activity at certain times.

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    Results of operations
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    Revenue

    Revenues for the year were $9,647,020 ($4,059,296 for the quarter)
comprising approximately 60 percent from processing and disposal fees and
40 percent from the sale of recovered oil (57 percent and 43 percent
respectively for the quarter).
    During the year, the Trust experienced a number of challenges at the
Grande Cache facility. In June the pipeline running from the plant to the
disposal well breeched. There was no exposure to the environment, as the inner
fiberglass pipeline was enclosed in a steel casing, however in order to
minimize the risk of future pipeline breaches at the facility, the entire
inner fiberglass pipeline was replaced. This resulted in a significant impact
to revenues as the pipeline was not brought back on-line until September 28,
2006. During this time, Grande Cache was still receiving limited amounts of
production fluids and trucking the water from the plant to the well site.
Small volumes of oilfield waste were being processed during this period as
well.
    In October and November, a solids treatment pad was installed at Grande
Cache to improve solid waste handling and treatment abilities; however, the
installation disrupted the ability to receive and process waste in October and
November.
    On December 7, 2006, an explosion and subsequent fire occurred at the
Grande Cache facility, The damage was isolated to a single tank in the vacuum
truck unloading system, and the facility resumed operations on December 14,
2006. For the remainder of the year, the facility was only capable of
receiving waste transported in tanker trucks, which could be offloaded
directly into Deepwell's tanks. On February 1, 2007, Deepwell resumed
receiving waste transported in vacuum trucks.
    The above-noted operational issues at Grande Cache negatively impacted
revenues by an estimated $743,000 for the year, and $473,000 for the quarter.
    The Mayerthorpe facility provided consistent operational and financial
results for the year and the quarter, and generally exceeded expectations. The
Rycroft facility provided strong results except in June, when the facility was
out of operation for two weeks during stimulation of the disposal well. The
downtime while the well was stimulated decreased revenues, however at year end
the facility was at a "run-rate" significantly beyond original expectations.

    Expenses

    Operating expenses

    Operating expenses were $4,594,714 for the year, and the relationship to
revenues is generally consistent with management's expectations. Operating
expenses include $1,133,828 in oil credits repaid to customers ($371,068 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. Additional trucking costs of approximately $166,000 were incurred
during the third quarter of the year, to transport water to the wellhead for
disposal, while the disposal pipeline at the Grande Cache facility was out of
service.

    Selling and administrative

    Selling and administrative costs for the year were $1,409,031 or
15 percent of revenue ($730,354 and 18 percent for the quarter). Professional
fees, audit fees, wages and benefits for head office personnel, office
supplies, and computer related expenses were the most significant cash costs.

    Depreciation, amortization and accretion

    Depreciation, amortization and accretion expense was $2,186,578 for the
period ($993,621 for the quarter) and consists of depreciation of fixed assets
of $1,875,595 ($867,586 for the quarter), amortization of intangible assets of
$218,963 ($82,160 for the quarter), accretion of $36,188 ($14,243 for the
quarter), amortization of deferred financing charges of $55,832 ($29,632 for
the quarter). Intangible assets consist of regulatory approvals, customer
relationships, and non-competition agreements.

    Interest

    Total cash interest expense for the year was $359,740 ($149,325 for the
quarter) comprised of interest on long-term debt of $341,375 and interest on
the Trust's operating loan of $18,365. 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 0.625 percent over the lender's prime rates.

    Loss on sale of assets

    During the fourth quarter, a plant vehicle and a tractor loader were
sold, for total proceeds of $55,500, and recognized losses on disposal were
$34,295.

    Income taxes

    The Trust is a taxable entity under the Income Tax Act (Canada) but is
taxable only on income that is not distributed to the Unitholders. Any taxable
income is distributed to the Unitholders and therefore no provision for income
taxes relating to the Trust is included in these financial statements.
    Income taxes in the Trust's corporate subsidiary are accounted for under
the asset and liability method. Future tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement and income tax basis of assets and liabilities. Future
tax assets and liabilities are measured using enacted or substantially enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
future tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment or substantive enactment
date.
    On December 21, 2006, the Federal Minister of Finance released draft
legislation to implement proposals originally announced on October 31, 2006
relating to the taxation of certain distributions from certain trusts and
partnerships (the "Trust Taxation Proposal"). Subject to the Trust Taxation
Proposal, returns on capital are generally taxed as ordinary income in the
hands of a unitholder who is resident in Canada for purposes of the Income Tax
Act (Canada) (The "Tax Act"). Pursuant to the Trust Taxation Proposal,
commencing January 1, 2011 (provided the Trust only experiences "normal
growth" and no "undue expansion" before then) certain distributions from the
Trust which would otherwise have been taxed as ordinary income generally will
be characterized as dividends in addition to being subject to tax at corporate
rates at that trust level. Returns of capital generally are (and under the
Trust Taxation Proposal will continue to be) tax-deferred for unitholders who
are resident in Canada for purposes of the Tax Act (and reduce such
unitholder's adjusted cost based in the Trust Unit for purposes of the Tax
Act). Distributions, whether of income or capital to a unitholder who is not
resident in Canada for purposes of the Tax Act, or that is partnership that is
not a "Canadian partnership" for purposes of the Tax Act, generally will be
subject to Canadian withholding tax.

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    Distributions to Unitholders
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    During the year, distributions declared to unitholders were $3,366,393,
and distributions paid during the year were $2,949,085. Since inception, the
Trust has made monthly distributions of $0.0958 per unit, with the first
payment prorated for the two days following acquisition to the end of April,
2006. On March 19, 2007 the Trust announced a change in the monthly
distribution and that the cash distribution for the period of March 1 to
March 31, 2007 has been set at $0.06 per Trust unit; this cash distribution is
payable on April 13, 2007 to unitholders of record on March 30, 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. A reduction in the cash distribution will provide greater
financial flexibility to exploit Deepwell's high-return growth opportunities.

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    Investing activities
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    Net cash used in investing activities during the year was $49,215,940.

    Business acquisitions

    On April 27 the Trust purchased all of the issued and outstanding shares
of Deepwell Disposal Services Inc. in exchange for 356,000 Class B Trust Units
valued at $3,560,000. The Trust incurred transaction costs of $57,068.
    On April 28, 2006, the Trust purchased the oilfield waste management
assets of Producers Disposal Services Ltd. and Rycroft Disposal Well Inc.
("PDS" and "Rycroft" respectively) for cash consideration of $42,754,509. The
Trust also incurred transaction costs of $241,279. The Trust acquired all of
the assets of PDS and Rycroft, excluding security deposits held by the EUB.
The Trust assumed the asset retirement obligations of PDS and Rycroft; however
the Trust assumed only those operating liabilities accruing to PDS and Rycroft
subsequent to March 31, 2006. The Trust also did not assume any bank
indebtedness or amounts due to affiliates.

    Capital expenditures

    Excluding investment on the original acquisition, (which is detailed
above) the Trusts' capital expenditures for purchase of property and equipment
for the year were $6,808,967.
    In the third quarter of 2006, a new pipeline from the Grande Cache
facility to the disposal well was installed at a cost of approximately
$1,290,000.
    To increase capacity at Grande Cache, a second disposal well was placed
into operation by stimulating an out-of-service disposal well at a cost of
approximately $1,900,000. The well was put into service in late September and
some productivity increases were realized in the fourth quarter, although the
positive impact was mitigated by the operational downtime at Grande Cache in
the fourth quarter. In March, 2007, Deepwell received EUB approval to increase
wellhead pressure at this well, and further increases in injection rate are
expected as a result.
    A solids treatment pad was installed at Grande Cache in the fourth
quarter at a cost of approximately $390,000. The pad allows solids to be
treated, such that landfill disposal costs can be significantly reduced. The
pad was damaged in the December 7, 2006 fire, but should be repaired and
placed back into service in the second quarter of 2007.
    Approximately $350,000 was invested in computers, furniture and other
head office equipment upon the establishment of the Trust's head office
location in August, 2006.
    Approximately $170,000 was invested in preliminary costs for acquisition
and conversion of a second disposal well at Rycroft. An application was made
in 2006 to the EUB for approval to add the second well into service, and
approval was granted in March, 2007. The existing well at Rycroft was
stimulated in June, 2006 at a cost of approximately $260,000, and the well's
performance has improved substantially since that time.
    Approximately $730,000 was invested in preparation of the well, and
application to the EUB for approval of Deepwell's planned facility at
Claresholm., Alberta. An additional $30,000 was invested in costs related to
other future facilities.
    The remaining cost relate primarily to improvements of drainage and
retention ponds at the facilities, new injection pumps, new tanks, mobile
equipment.

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    Unitholders' equity
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    On April 27, 2006, the Trust completed a private placement offering of
4,000,000 Class B Trust units at $10 per unit, for total gross proceed of
$40,000,000 less agents' commission of $2,400,000 and other expenses of
$669,133. The net proceeds of $36,930,367 were used to complete the
acquisition of PDS and Rycroft. An additional 356,000 Class B Trust units were
issued as purchase consideration for Deepwell Disposal Services Inc.
    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. As of the March 28,
2007, the Trust had 4,356,000 Units outstanding.

    Trust unit option plan

    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. Compensation
expense is offset with a corresponding increase to contributed surplus.
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 Unitholders' capital.
    As at December 31, 2006 a total of 314,500 options issued pursuant to the
Trust incentive stock option plan ("Option Plan") were outstanding at an
average exercise price of $10.01. All of these units were issued during the
period and remain outstanding at December 31, 2006. No options are exercisable
at December 31, 2006, and the weighted average contractual life remaining is
4.65 years. The total number of outstanding options shall not exceed 10% of
the outstanding Trust Units. 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. As at
December 31, 2006, the exercise prices of outstanding options range from $9.62
to $10.26 per unit and the weighted average exercise price of granted options
is $9.63 per unit.
    The Trust recorded unit option compensation expense and contributed
surplus of $251,432 during the period. The fair value of options issued during
the period was estimated using the Black-Scholes pricing model with the
following assumptions: risk free interest rate of 4.25%; volatility of 35%;
life of 5 years; 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.

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    Liquidity
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    As at December 31, 2006, the Trust had cash of $28,861. The Trust also
has credit facilities in place in the aggregate of $17,500,000.
    Net cash provided by financing activities for the year was $45,385,577.
The Trust realized $36,930,377 in net proceeds of its private placement on
April 27, 2006. At December 31, 2006, the Trust had drawn $11,500,000 million
on its long term credit facility. Deferred financing costs of $95,711 were
paid relating to the establishment of the Trust's credit facilities. A total
of $55,841 of deferred financing costs was amortized during the period. Other
financing activities include the payment of $2,949,088 in distributions to
Unitholders related to the periods from April 29, 2006 to December 31, 2006.

    Credit facilities

    Deepwell LP established credit facilities on April 27, 2006 with a
Canadian chartered bank (the "credit facilities") which consist of a
$2,000,000 demand revolving operating loan and a $15,500,000 364-day
extendible revolving term loan, as well as a credit card facility. As of
December 31, 2006, the borrowing base for the demand revolving loan was at
$1,808,000 and the amount drawn was nil. As at December 31, 2006, an aggregate
of $11,500,000 was drawn on the revolving term loan.
    The operating loan bears interest ranging from the lender's prime rate
plus 0.125 percent to prime plus 0.625 percent depending on the rate of debt
to EBITDA, with interest payable monthly. The extendible revolving facility
does not require principal payments thereunder until May 31, 2007, unless
otherwise extended. If extended, the facility will continue not to require the
payment of principal. If not extended, the credit facility reverts to a
three-year term with principal payments thereunder commencing monthly after
the date such facility is not renewed.
    As security for the credit facilities, Deepwell LP granted the lenders a
security interest over all of its assets. In addition, each of the Trust,
Deepwell Energy Services Commercial Trust and the Deepwell Energy Services
Ltd. 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 enforcement of the Credit Facilities
or the above-mentioned guarantees, the lenders, as creditors, will have a
prior-ranking claim relative to the Unitholders.
    The credit facility is subject to customary terms and conditions for
borrowings of this nature, including limits on incurring additional
indebtedness, granting liens or selling assets without the consent of the
lender and maintenance of certain interest coverage and leverage ratios.

    Interest rate risk

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

    
    Contractual obligations

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                                                    Less than
    Payments due by period              Total        1 year      1 - 3 years
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    Long term debt                  $ 11,500,000  $          -  $  9,347,222
    Operating leases                     753,056       168,972       335,906
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    Total contractual obligations   $ 12,253,056  $    168,972  $  9,683,128
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    -----------------------------------------------------------
                                                      After
    Payments due by period           4 - 5 years     5 years
    -----------------------------------------------------------
    Long term debt                  $  2,152,778  $          -
    Operating leases                     248,178             -
    -----------------------------------------------------------
    Total contractual obligations   $  2,400,956  $          -
    -----------------------------------------------------------


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    Quarterly information
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                           64 days  Three months  Three months      247 days
                             ended         ended         ended         ended
                      Jun 30, 2006 Sept 30, 2006  Dec 31, 2006  Dec 31, 2006
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    Revenues          $  1,778,929  $  3,808,795  $  4,059,296  $  9,647,020
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    Expenses
    Operating              948,937     2,040,285     1,605,492     4,594,714
    Selling and
     administrative        229,889       448,788       730,354     1,409,031
    Depreciation and
     accretion             469,705       560,249       881,829     1,911,783
    Amortization of
     intangible assets           -       136,803        82,160       218,963
    Unit-based
     compensation                -        53,620       197,812       251,432
    Interest on short
     term debt                   -         4,601        13,764        18,365
    Interest on long
     term debt             107,946        97,868       135,561       341,375
    Amortization of
     deferred financing
     costs                  10,612        15,588        29,632        55,832
    Loss on sale of
     assets                      -             -        34,295        34,295
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                         1,767,089     3,357,802     3,710,899     8,835,790

    Income before taxes     11,840       450,993       348,397       811,230

    Future income tax
     recovery                    -             -       (47,799)      (47,799)

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    Net income        $     11,840  $    450,993  $    396,196  $    859,029

    Distributions to
     unitholders          (445,258)   (1,669,145)   (1,251,990)   (3,366,393)
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    Deficit, end of
     period           $   (433,418) $ (1,651,570) $ (2,507,364) $ (2,507,364)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net income per
     trust unit:
      Basic           $       0.00  $       0.10  $       0.09  $       0.20
      Diluted         $       0.00  $       0.10  $       0.09  $       0.20
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    Weighted average
     number of Trust
    Units outstanding
      Basic              4,356,000     4,356,000     4,356,000     4,356,000
      Diluted            4,356,000     4,477,793     4,356,000     4,357,187
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    Financial instruments
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    All of the Trust's financial instruments as at December 31, 2006 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
represents 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, the
extent that the Trust borrows under these facilities, the Trust is at risk to
rising interest rates.

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    Outlook
    -------------------------------------------------------------------------

    The outlook for the Trust is positive. Demand for services has remained
strong to date in 2007, and Deepwell implemented a general price increase of
approximately 10 percent on processing fees on January 1, 2007.
    The addition of the second well and solids treatment pad at the Grande
Cache facility should add to capacity and efficiency, and the facility was
back up to full operations on February 1, 2007, following the outage of the
vacuum truck unloading system from the December 7, 2006 fire. In addition,
Deepwell received approval from the EUB to increase wellhead pressure at the
second well at Grande Cache. The cost to upgrade equipment for the increased
operating pressure is estimated at approximately $100,000, and the upgrades
were put into service on March 26, 2007. Assuming that the upgraded Grande
Cache facility operates at full capacity, Deepwell estimates that the increase
in capacity can result in additional annualized EBITDA of approximately
$400,000.
    Deepwell received approval from the EUB for a second Class Ib disposal
well at its Rycroft facility. A second well adds significant capacity without
requiring an immediate increase in staff, or a significant investment in
infrastructure at the facility site. Tests indicate that the well will
increase injection capacity at Rycroft by approximately 40 percent.
Construction of a 1.2 km pipeline to the well will commence as soon as crews
and equipment are available. Costs to complete the project are estimated at
approximately $900,000. Assuming completion of the pipeline and that the
expanded Rycroft facility operates at full capacity, Deepwell estimates that
the increase in capacity provided by the second well can result in additional
annualized earnings before interest, taxes, depreciation and amortization
(EBITDA) of approximately $800,000.
    Deepwell is also in the final stages of the EUB approval process for its
fourth facility, near Claresholm, Alberta. Deepwell believes that it is
nearing approval of the facility, although no date for approval has been
provided by the EUB. Construction commencement cannot be confirmed at this
time, but Deepwell remains optimistic that construction of the facility will
be completed during 2007.
    In addition, Deepwell owns rights to a location and disposal well for
future expansion after Claresholm, and anticipates that an application for
approval of this facility may be submitted to the EUB in the second quarter of
2007.

    -------------------------------------------------------------------------
    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,
and accretion. 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 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 lead 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
in the level of energy services. The timing and duration of spring break-up is
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 for 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 49.8 percent of revenue for the year, with no single customer
accounting for more than approximately 8.5 percent. Deepwell does not
generally enter into long-term contracts with their 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, 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 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.

    -------------------------------------------------------------------------
    Related party transactions
    -------------------------------------------------------------------------

    During the year 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.
    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 is
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
    -------------------------------------------------------------------------

    Financial instruments, other comprehensive income

    This pronouncement, effective for fiscal years beginning on or after
October 1, 2006, addresses when to recognize, and how to measure, a financial
instrument on the balance sheet and how gains and losses are to be presented.
An additional financial statement, other comprehensive income, is required in
certain circumstances. The Trust currently has no items that would create
other comprehensive income. The fair values of those financial instruments,
which are designated as hedges, are to be included on the balance sheet as a
financial asset or liability with the related mark-to-market gain or loss
recognized in other comprehensive income. Because the Trust did not have any
derivative financial instruments at December 31, 2006, this required change
will have no effect on the Trust's reported financial position or net income.

    -------------------------------------------------------------------------
    Disclosure and internal controls
    -------------------------------------------------------------------------

    The Trust's Chief Executive Officer and Chief Financial Officer are
responsible for establishing and maintaining the Trust's disclosure controls
and procedures to provide reasonable assurance that material information
related to the Trust is made known. In addition, internal controls over
financial reporting have been designed or have been caused to be designed
under the supervision of the CEO and CFO to provide reasonable assurance
regarding the reliability of financial reporting and preparation of financial
statements for external purposes in accordance with GAAP. They are assisted in
these responsibilities by other members of the Trust's management team.
    The Trust has conducted a review and evaluation of its disclosure
controls and procedures. The Trust's CEO and CFO conclude that as at
December 31, 2006, the Trust's disclosure controls and procedures are adequate
to provide reasonable assurance that material information related to the Trust
is made known to them by others within the Trust.
    During the Trust's assessment of its system of internal controls as
defined under Multilateral Instrument 52-109, the Trust identified the
following weakness in internal controls over financial reporting:

    Due to the limited number of staff, it is not feasible to achieve the
    complete segregation of incompatible duties.

    The broad scope of senior management's oversight and strong entity level
control are expected to compensate for any individual internal control
weakness. In addition, the weakness identified is mitigated by: the active
involvement of senior management in all the affairs of the Trust; open lines
of communication within the Trust; the present levels of activities within the
Trust being relatively transparent; the thorough review of the Trust's
financial statements by management and the establishment of a whistle-blower
policy. However these mitigating factors will not necessarily eliminate the
likelihood that a material restatement will occur as a result of the aforesaid
weakness in the Trust's internal controls over financial reporting.
    It should be noted that a control system, including the Trust's
disclosure and internal controls over financial reporting, no matter how well
conceived or operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system will be met and it should not be
expected that the disclosure and internal controls will prevent all errors or
fraud.

    -------------------------------------------------------------------------
    Forward looking statements
    -------------------------------------------------------------------------

    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.


    
    CONSOLIDATED FINANCIAL STATEMENTS OF

    DEEPWELL ENERGY SERVICES TRUST

    FOR THE PERIOD FROM APRIL 27, 2006 TO
    DECEMBER 31, 2006



    DEEPWELL ENERGY SERVICES TRUST
    CONSOLIDATED BALANCE SHEET

    December 31                                                         2006
    -------------------------------------------------------------------------
    Assets
    Current assets:
      Cash                                                      $     28,861
      Accounts receivable                                          2,729,106
      Inventory                                                       80,205
      Prepaid expenses and deposits                                  242,990
    -------------------------------------------------------------------------
                                                                   3,081,162
    Property and equipment (Note 4)                               39,565,606
    Intangible assets (Note 5)                                     3,254,037
    Goodwill (Note 3)                                              7,157,402
    Financial security deposits                                    1,433,474

    -------------------------------------------------------------------------
                                                                $ 54,491,681
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Liabilities
    Current liabilities:
      Accounts payable and accrued liabilities                  $  3,538,986
      Distributions payable                                          417,305
    -------------------------------------------------------------------------
                                                                   3,956,291
    Long term debt (Note 8)                                       11,500,000
    Future income taxes (Note 7)                                      87,201
    Asset retirement obligations (Note 9)                            713,744
    -------------------------------------------------------------------------
                                                                  16,257,236
    -------------------------------------------------------------------------
    Unitholders' Equity
    Trust Units (Note 6)                                          40,490,377
    Contributed surplus (Note 6)                                     251,432
    Deficit                                                       (2,507,364)
    -------------------------------------------------------------------------
                                                                  38,234,445

    Commitments (Note 12)                                       $ 54,491,681
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.


    On behalf of the Board of Trustees:

    -----------------------------------
    Trustee

    -----------------------------------
    Trustee



    DEEPWELL ENERGY SERVICES TRUST
    CONSOLIDATED STATEMENT OF INCOME
     AND ACCUMULATED EARNINGS (DEFICIT)

    For the period from April 27 to December 31,                        2006
    -------------------------------------------------------------------------

    Revenues                                                    $  9,647,020
    -------------------------------------------------------------------------

    Expenses
      Operating                                                    4,594,714
      Selling and administrative                                   1,660,463
      Depreciation and accretion                                   1,911,783
      Amortization of intangible assets (Note 5)                     218,963
      Interest on short term debt (Note 8)                            18,365
      Interest on long term debt (Note 8)                            341,375
      Amortization of deferred financing costs                        55,832
      Loss on sale of property and equipment                          34,295
    -------------------------------------------------------------------------

                                                                   8,835,790

    Income before taxes                                              811,230

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

    -------------------------------------------------------------------------
    Net income                                                       859,029

    Distributions to unitholders                                  (3,366,393)
    -------------------------------------------------------------------------

    Accumulated earnings (deficit), end of period               $ (2,507,364)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net income per trust unit:
      Basic                                                     $       0.20
      Diluted                                                   $       0.20
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Weighted average number of trust units outstanding :
      Basic                                                        4,356,000
      Diluted                                                      4,357,187
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.



    DEEPWELL ENERGY SERVICES TRUST
    CONSOLIDATED STATEMENT OF CASH FLOWS

    For the period from April 27 to December 31,                        2006
    -------------------------------------------------------------------------

    Operating activities
      Net income                                                $    859,029

    Non cash items:
      Depreciation and accretion                                   1,911,783
      Amortization of deferred financing costs                        55,832
      Amortization of intangibles                                    218,963
      Future income tax recovery (Note 7)                            (47,799)
      Unit based compensation                                        251,432
      Loss on sale of property and equipment                          34,295

    Change in non-cash working capital                               575,718
    -------------------------------------------------------------------------
    Cash flow from operating activities                            3,859,253
    -------------------------------------------------------------------------

    Investing activities
      Financial security deposits                                 (1,408,120)
      Business acquisitions (net of cash of $259,925)            (42,792,931)
      Purchase of property and equipment                          (6,808,996)
      Proceeds on sale of property and equipment                      55,500
      Change in non-cash investing working capital                 1,738,578
    -------------------------------------------------------------------------
    Cash flow from investing activities                          (49,215,969)
    -------------------------------------------------------------------------

    Financing activities
      Net proceeds from issuance of units                         36,930,377
      Net proceeds from long term debt                            11,404,288
      Distributions to unitholders                                (2,949,088)
    -------------------------------------------------------------------------
    Cash flow from financing activities                           45,385,577
    -------------------------------------------------------------------------

      Change in cash                                                  28,861

    -------------------------------------------------------------------------
    Cash, end of period                                         $     28,861
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary Information
      Cash interest paid                                        $    359,740
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.



    DEEPWELL ENERGY SERVICES TRUST
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    FOR 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.

    On April 27, 2006, the Trust completed its private placement offering
    (the "Offering") whereby 4,000,000 Trust units were issued at $10 per
    Trust unit for gross proceeds of $40,000,000.

    On April 27 and April 28, 2006, the Trust completed two acquisitions
    which provided substantially all of the basis of the operating business.
    These consolidated financial statements reflect the operations and
    activities of the Trust from the dates of these acquisitions.

    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, and accretion.
    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 summarized below.

    (b) Principles of consolidation

    The consolidated financial statements include the accounts of the Trust
    and its subsidiaries. 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.

    (c) Cash

    Cash includes cash on hand, balances with banks, cheques issued in excess
    of bank balance, and cash held in trust.

    (d) 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.

    (e) Property and equipment

    Property and equipment is recorded at cost. 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 over
                                     estimated life of well      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


    Depreciation is calculated starting from the month after the date of
    purchase.

    (f) 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.

    (g) Intangibles

    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)

    (h) Goodwill

    Goodwill is recognized when the total purchase price of a business
    acquisition exceeds the fair value of the net identifiable assets and
    liabilities 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.

    (i) 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 net 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.

    (j) 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 collectibility is reasonably assured.
    Processing and disposal revenue are recorded at the time of sale. Oil
    sales are recorded at the time of sale.

    (k) Income taxes

    The Trust is a taxable entity under the Income Tax Act (Canada) but is
    taxable only on income that is not distributed to the Unitholders. Any
    taxable income is distributed to the Unitholders and therefore no
    provision for income taxes relating to the Trust is included in these
    financial statements.

    Income taxes in the Trust's corporate subsidiary are accounted for under
    the asset and liability method. Future tax assets and liabilities are
    recognized for the future tax consequences attributable to differences
    between the financial statement and income tax basis of assets and
    liabilities. Future tax assets and liabilities are measured using enacted
    or substantially enacted tax rates expected to apply to taxable income in
    the years in which those temporary differences are expected to be
    recovered or settled. The effect on future tax assets and liabilities of
    a change in tax rates is recognized in income in the period that includes
    the enactment or substantive enactment date.

    (l) Deferred financing costs

    Costs associated with establishing long-term debt arrangements are
    deferred and amortized over the term of the related obligation.

    (m) 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.

    (n) 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.

    (o) Recent accounting pronouncements

    In January 2005, the Canadian Institute of Chartered Accountants ("CICA")
    issued new accounting standards; Handbook Section 1530 "Comprehensive
    Income" and Handbook Section 3251 "Equity" for the reporting and
    disclosure of comprehensive income. Unrealized gains and losses on
    financial assets that will be held as available for sale, unrealized
    foreign currency translation amounts arising from self-sustained foreign
    operations, and changes in the fair value of cash flow hedging
    instruments, will be in a Consolidated Statement of Other Comprehensive
    Income until recognized in the consolidation statements of earnings.
    These standards are effective for the Trust as of January 1, 2007. The
    Trust has determined these standards are not expected to have a material
    impact on its consolidated financial statements.

    In January 2005, the CICA issued new accounting standards; Handbook
    Section 3855 "Financial Instruments-Disclosure and Presentation". Under
    the new standards, all financial instruments will be classified as one of
    the following: held-to-maturity, loans and receivables, held for trading
    and available for sale. Financial assets and liabilities held for trading
    will be measured at fair value with gains and losses recognized in net
    income. Financial assets held-to-maturity, loans and receivables and
    financial liabilities other than those held-for-trading will be measured
    at amortized cost. Available for sale instruments will be measured at
    fair value with gains and losses recognized in other comprehensive
    income. These standards are effective for the Trust as of January 1,
    2007. As a result of these standards, the balance of deferred financing
    charges, currently included in prepaids and deposits, will be netted
    against the corresponding balances in the respective credit facility. The
    Trust has determined that these standards are not expected to have a
    material impact on its consolidated financial statements.

    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 exchange amount 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, 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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    5.  Intangible assets

                                                   Accumulated           Net
    December 31, 2006                       Cost  depreciation    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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Completions and contracts of $312,500 have not been amortized during the
    period but amortization will commence once the related assets are placed
    into service.

    6.  Unitholders' 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.

    -------------------------------------------------------------------------
                                                        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)
    -------------------------------------------------------------------------
    Balance, December 31, 2006                               -  $          -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (b) Regular Trust Units

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

    -------------------------------------------------------------------------
                                                        Number      Proceeds
    -------------------------------------------------------------------------
    Issued on redemption of Class B units            4,356,000  $ 43,560,000
    Trust Unit issue costs                                        (3,069,623)
    -------------------------------------------------------------------------
    Balance,  December 31, 2006                      4,356,000  $ 40,490,377
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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.

    (c) Special Voting Units

    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 and unit-based compensation

    As at December 31, 2006 a total of 314,500 options issued pursuant to the
    Trust incentive unit option plan ("Option Plan") were outstanding at an
    average exercise price of $10.01. All of these units were issued during
    the period and remain outstanding at December 31, 2006. No options are
    exercisable at December 31, 2006, and the weighted average contractual
    life remaining is 4.65 years. The total number of outstanding options
    shall not exceed 10% of the outstanding Trust Units. 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. As at December 31, 2006,
    the exercise prices of outstanding options range from $9.62 to $10.26 per
    unit and the weighted average exercise price of granted options is
    $9.63 per unit

    The Trust recorded unit option compensation expense and contributed
    surplus of $251,432 during the period. The fair value of options issued
    during the period was estimated using the Black-Scholes pricing model
    with the following assumptions: risk free interest rate of 4.25%;
    volatility of 35%; life of 5 years; 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. The weighted average fair
    value of options granted during the year was $3.81 per option.

    (e) Cash distributions

    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 schedule:

    -------------------------------------------------------------------------
                                                          Cash per
                                                             Trust
    Period                   Record date    Payment date      unit    Amount
    -------------------------------------------------------------------------
    April 28-30, 2006     April 30, 2006    May 15, 2006   $0.0064   $27,953
    May 1-31, 2006          May 30, 2006    Jun 15, 2006    0.0958   417,305
    June 1-30, 2006         July 6, 2006    Jul 14, 2006    0.0958   417,305
    July 1-31, 2006        July 28, 2006    Aug 15, 2006    0.0958   417,305
    August 1-31, 2006    August 31, 2006    Sep 15, 2006    0.0958   417,305
    September 1-30,         September 29,     October 13,
     2006                           2006            2006    0.0958   417,305
    October 1-31,       October 31, 2006     November 15,
     2006                                           2006    0.0958   417,305
    November 1-30,           November 30,    December 15,
     2006                           2006            2006    0.0958   417,305
    December 1-31,     December 29, 2006      January 15,
     2006                                           2007    0.0958   417,305
    -------------------------------------------------------------------------
    Distributions to unitholders declared during the period       $3,366,393
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    7.  Income taxes

    The provision for income taxes in the consolidated financial statements
    differs from the result that would have been obtained by applying the
    combined federal and provincial tax rate to the net income before income
    taxes. The difference results from the following items:

    -------------------------------------------------------------------------
                                                                        2006
    -------------------------------------------------------------------------
    Income before income tax                                    $    811,230
    Combined federal and provincial income tax rate                   32.49%
    -------------------------------------------------------------------------
    Expected tax                                                     263,569
    Increase (decrease) in income taxes resulting from:
      Non-taxable portion of net income                             (313,509)
      Changes in tax rate                                             (1,303)
      Non deductible items and other                                   3,444
    -------------------------------------------------------------------------
    Future income tax recovery                                  $    (47,799)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The components of the future income tax liability for the corporate
    subsidiary of the Trust are as follows:

    -------------------------------------------------------------------------
    As at December 31                                                   2006
    -------------------------------------------------------------------------
    Property and equipment                                      $     25,100
    Intangible assets                                                108,500
    Non-capital losses                                               (41,760)
    Other                                                             (4,639)
    -------------------------------------------------------------------------
                                                                $     87,201
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    On December 21, 2006, the Federal Minister of Finance released draft
    legislation to implement proposals originally announced on October 31,
    2006 relating to the taxation of certain distributions from certain
    trusts and partnerships (the "Trust Taxation Proposal"). Subject to the
    Trust Taxation Proposal, returns on capital are generally taxed as
    ordinary income in the hands of a unitholder who is resident in Canada
    for purposes of the Income Tax Act (Canada) (The "Tax Act"). Pursuant to
    the Trust Taxation Proposal, commencing January 1, 2011 (provided the
    Trust only experiences "normal growth" and no "undue expansion" before
    then) certain distributions from the Trust which would otherwise have
    been taxed as ordinary income generally will be characterized as
    dividends in addition to being subject to tax at corporate rates at that
    trust level. Returns of capital generally are (and under the Trust
    Taxation Proposal will continue to be) tax-deferred for unitholders who
    are resident in Canada for purposes of the Tax Act (and reduce such
    unitholder's adjusted cost based in the Trust Unit for purposes of the
    Tax Act). Distributions, whether of income or capital to a unitholder who
    is not resident in Canada for purposes of the Tax Act, or that is
    partnership that is not a "Canadian partnership" for purposes of the Tax
    Act, generally will be subject to Canadian withholding tax.

    8.  Credit facilities

    The Trust established credit facilities on April 27, 2006 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 0.625% as is dependent on the funded debt to EBITDA
    ratio. No principal repayments are required until May 2007 unless
    otherwise extended. As of December 31, 2006 the borrowing base for the
    demand loan was at $1,808,000 and the amount drawn was 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 31, 2010. 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 0.625% per annum.
    Interest is calculated monthly and paid in arrears. As at December 31,
    2006 an aggregate of $11,500,000 principal amount was drawn on the loan.
    The revolving period extends to May 31, 2007, at which time the credit
    facility, unless renewed, reverts to three-year term with the monthly
    principal repayments, if necessary, commencing on June 26 under the three
    year term. The effective interest rate on the long term credit facility
    for the period was 6.12%

    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.

    Included in prepaid expenses and deposits are deferred financing costs of
    $39,880 representing costs incurred to secure the various credit
    facilities. During the period, $55,832 was amortized in relation to the
    financing.

    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 its estimated useful life.

    Changes in the asset retirement obligation balance are summarized below:

    -------------------------------------------------------------------------
                                                                        2006
    -------------------------------------------------------------------------
    Asset retirement obligation, upon acquisition               $    677,556
    Accretion expense                                                 37,982
    -------------------------------------------------------------------------
    Asset retirement obligation, end of period                  $    715,538
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    10. Financial Instruments

    The Trust's financial instruments consist of cash, accounts receivable,
    financial security deposits, accounts payable and accrued liabilities and
    long-term debt. These financial instruments approximate their fair value.

    (a) Credit Risk

    The Trust's accounts receivable are comprised of two primary streams, oil
    sales and waste disposal and processing charges. Oil sales accumulated as
    shipped by the marketer, are paid in full the month following receipt.
    Waste and disposal processing sales are exposed to typical industry
    credit risks. 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 settlement date.

    (b) Interest Rates

    Deepwell LP is exposed to interest rate risk through the utilization of
    floating rate credit facilities to finance operations.

    11. Related Party Transactions

    During the period 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.

    12.  Commitments

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

    -------------------------------------------------------------------------
    2007                                                        $    168,972
    2008                                                             168,972
    2009                                                             166,934
    2010                                                             156,744
    2011                                                              91,434
    Thereafter                                                             -
    -------------------------------------------------------------------------
                                                                $    753,056
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    13. Subsequent events

    The Trust declared a cash distribution for the period January 1, 2007 to
    January 31, 2007 at $0.0958 per unit, to be paid on February 15, 2007 to
    Unitholders of record on January 31, 2007.

    The Trust declared a cash distribution for the period February 1, 2007 to
    February 28, 2007 at $0.0958 per unit, to be paid on March 15, 2007 to
    Unitholders of record on February 28, 2007.

    The Trust declared a cash distribution for the period March 1, 2007 to
    March 31, 2007 at $0.06 per unit, to be paid on April 15, 2007 to
    Unitholders of record on March 30, 2007.
    

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

    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 could cause
actual results to differ materially from the results discussed in the forward
looking statements.





For further information:

For further information: Robert Dodds, President and CEO, or Scott
Gerecke, Vice-President Finance and CFO, Deepwell Energy Services Trust, Tel:
(403) 508-6000, Email: investing@deepwellenergy.com

Organization Profile

DEEPWELL ENERGY SERVICES TRUST

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