HSE Integrated Ltd. - Third quarter report - Continued growth in industrial safety tempered by declining market demand for oilfield services



    CALGARY, Nov. 13 /CNW/ - HSE Integrated Ltd. ("HSE", "Our", "We", or the
"Company") announced its third quarter financial results for the quarter and
nine months ended September 30, 2007. Financial and operating highlights are
summarized below:

    
    -   Revenue was $23.6 million in the quarter (YTD - $70.9 million), which
        represented a reduction of 12.5% (YTD - 4.7%) compared to the same
        periods in the prior year.
    -   The success of the Company's revenue diversification strategy
        continues to be demonstrated as significant declines in revenues from
        conventional Oilfield activity were largely offset by growth in
        Industrial and Environment revenues on a year to date basis.
    -   Revenues from Industrial markets (non-conventional upstream oil and
        gas, plants, facilities, training, and safety management services)
        increased by 91%, growing to $11.4 million in the quarter as compared
        to $6 million for the same period in the prior year.
    -   Industrial safety services revenue as a percentage of the total
        business mix in the quarter more than doubled - 49% in 2007 compared
        to 22% in the previous year.
    -   Customer demand continues to increase for the Company's air quality
        monitoring or "Environment" market, which rose 21% in the quarter.
    -   During the quarter, the Company acquired Prairie Wide Safety Ltd,
        which expanded the national delivery footprint for the Company's full
        suite of services into the established and active hydrocarbon
        producing region of southeast Saskatchewan.
    -   EBITDA was $1.4 million for the quarter (2006 - $4.3 million) as the
        redeployment of personnel to Industrial safety services only
        partially offset a 50% decline in generally higher margin Oilfield
        services revenue.
    -   As part of the continual focus on increased efficiency and higher
        profit margins, the Company has implemented an initiative for cost
        reductions of over $3 million on an annualized basis, the bulk of
        which is to be in 2008 and beyond. This initiative includes field
        service facility consolidation and a reduction in equipment and
        personnel not essential for service delivery.
    -   Equipment redeployment continues as the Company relocates safety
        equipment surplus to current demand in the Oilfield sector in Alberta
        to expanding field service operations in British Columbia,
        Saskatchewan, Ontario, New Brunswick, Nova Scotia and Michigan.
    -   Although HSE is only partially exposed to the Oilfield market and has
        the ability to re-deploy resources to other industries, a significant
        decline in market capitalization value precipitated a $15 million
        non-cash goodwill impairment charge for the quarter.
    -   As at September 30, 2007, the Company was in compliance with its
        financial covenants under its credit facilities.
    

    David Yager, Chairman and CEO, offered the following comments for HSE's
third quarter financial results.
    "Demand for services for conventional oil and gas activity remained soft
in the third quarter requiring HSE to continue to adjust its business model
and organization. HSE's diversification into new industries and geographic
regions continues to be very successful and has given HSE a platform for
continued growth even if natural gas prices and drilling activity levels do
not improve.
    This year's significant downturn in the oilpatch has freed up manpower
and equipment for redeployment into other markets and industries. Job quality
continues to improve as HSE's significant investments in a unique integrated
services package, new equipment, worker training and outstanding technical
support become apparent to our customers.
    HSE has permanently changed its business model in 2007, transforming from
a large oilfield safety company to Canada's first national industry safety
company. Our marketing and technical staff has risen to the challenge this
year and is proving every day that the market for the Company's services is
larger than previously thought, even in Alberta.
    Continually rising Industrial revenues prove HSE's business model is
sound and valuable. Attractive growth opportunities in new markets and
industries, combined with ongoing examinations and adjustments of fixed costs
and operating processes, give us confidence that the major adjustments of 2007
will provide the foundation for a return to overall growth in 2008 and beyond.
    I encourage investors to take the time to better understand HSE's
business model, its strategies and ongoing growth opportunities."
    For further information and analysis please see the attached Management's
Discussion and Analysis and Financial Statements.

    CONFERENCE CALL

    HSE will be hosting a conference to discuss their results at 11 AM
(Eastern Standard Time), 9 AM (Mountain Standard Time) on Wednesday
November 14, 2007. To participate call 1-866-250-4909 or 1-416-646-3095.
Details on the webcast and conference call replay are contained in a separate
previous News Release.

    HSE is an integrated, national supplier of industrial Health, Safety and
Environmental services. From its head office in Calgary, Alberta, it serves
its clients from field service locations in Alberta, British Columbia,
Saskatchewan, Ontario, Nova Scotia, New Brunswick and Michigan. HSE trades on
the TSX under the symbol "HSL".

    Forward Looking Statements

    This news release may contain forward-looking statements concerning,
among other things, the Company's prospects, expected revenues, expenses,
profits, financial position, strategic direction, and growth initiatives, all
of which are subject to risks, uncertainties and assumptions. These
forward-looking statements are identified by their use of terms and phrases
such as expect, anticipate, estimate, believe, may, will, intend, plan,
continue, project, objective and other similar terms and phrases. These
statements are based on certain assumptions and analyses made by the Company
based on its experience and assessment of current conditions, known trends,
expected future developments and other factors it believes are appropriate
under the circumstances. Such statements are subject to numerous external
variables, both known and unknown, such as changes in commodity prices for
natural gas and oil, changes in drilling activity, weather conditions,
industry-specific and general economic conditions and exchange rate
fluctuations. If any of these risks and uncertainties materializes or if
assumptions are incorrect, actual results may differ materially from those
expressed or implied in the forward-looking statements. The forward looking
statements included in this news release are not guarantees of future
performance and should not be unduly relied upon.

    Non GAAP Measures

    This report makes reference to EBITDA, a measure that is not recognized
under generally accepted accounting principles (GAAP). Management believes
that, in addition to net earnings, EBITDA is a useful supplementary measure.
EBITDA provides investors with an indication of earnings before provisions for
interest, taxes, amortization, gains or losses on the disposal of property and
equipment, foreign exchange gains or losses, and the non-cash effect of
stock-based compensation expense. Investors should be cautioned that EBITDA
should not be construed as an alternative to net earnings determined by GAAP
as an indication of the Company's performance. This method of calculating
EBITDA may differ from that of other companies and accordingly may not be
comparable to measures used by other companies.



    HSE Integrated Ltd.
    Management Discussion and Analysis ("MD&A")
    For the three and nine months ended September 30, 2007 and 2006

    The following management discussion and analysis is dated November 13,
2007, and is a review of the financial results of HSE Integrated Ltd. ("HSE",
"We", "Our", or the "Company") for the quarter and nine months ended
September 30, 2007 and 2006. This should be read in conjunction with the
documents filed on SEDAR at www.sedar.com. Unless otherwise disclosed, the
financial information presented in this discussion has been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP") and
takes into consideration information available to management up to
November 13, 2007. Unless otherwise stated, dollar figures presented are
expressed in thousands of Canadian dollars and per-share figures in dollars
per weighted-average common share. The following MD&A contains forward-looking
information and statements. We refer you to the end of the MD&A for the
disclaimer on forward looking statements.

    
    Selected Financial Information

    -------------------------------------------------------------------------
                   Three Months ended  Quarter   Nine Months ended    Period
                       September 30,      Over      September 30,       Over
                  -------------------  Quarter  -------------------   Period
                      2007      2006  % Change      2007      2006  % Change
    -------------------------------------------------------------------------
    Revenue       $ 23,578  $ 26,952    (12.5)% $ 70,878  $ 74,340    (4.7)%
    Operating and
     materials      20,113    19,974       0.7%   59,287    56,535      4.9%
    Operating
     margin          3,465     6,978    (50.3)%   11,591    17,805   (34.9)%
    Operating
     margin %        14.7%     25.9%    (43.2)%    16.4%     23.9%   (31.4)%
    Selling,
     general &
     adminis-
     trative      $  2,089  $  2,695    (22.5)% $  7,202  $  6,836      5.4%
    Net earnings
     (loss)        (15,920)    1,197 (1,429.9)%  (18,129)    2,477  (831.9)%
    - per share
      basic          (0.42)     0.03 (1,500.0)%    (0.48)     0.07  (785.7)%
    - per share
      diluted        (0.42)     0.03 (1,500.0)%    (0.48)     0.07  (785.7)%
    EBITDA(1)     $  1,376  $  4,283    (67.9)% $  4,389  $ 10,969   (60.0)%
    EBITDA %          5.8%     15.9%    (63.5)%     6.2%     14.8%   (58.1)%
    Total assets                                $ 84,256  $100,393   (16.1)%
    Total long-term
     liabilities                                  23,969    20,784     15.3%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See Non-GAAP Measures for (1)
    


    Financial Review

    Revenue

    HSE operates in a single industry segment, which involves providing a
variety of asset, worker and community safety-protection services including:
on-site safety supervision; gas detection; fixed and mobile air-quality
monitoring; breathing equipment rentals and services; fixed and mobile
firefighting and fire protection services and equipment; worker
decontamination (shower) services; on-site medical services; worker safety
training; and safety management consulting services.
    For the third quarter and year to date ended September 30, 2007 and 2006
the Company had no customers representing more than 10% of revenue.
    The Company currently provides services to its customers in the following
main business areas: Oilfield Services ("Oilfield"), Industrial Services
("Industrial"), and Environment Monitoring Services ("Environment"). Oilfield
is the provision of the Company's services within the conventional upstream,
or "wellhead", sector of the oil and gas industry. Industrial represents
services delivered to non-conventional upstream oil and gas development and
production, oil and gas processing and refining plants and facilities, diverse
non-petroleum resource and manufacturing industries, worker safety training
and safety consulting services. Environment focuses on air-quality monitoring
to detect airborne contaminants which may affect the health of workers, the
public, livestock, and wildlife.
    The revenue for these services is shown below:

    
    -------------------------------------------------------------------------
                   Three Months ended  Quarter   Nine Months ended    Period
                       September 30,      Over      September 30,       Over
                  -------------------  Quarter  -------------------   Period
                      2007      2006  % Change      2007      2006  % Change
    -------------------------------------------------------------------------
    Oilfield      $  9,351  $ 18,656   (49.9)%  $ 30,859  $ 52,357   (41.1)%
    Industrial      11,438     5,984     91.1%    31,419    16,404     91.5%
    Environment      2,789     2,312     20.6%     8,600     5,579     54.1%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total Revenue $ 23,578  $ 26,952   (12.5)%  $ 70,878  $ 74,340    (4.7)%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As a % of
     Revenue:
    Oilfield         39.7%     69.2%               43.6%     70.4%
    Industrial       48.5%     22.2%               44.3%     22.1%
    Environment      11.8%      8.6%               12.1%      7.5%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total Revenue   100.0%    100.0%              100.0%    100.0%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    


    The success of the Company's revenue diversification strategy continues
to be demonstrated as significant declines in Oilfield revenues were largely
offset by growth in Industrial and Environment revenues on a year to date
basis.
    Oilfield revenues have experienced large declines in both the quarter and
year to date when compared to the same period in the prior year because of
reduced overall activity levels within the conventional upstream, or
"wellhead", sector of the oil and gas industry: wellbore drilling, completion
and work-over activity. The primary area of decline is related to natural gas.
Industry sources have indicated that, as compared to the same period in the
prior year, new conventional oil and gas well drilling activity levels in the
Western Canadian Sedimentary Basin ("WCSB") have declined, as have well
re-completion and stimulation activity on existing wells. Although HSE has
been able to largely maintain its pricing levels with its customers,
additional capacity added by competitors, in conjunction with an overall
reduction in demand, has also contributed to the Company's lower revenue
levels for this sector.
    The Company is continuing its business diversification strategy, and
reports a 91% increase in Industrial revenues on a quarterly basis and 92% on
a year to date basis when compared to the same periods in the prior year.
    The rise in Industrial revenues is from the delivery of increased levels
of safety services to oil and gas processing facilities, thermal heavy oil
recovery and oil-sands extraction and construction projects in Alberta; safety
services, fire suppression, gas detection and breathing-air equipment sales
and service to diverse industrial and commercial markets in British Columbia,
Alberta, and Ontario; safety services for the refining, mining, offshore
drilling and production and other industries in Atlantic Canada; and worker
safety training and safety consulting services in all markets.
    Seasonally, Industrial revenues are typically higher in the second and
third quarters due to demand for safety services to support plant and facility
maintenance and repair projects which usually occur during this period. In the
second and third quarter of this year, the Company secured and executed a
greater number of simultaneous, large scale projects of this type than in any
prior years. The customers for these large scale safety services were very
diverse. Projects included services to oil sands facilities, refineries,
cement plants, high volume sour gas plants, chemical plants, and fertilizer
facilities.
    The provision of continuous or year-round safety services to facilities
has also increased. The largest addition was an assignment for services to an
oil sands facility which was secured in the current year. Other year round
contracts of varying sizes include oilsands facility construction, pulp and
paper, meat processing, and refineries and petrochemical plants. Services of
this type assist in achieving the seasonal revenue stability strategy pursued
by the Company.
    Services delivered in Ontario and Atlantic Canada is characterized as
Industrial revenue. Revenue from these areas has increased on a year to date
basis by 47% to almost $9 million. This is due both to the acquisitions
completed in April 2006, and through increased marketing efforts in existing
markets.
    Greater marketing efforts have also increased worker training demand
resulting in increased classroom capacity and course offerings across Canada.
    As a result of the additional air quality monitoring capacity added in
the prior year, Environment revenues increased in the quarter by 21% and
increased for the year by 54% as compared to the same periods in 2006. The
Company has experienced client and sectoral diversification in this business
group.
    In the quarter, the Company acquired Prairie Wide Safety Ltd. ("PWS") of
Weyburn, Saskatchewan. PWS serves the hydrocarbon producing region of
southeast Saskatchewan by providing complete oilfield and industrial safety
services to drilling, completion, well servicing and field processing
operations. The revenue included in the third quarter associated with this
acquisition was approximately $0.5 million and is accretive to earnings.

    Operating and Materials Expense and Operating Margin

    Operating and materials expense consists of costs directly attributable
to the provision of safety and related services to customers. These include:
wages and benefits for field employees and contractors; equipment rentals and
leases; field service centre property costs; transportation; fuel;
consumables; equipment repairs and maintenance; and field office
administration including field sales.
    Operating and materials expense for the quarter ended September 30, 2007
totaled $20.1 million or 85.3% of revenue as compared to $20.0 million or
74.1% of revenue in the third quarter of 2006. Operating margin in the quarter
has declined from $7.0 million (25.9% of revenue) in the third quarter of
2006, to $3.5 million (14.7% of revenue) in the third quarter of 2007. The
Company also experienced increases in operating expenses and declines in
operating margins on a year to date basis.
    The reduction in operating margins is primarily due to both a lower level
of overall revenue, and a reduction of the level of Oilfield revenues which
contains a greater proportion of higher margin equipment rental revenue (such
as fire trucks and large mobile decontamination units) which are mainly
utilized in the completion and stimulation of newly drilled natural gas and
crude oil wells, or major workovers or re-completions of the same. Lower
equipment utilization was partially offset by the re-deployment of personnel
to the Industrial market as part of the execution of the Company's
diversification strategy.
    Included in the quarter is an addition to the provision for doubtful
accounts of approximately $0.4 million as recognition of the potentially
challenging environment faced by some of the Company's smaller customers
operating in Alberta.

    Selling, General and Administrative Expense

    Selling, general and administrative ("SG&A") expense consists of costs
not directly attributable to the provision of services to customers. These
include costs generally associated with the following: corporate head-office
functions and services; administrative personnel; corporate sales and
marketing costs; liability insurance; professional fees; and investor
relations expenses.
    SG&A for the quarter ended September 30, 2007 amounted to $2.1 million
(YTD - $7.2 million), versus $2.7 million (YTD - $6.8 million) for the
comparable periods in 2006. Although SG&A as a percentage of revenue declined
in the quarter, on a year to date basis it has increased to 10.2%, from 9.2% a
year earlier. The increase in SG&A costs in comparison to the prior year is a
result of higher corporate costs necessary to support the Company's strategic
goals. Included in the year to date costs are amounts related to the Company's
initial listing on the Toronto Stock Exchange.

    EBITDA and Net Earnings

    Despite relatively stable revenue levels as compared to the prior year,
EBITDA (see "Non-GAAP Measures") in the quarter has declined to $1.4 million
(YTD - $4.4 million), from $4.3 million (YTD - $11.0 million) for the same
periods a year earlier. This was caused by lower levels of overall revenue
caused mainly by reduced utilization of higher margin equipment rental revenue
associated with the Oilfield services component, as well as an increased
investment in SG&A costs discussed above.
    The Company has experienced reduced activity on the Oilfield side of the
business mainly due to weaker economic fundamentals faced by customers
involved in that industry. Although HSE is only partially exposed to this
market and has the ability to re-deploy resources to other industries, the
Company has encountered a significant decline in overall market capitalization
value in the quarter. Management has, in accordance with the Company's
accounting policy for goodwill, begun an analysis of goodwill impairment at
September 30, 2007. This analysis is not yet complete but is expected to be
finalized in the fourth quarter of this year. In the interim, Management has
determined an initial estimate of $15 million as a non-cash impairment charge
to goodwill in the quarter. Upon the completion of the impairment analysis,
this initial estimate may be adjusted. Based upon reduced market
capitalization levels experienced subsequent to the end of the quarter, a
further non-cash impairment charge may be considered likely.
    Total amortization on a year to date basis was $5.8 million and consisted
of $4.9 million in property and equipment amortization, and $0.9 million in
intangibles amortization. Property and equipment amortization has increased by
$0.5 million when compared to the prior year due to previous investments in
property and equipment and from similar assets acquired through acquisitions.
As well, the recognition of intangible assets on acquisitions made in the
prior year has also contributed to the increase in amortization.
    Stock-based compensation on a year to date basis of $0.9 million (2006 -
$0.7 million) has increased due to additional grants of stock options to
employees of the Company.
    Interest on long term debt and other interest and bank charges decreased
slightly from $993 in the first three quarters of 2006 to $943 for the same
period in 2007. Interest from increased obligations under capital leases was
offset by interest from lower levels of bank debt.
    On a year to date basis, the loss on disposal of property and equipment
was $0.8 million with proceeds on sale of $0.9 million. Asset divestitures
consisted mainly of retirement of vehicles replaced through the Company's
capital expenditure program.
    Due to a net loss before income tax, there was an income tax recovery of
$1.0 million in the first three quarters of the year as compared to an expense
of $1.2 million for the same period in the prior year.
    The net loss in the quarter was $15.9 million (loss YTD - $18.1 million),
which represents a decline compared to the net gain of $1.2 million in the
third quarter of 2006, and the net earnings of $2.5 million on a year to date
basis in the prior year. The decrease in net earnings is primarily due to a
non-cash goodwill impairment charge, and to a lesser extent to lower levels of
EBITDA, greater levels of amortization and stock-based compensation, offset by
the recovery of prior year income tax.

    Liquidity and Capital Resources

    The Company's principal sources of capital are cash flows from
operations, borrowings under an established credit facility with its senior
lender, and equity financing.
    The Company, through the conduct of its operations, has undertaken
certain contractual obligations as noted in the following table:

    
    -------------------------------------------------------------------------
    Periods ending
     December 31,          2007     2008     2009     2010     2011    Total
    -------------------------------------------------------------------------
    Capital lease
     obligations        $   394    1,602    1,208      303      114  $ 3,621
    Vehicle operating
     leases                 448    1,550    1,179    1,101      566    4,844
    Property & other
     leases                 522    2,003    1,626    1,132      577    5,860
    Long term debt           60    1,022      120   13,873       21   15,096
    -------------------------------------------------------------------------
    Total contractual
     obligations        $ 1,424    6,177    4,133   16,409    1,278  $29,421
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    


    Cash provided by (used in) operations

    Cash used in operations in the quarter was $3 million as compared to the
cash provided by operations of $1.7 million for the same period in the prior
year. The primary causes for the change are lower levels of profitability, and
greater aging in accounts receivable. Management has increased the provision
for doubtful accounts to $0.8 million as recognition of the potentially
challenging environment faced by some of the Company's smaller customers
primarily in the petroleum industry in Alberta.

    Cash provided by (used in) financing and investing

    During the first three quarters of 2007, the Company made payments of
$1.3 million for its capital leases, and $2.4 million towards repayment of
long-term debt ($0.3 million of which was debt reduction on the acquisition of
PWS).
    Purchases of property and equipment on a year to date basis amounted to
$3.7 million, the majority of which consists of revenue generating safety
services rental equipment, and the fabrication costs related to fire and
shower units.

    Liquidity

    In the quarter ended June 30, 2007, HSE entered into an agreement with
its current lender (a Canadian Chartered Bank) for credit facilities that
provide the Company with increased financial flexibility to pursue strategic
opportunities as they arise. The credit facilities include a $25 million
three-year interest-only revolving facility and a $7.5 million operating
facility. Depending upon certain financial ratios, the facilities bear
interest at the bank's prime rate (or U.S. base rate) plus up to 0.75 percent,
or at bankers' acceptance rates with a stamping fee of 1.50 to 2.25 percent.
An additional standby fee ranging between 0.20 to 0.35 percent per annum is
also required on the unused portion of the credit facilities. The revolving
facility matures on June 25, 2010, with an ability to extend the term at the
lender's option. The operating facility is renewable annually and is margined
to accounts receivable. This facility is subject to covenants that are typical
for this type of facility. The credit facilities are collateralized under a
general security agreement. At the end of the current quarter, the draw
against the revolving facility was $13.8 million, and the draw against the
operating facility was $1.7 million.
    At September 30, 2007, the Company was in compliance with its financial
covenants. Prolonged reduced customer activity in the Oilfield sector may
result in the need to review financial covenants for specified periods of time
with the Company's primary lender. Discussions with the Company's lender
continue to proceed favourably.

    Acquisition

    On July 1, 2007 the Company acquired the outstanding shares of Prairie
Wide Safety Ltd. ("PWS") of Weyburn, Saskatchewan in a business combination to
be accounted for using the purchase method. PWS serves the hydrocarbon
producing region of southeast Saskatchewan by providing complete oilfield and
industrial safety services to drilling, completion, well servicing and field
processing operations. The purchase consideration will be determined based
upon a predetermined formula not to exceed $2.2 million plus the assumption of
debt based upon historical results, with additional consideration contingent
upon performance measures achieved in the first year after the acquisition
date. The consideration will also be subject to adjustments based upon working
capital, and will be a combination of cash, the assumption of debt, and the
issuance of 100,000 common shares. The purchase price allocation has not been
completed and certain items such as fair value of assets and liabilities and
estimates for contingent consideration as of the acquisition date have not
been finalized.

    Outlook

    Reduced conventional oil and gas exploration, development and production
activity levels in the WCSB, relative to the record activity levels
experienced over the past few years, have negatively affected the Oilfield
safety services component of the business, and some industry analysts have
predicted that this will continue for the balance of the year, and well into
2008.
    In executing the Company's diversification strategy, marketing, equipment
and manpower resources were redeployed into the Industrial component of the
business which continues to diversify the Company's client base and assist in
reducing the cyclicality and seasonality of safety services provided to the
conventional upstream oil and gas sector.
    In the last two quarters, the Company was able to demonstrate its ability
to successfully execute multiple, simultaneous, large scale safety service
operations within diversified plant and facility operations for its customers.
This had three positive outcomes for HSE. First, redeploying Oilfield safety
services personnel to Industrial assignments has permitted the Company to
retain largely all of its technical field services personnel. This will
position HSE to fully exploit the recovery in the Oilfield sector when it
emerges. Second, diversifying the assignments of the technical field services
team has given these personnel valuable on-the-job training in delivering
safety services to different industries. Third, this capability was achieved
over the last several years by laying the groundwork of focused marketing
efforts, and the development of personnel and internal processes.
    By exhibiting its capabilities in activities of this magnitude, HSE, with
its integrated and bundled service model, is better positioned to partner with
its customers by offering a greater range of services that can be delivered
throughout the year, and from which higher margins can be attained. Servicing
the Industrial sector will be a permanent and growing component of the HSE
business mix in the future.
    In addition to the utilization of personnel in other industries, the
Company actively pursues a review of operational efficiencies throughout the
organization that is not intended to reduce or impair service or delivery
capacity. As part of the continual focus on increasing margins, these
initiatives will include facilities consolidation intended to increase
efficiency and reduce fixed costs, and a review of equipment, vehicles, and
personnel considered not essential in adding significant value to our
customers. An initial review has identified potential cost reductions of over
$3 million (when compared to the cost structure in 2007) on an annualized
basis, the bulk of which is anticipated to be realized in 2008. The Company
anticipates one time costs (such as severance) related to this initiative to
be approximately $0.3 million, the majority of which will be recorded in the
fourth quarter of 2007. The Company also does not anticipate the need to
significantly increase corporate support costs in the near term. As well, the
Company has reviewed originally planned expenditures for capital related to
the Oilfield side of the business, and has significantly reduced these
expenditures to meet lower forecasted activity.
    Based primarily on sharply lower natural gas drilling activity in 2007
and the outlook for 2008 that this trend will continue, HSE will increase its
initiatives to move surplus safety equipment to client requirements in other
markets where these assets can enjoy higher utilization levels and thus
increase the Company's revenues without significant capital investment.
Markets in which HSE has relocated equipment in 2007 include Saskatchewan,
Ontario and New Brunswick. Future markets where that equipment may be
redeployed include the foregoing, British Columbia, Nova Scotia, the
industrial Midwest of the United States, and one or more of the conventional
oil producing areas of the western United States.
    The recent Crown royalty changes announced by the province of Alberta
have increased the uncertainty for the Oilfield sector of the Company's
business in the future. These royalty changes will decrease the amount of oil
and gas development opportunities that are economic for our customers to
exploit in Alberta under different commodity pricing scenarios. While the
total impact of this major policy change on the Company and its clients has
yet to be determined, management is of the view that any events that reduce
the cash flow from hydrocarbon production generated by HSE's clients will
ultimately have a negative impact.
    In the third quarter, the Company expanded its national delivery
footprint with the acquisition of PWS. In the past, existing customers have
asked HSE to provide services in the established and active hydrocarbon
producing region of southeast Saskatchewan. PWS provides a base from which a
full range of services including breathing air safety services, gas detection,
shower services, fire protection, on-site first aid, worker safety training,
and plant and facility shutdown safety services. This southeast Saskatchewan
market is attractive in the current market environment for Oilfield services
because activity is primarily driven by crude oil, not natural gas. The
producing reservoirs also contain naturally occurring hydrogen sulphide which
increases the requirement for safety services.
    The Company believes its continued investment in sector and geographic
diversification, organic growth, skilled safety professionals and internal
process improvements and operational efficiency will ultimately increase
shareholder value.

    
    Quarterly Results

                                           2007                     2006
    -------------------------------------------------------------------------
                                  Q3        Q2        Q1        Q4        Q3
    -------------------------------------------------------------------------
    Revenue                  $23,578   $19,352   $27,948   $26,198   $26,952
    Net earnings (loss)      (15,920)   (3,113)      904       984     1,197
    EBITDA(1)                  1,376    (1,790)    4,802     4,341     4,283
    -------------------------------------------------------------------------
    Income (loss) per share
     - basic and diluted     $ (0.42)  $ (0.08)  $  0.02   $  0.03   $  0.03
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                     2006           2005
    ------------------------------------------------------
                                  Q2        Q1        Q4
    ------------------------------------------------------
    Revenue                  $19,924   $27,465   $17,280
    Net earnings (loss)       (1,073)    2,353       (59)
    EBITDA(1)                  1,140     5,548     1,501
    ------------------------------------------------------
    Income (loss) per share
     - basic and diluted     $ (0.03)  $  0.07   $ (0.01)
    ------------------------------------------------------
    ------------------------------------------------------

    See Non GAAP Measures for (1)


    HSE's business has a seasonal component. For a description of this
seasonality, please refer to the Company's 2006 Annual Report.

    Related-Party Transactions

    During the quarter, the Company had the following transactions with
related parties all of which are measured at exchange amounts, which
approximate an arm's length equivalent at fair market value:

    -   Included in accounts receivable is a promissory note of $49, (2006 -
        $54) which is due from an officer and director of the Company. This
        note is payable on demand. In the third quarter of 2007, the
        Company paid rent and property taxes to a corporation related to this
        same officer and director of the Company in the amount of $61 (2006 -
        $62). The rent is for a regional office.
    -   In the third quarter of 2007, the Company also paid rent of $12 (2006
        - $15), $79 (2006 - $79), and $11 (2006 - $nil) for regional offices
        to three different corporations. Each corporation is controlled by
        different members of senior management of the Company.
    

    Critical Accounting Policies and Estimates

    HSE prepares its consolidated financial statements in accordance with
Canadian Generally Accepted Accounting Principles. In doing so, management is
required to make various estimates and judgments in determining the reported
amounts of assets and liabilities, revenues and expenses, as well as the
disclosure of commitments and contingencies. Management bases its estimates
and judgments on historical experience and on other various assumptions that
are believed to be reasonable under the circumstances. Estimates and
assumptions are reviewed periodically, and actual results may differ from
those estimates under different assumptions or conditions. Management must use
its judgment related to uncertainties in order to make these estimates and
assumptions.
    The accounting policies and estimates believed to require the most
difficult, subjective or complex judgments and which is material to the
Company's financial reporting results include: allowance for doubtful
accounts, intangible assets and goodwill, impairment of long lived assets,
depreciation and amortization of property and equipment, and future income tax
liabilities. A full description of these accounting policies and estimates can
be found in HSE's 2006 Annual Report.

    Accounting Pronouncements

    On January 1, 2007, the Company adopted the new accounting standards
issued by the Canadian Institute of Chartered Accountants regarding the
recognition, measurement, disclosure and presentation of financial
instruments. Under these standards, financial instruments must be classified
into one of five categories: (i) held-for-trading, (ii) held-to-maturity,
(iii) loans and receivables, (iv) available-for-sale, and (v) other financial
liabilities. The new standards require that all financial instruments within
the scope of the standards, including all derivative instruments, be
recognized on the balance sheet initially at fair value. Subsequent
measurement of all financial assets and liabilities - except those in the
held-for-trading and available-for-sale categories - must be determined at
amortized cost using the effective interest rate method. Held-for-trading
financial instruments are measured at fair value with changes in fair value
recognized in earnings. Available-for-sale financial instruments are measured
at fair value with changes in fair value recognized in comprehensive income
until the investment is derecognized or impaired at which time the amounts
would be recorded in net earnings.
    Under adoption of these new standards, the Company designated accounts
receivable as "loans and receivables", which are measured at amortized cost.
Short-term investments have been designated as "held-for-trading", which are
measured at fair values with changes in such value included in earnings.
Accounts payable and accrued liabilities and long-term debt are classified as
"other financial liabilities" which are measured at amortized cost. We have
classified deferred financing costs of $29 previously included in prepaid
expenses and other assets, as unamortized debt issues costs which now reduces
the carrying value of the long-term debt. The debt issue costs will be
accreted to the carrying value of long-term debt using the effective interest
method. Comparative amounts for prior periods have not been restated.
    The Company also adopted as of January 1, 2007 new standards with respect
to comprehensive income. The new standards require a statement of
comprehensive income, if there are items that give rise to comprehensive
income or loss. The Company did not identify any such items giving rise to
comprehensive income or loss in the three and nine months ended September 30,
2007, or that would result in an adjustment to opening balances for
accumulated other comprehensive income or loss.
    The Company was also required to adopt new accounting standards with
respect to hedging activities. As the Company does not currently have a
hedging program that is impacted by this accounting standard, the adoption of
these standards has no impact on the financial statements.
    Three new Canadian accounting standards have been issued which will
require additional disclosure in the Company's financial statements commencing
January 1, 2008 about the Company's financial instruments as well as its
capital and how it is managed. The third standard relates to inventory and is
effective for interim and annual financial statements beginning on or after
January 1, 2008. The new standard requires that inventory be carried at the
lower of cost and net realizable value, provides more guidance on cost and
requires impairment testing as well as expanded disclosures.

    Business Risks

    The activities the Company undertakes involve a number of risks and
uncertainties, some of which are: crude oil and natural gas prices, cyclical
or seasonal nature of industry, merger and acquisition activity, availability
of qualified staff and financing, financial instruments, government policy,
and litigation and contingencies. Additional risks and uncertainties that the
Company may be unaware of, or that were determined to be immaterial, may also
become important factors that affect the Company. A discussion on the business
risks faced by the Company can be found in HSE's 2006 Annual Report.

    Disclosure Controls and Procedures

    An evaluation was performed under the supervision and with participation
of the Company's management, including the Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as defined in
Multilateral Instrument 52-109. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were designed to provide a reasonable level of
assurance over disclosure of material information, and are effective as at
September 30, 2007.

    Changes in Internal Control over Financial Reporting During Third Quarter
    2007

    The CEO and CFO of HSE Integrated Ltd. are responsible for designing
internal controls over financial reporting or causing them to be designed
under supervision. The Company's internal controls over financial reporting
are designed to provide reasonable assurance regarding the reliability of the
Company's financial reporting and its preparation of financial statements for
external purposes in accordance with Canadian generally accepted accounting
principles. Internal controls over financial reporting, no matter how well
designed, have inherent limitations. Therefore, internal controls over
financial reporting can provide only reasonable assurance with respect to
financial statement preparation and may not prevent or detect all
misstatements.
    During the third quarter of 2007, the Company acquired the outstanding
shares of PWS of Weyburn, Saskatchewan in a business combination to be
accounted for using the purchase method. The Weyburn operation is currently
being integrated into our operations, which includes assessing and designing
internal controls over financial reporting and disclosure controls and
procedures. Although the operation is not expected to be fully integrated
until the fourth quarter of 2007, an initial evaluation of controls conducted
in the third quarter did not reveal any material weaknesses.

    Common Shares Outstanding

    At November 8, 2007, there were 37,567,675 common shares of HSE
outstanding, compared with 37,462,342 common shares outstanding as at December
31, 2006.

    Non-GAAP Measures

    This report makes reference to EBITDA, a measure that is not recognized
under generally accepted accounting principles (GAAP). Management believes
that, in addition to net earnings, EBITDA is a useful supplementary measure.
EBITDA provides investors with an indication of earnings before provisions for
interest, taxes, amortization, foreign exchange gains or losses, gains or
losses on the disposal of property and equipment, and the non-cash effect of
stock-based compensation expense. Investors should be cautioned that EBITDA
should not be construed as an alternative to net earnings determined by GAAP
as an indication of the Company's performance. HSE's method of calculating
EBITDA may differ from that of other companies and accordingly may not be
comparable to measures used by other companies.

    
    EBITDA calculation

    -------------------------------------------------------------------------
    For the Nine Months Ended September 30                   2007       2006
    -------------------------------------------------------------------------
    Net earnings (loss)                                  $(18,129)  $  2,477
    Add (deduct):
      Amortization                                          5,847      5,160
      Impairment of goodwill                               15,000          -
      Stock based compensation                                876        692
      Interest                                                943        993
      Foreign exchange loss                                    24          -
      Loss on disposal of property and equipment              836        432
      Income tax                                           (1,008)     1,215
    -------------------------------------------------------------------------
    EBITDA                                               $  4,389   $ 10,969
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Quarterly EBITDA calculation
                                           2007                     2006
    -------------------------------------------------------------------------
                                  Q3        Q2        Q1        Q4        Q3
    -------------------------------------------------------------------------
    Net earnings (loss)     $(15,920)  $(3,113)  $   904   $   984   $ 1,197
    Add (deduct):
      Amortization             2,004     1,955     1,888     2,458     1,862
      Impairment of goodwill  15,000         -         -         -         -
      Stock based
       compensation              186       333       357       285       312
      Interest                   309       302       332       403       346
      Foreign exchange
      (gain) loss                 22         3        (1)      (93)        -
      Loss (gain) on
       disposal of property
       and equipment              99        30       707       (26)      (19)
      Income taxes              (324)   (1,300)      615       330       585
    -------------------------------------------------------------------------
    EBITDA                   $ 1,376   $(1,790)  $ 4,802   $ 4,341   $ 4,283
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                     2006           2005
    ------------------------------------------------------
                                  Q2        Q1        Q4
    ------------------------------------------------------
     Net earnings (loss)     $(1,073)  $ 2,353   $   (58)
     Add (deduct):
       Amortization            1,870     1,428     1,007
       Impairment of goodwill      -         -         -
       Stock based
        compensation             231       149        98
       Interest                  359       290        34
       Foreign exchange
       (gain) loss                 -         -        16
       Loss (gain) on
        disposal of property
        and equipment            272       179       177
       Income taxes             (519)    1,149       226
    ------------------------------------------------------
     EBITDA                  $ 1,140   $ 5,548   $ 1,500
    ------------------------------------------------------
    ------------------------------------------------------
    

    Forward-Looking Statements

    This report contains forward-looking information and statements within
the meaning of applicable securities laws. These forward-looking statements
concern, among other things, the Company's prospects, expected revenues,
expenses, profits, financial position, strategic direction, and growth
initiatives, all of which are subject to risks, uncertainties and assumptions.
These forward-looking statements are identified by their use of terms and
phrases such as expect, anticipate, estimate, believe, may, will, intend,
plan, continue, project, objective and other similar terms and phrases. These
statements are based on certain assumptions and analyses made by the Company
based on its experience and assessment of current conditions, known trends,
expected future developments and other factors it believes are appropriate
under the circumstances. Such statements are subject to numerous external
variables, both known and unknown, such as changes in commodity prices for
natural gas and oil, changes in drilling activity, weather conditions,
industry-specific and general economic conditions and exchange rate
fluctuations. If any of these risks and uncertainties materializes or if
assumptions are incorrect, actual results may differ materially from those
expressed or implied in the forward-looking statements. The forward-looking
statements included in this MD&A are not guarantees of future performance and
should not be unduly relied upon. Such information and statements involve
known and unknown risks, uncertainties and other factors that may cause actual
results or events to differ materially from those anticipated in such
forward-looking information and statements.
    The forward-looking information and statements contained in the MD&A
speak only as of the date of this MD&A, and none of the Company or its
subsidiaries assumes any obligation to publicly update or revise them to
reflect new events or circumstances, except as may be required pursuant to
applicable laws.

    Additional Information

    Additional information relating to HSE is available under our profile on
the SEDAR website at www.sedar.com and at www.hseintegrated.com.



    
    HSE Integrated Ltd.
    Consolidated Balance Sheets
                                                  September 30   December 31
    (Stated in thousands) (unaudited)                     2007          2006
    -------------------------------------------------------------------------
    ASSETS
    Current
      Cash and cash equivalents                      $     791     $   6,551
      Short term investments                                 -           802
      Accounts receivable                               22,233        23,363
      Inventory                                            746           764
      Prepaid expenses and other assets                    890           963
      Income taxes recoverable                             956             -
                                                     ------------------------
                                                        25,616        32,443

    Property and equipment (note 5)                     43,169        44,745
    Goodwill (note 3)                                    9,806        23,641
    Intangible assets                                    5,665         6,109
                                                     ------------------------
                                                     $  84,256     $ 106,938
                                                     ------------------------
                                                     ------------------------
    LIABILITIES
    Current
      Operating line of credit (note 6)              $   1,702     $       -
      Accounts payable and accrued liabilities           7,239         9,540
      Income taxes payable                                   -         1,602
      Current portion of obligations under
       capital leases (note 7)                           1,403         1,458
      Current portion of long-term debt (note 6)           231         4,199
                                                     ------------------------
                                                        10,575        16,799
    Obligations under capital leases (note 7)            1,884         3,039
    Long-term debt (note 6)                             14,786        12,834
    Future income taxes                                  7,299         7,454
                                                     ------------------------
                                                        34,544        40,126
                                                     ------------------------

    SHAREHOLDERS' EQUITY
      Share capital (note 8)                            60,036        61,471
      Contributed surplus (note 9)                       3,887         1,423
      Retained earnings (deficit)                      (14,211)        3,918
                                                     ------------------------
                                                        49,712        66,812
                                                     ------------------------

                                                     $  84,256     $ 106,938
                                                     ------------------------
                                                     ------------------------

      See accompanying notes to the consolidated financial statements.



    HSE Integrated Ltd.
    Consolidated Statements of Earnings (Loss) and Retained Earnings
    (Deficit)
                                               Three               Nine
                                           Months ended        Months ended
    (Stated in thousands,                  September 30        September 30
     except per share amounts)        ---------------------------------------
    (unaudited)                           2007      2006      2007      2006
    -------------------------------------------------------------------------
    REVENUE                           $ 23,578    26,952  $ 70,878    74,340
                                      ---------------------------------------

    COSTS
      Operating and materials           20,113    19,974    59,287    56,535
      Selling, general and
       administrative                    2,089     2,695     7,202     6,836
      Amortization of property and
       equipment                         1,682     1,563     4,909     4,388
      Amortization of intangibles          322       299       938       772
      Stock based compensation
       (note 10)                           186       312       876       692
      Interest on long-term debt           291       318       879       934
      Other interest and bank charges       18        28        64        59
      Foreign exchange loss                 22         -        24         -
      Loss (gain) on disposal of
       property and equipment               99       (19)      836       432
                                      ---------------------------------------
                                        24,822    25,170    75,015    70,648
                                      ---------------------------------------
    EARNINGS (LOSS) BEFORE
     GOODWILL IMPAIRMENT                (1,244)    1,782    (4,137)    3,692
      Goodwill impairment (note 3)     (15,000)        -   (15,000)        -
                                      ---------------------------------------
    EARNINGS (LOSS) BEFORE INCOME
     TAXES                             (16,244)    1,782   (19,137)    3,692
                                      ---------------------------------------
    Income taxes
      Current (recovery)                  (169)      847      (527)    1,657
      Future reduction                    (155)     (262)     (481)     (442)
                                      ---------------------------------------

                                          (324)      585    (1,008)    1,215
                                      ---------------------------------------
    NET EARNINGS (LOSS) AND
     COMPREHENSIVE (LOSS)              (15,920)    1,197   (18,129)    2,477
    RETAINED EARNINGS, beginning of
     period                              1,709     1,737     3,918       457
                                      ---------------------------------------
    RETAINED EARNINGS (DEFICIT),
     end of period                    $(14,211)    2,934  $(14,211)    2,934
                                      ---------------------------------------
                                      ---------------------------------------
    Earnings (loss) per share
      Basic and diluted               $  (0.42)     0.03  $  (0.48)     0.07
                                      ---------------------------------------
                                      ---------------------------------------
    Weighted average number of
     shares (thousands)
      Basic                             37,565    37,458    37,499    35,310

      See accompanying notes to the consolidated financial statements.



    HSE Integrated Ltd.
    Consolidated Statements of Cash Flows

                                          Three Months       Nine Months
                                         ended Sept. 30     ended Sept. 30
                                      ---------------------------------------
    (Stated in thousands) (unaudited)     2007      2006      2007      2006
    -------------------------------------------------------------------------
    Cash provided by (used in)

    Operations
      Net earnings (loss)             $(15,920)    1,197  $(18,129)    2,477
        Charges to income not
         involving cash
          Goodwill impairment           15,000         -    15,000         -
          Amortization                   2,004     1,862     5,847     5,160
          Stock-based compensation
           (note 10)                       186       312       876       692
          Future income tax expense
           (reduction)                    (155)     (262)     (481)     (442)
          Loss (gain) on disposal of
           property and equipment           99       (19)      836       432
      Change in non-cash working
       capital                          (4,252)   (1,408)   (2,875)   (5,702)
                                      ---------------------------------------
    Cash provided by (used in)
     operations                         (3,038)    1,682     1,074     2,617
                                      ---------------------------------------
    Financing
      Advances (repayment) of
       operating line of credit          1,702         -     1,702    (1,597)
      Repayment of obligations under
       capital leases                     (408)     (234)   (1,347)     (812)
      Issuance of long-term debt             -         -         -    23,356
      Repayment of long-term debt         (269)   (1,357)   (2,416)   (7,288)
      Issuance of share capital, net
       of costs                              2        29         6    13,231
      Settlement of liabilities at
       acquisition (note 4)                  -         -         -    (3,657)
                                      ---------------------------------------
    Cash provided by (used in)
     financing                           1,027    (1,562)   (2,055)   23,233
                                      ---------------------------------------
    Investing
      Purchase of property and
       equipment                          (876)   (1,822)   (3,691)   (2,971)
      Acquisitions (note 4)             (1,974)     (826)   (1,974)  (17,208)
      Proceeds from disposal of
       property and equipment              266       125       886       470
                                      ---------------------------------------

    Cash used in investing              (2,584)   (2,523)   (4,779)  (19,709)
                                      ---------------------------------------
    Net increase (decrease) in
     cash and cash equivalents          (4,595)   (2,403)   (5,760)    6,141

    Cash and cash equivalents,
     beginning of period                 5,386     8,926     6,551       382
                                      ---------------------------------------
    Cash and cash equivalents,
     end of period                    $    791     6,523  $    791     6,523
                                      ---------------------------------------
                                      ---------------------------------------
    Supplementary cash flow
     information
      Interest paid                   $    241       547  $    745     1,194
      Income taxes paid                      -        25     2,013       825
                                      ---------------------------------------

      See accompanying notes to the consolidated financial statements.



    -------------------------------------------------------------------------
    HSE Integrated Ltd.
    Notes to the Consolidated Financial Statements
    (unaudited)
    For the three and nine month periods ended September 30, 2007 and 2006
    (stated in thousands of dollars, except share amounts)
    -------------------------------------------------------------------------

    NOTE 1 - NATURE OF BUSINESS

    Nature of business

    These unaudited interim consolidated financial statements of HSE
    Integrated Ltd. (the "Company") have been prepared following the same
    accounting policies and methods of computation as the audited annual
    consolidated financial statements of the Company for the year ended
    December 31, 2006, except as outlined in note 2. The disclosures provided
    below are incremental to those included with the audited annual
    consolidated financial statements and certain disclosures, which are
    normally required to be included in the notes to the annual consolidated
    financial statements, have been condensed or omitted. These unaudited
    interim consolidated financial statements should be read in conjunction
    with the audited consolidated financial statements and notes for the
    Company for the year ended December 31, 2006.

    These unaudited interim consolidated financial statements include the
    accounts of the Company and its subsidiaries, are stated in Canadian
    dollars, and have been prepared in accordance with Canadian generally
    accepted accounting principles ("GAAP"). Management is required to make
    estimates and assumptions that affect reported amounts of assets and
    liabilities and disclosure of contingent assets and liabilities as at the
    date of the financial statements and the reported amounts of revenue and
    expenses during the reported period. Actual results could differ from
    these estimates.

    The Company's business is seasonal in nature with the highest activity in
    the winter months (first and fourth fiscal quarters) and the lowest
    activity during spring break up (second fiscal quarter) due to road
    weight restrictions and reduced accessibility to remote work areas.
    Certain prior year figures have been reclassified to conform with the
    current period presentation.

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

    NOTE 2 - CHANGE IN ACCOUNTING POLICIES

    On January 1, 2007, the Company adopted the new accounting standards
    issued by the Canadian Institute of Chartered Accountants regarding the
    recognition, measurement, disclosure and presentation of financial
    instruments. Under these standards, financial instruments must be
    classified into one of five categories: (i) held-for-trading, (ii) held-
    to-maturity, (iii) loans and receivables, (iv) available-for-sale, and
    (v) other financial liabilities. The new standards require that all
    financial instruments within the scope of the standards, including all
    derivative instruments, be recognized on the balance sheet initially at
    fair value. Subsequent measurement of all financial assets and
    liabilities - except those in the held-for-trading and available-for-sale
    categories - must be determined at amortized cost using the effective
    interest rate method. Held-for-trading financial instruments are measured
    at fair value with changes in fair value recognized in earnings.
    Available-for-sale financial instruments are measured at fair value with
    changes in fair value recognized in comprehensive income until the
    investment is derecognized or impaired at which time the amounts would be
    recorded in net earnings.

    Under adoption of these new standards, the Company designated accounts
    receivable as "loans and receivables", which are measured at amortized
    cost. Short-term investments have been designated as "held-for-trading",
    which are measured at fair values with changes in such value included in
    earnings. Accounts payable and accrued liabilities and long-term debt are
    classified as "other financial liabilities" which are measured at
    amortized cost.

    We have classified previously deferred financing costs of $29 included in
    prepaid expenses and other assets as unamortized debt issues costs, which
    now reduces the carrying value of the long-term debt. The debt issue
    costs will be accreted to the carrying value of long-term debt using the
    effective interest method. Comparative amounts for prior periods have not
    been restated.

    The Company also adopted as of January 1, 2007 new standards with respect
    to comprehensive income. The new standards require a statement of
    comprehensive income, if there are items that give rise to comprehensive
    income or loss. The Company did not identify any such items giving rise
    to comprehensive income or loss in the three and nine months ended
    September 30, 2007 or that would result in an adjustment to opening
    balances for accumulated other comprehensive income or loss.

    The Company was also required to adopt new accounting standards with
    respect to hedging activities. As the Company does not currently have a
    hedging program that is impacted by this accounting standard, the
    adoption of these standards has no impact on the financial statements.

    Three new Canadian accounting standards have been issued. Two of the
    standards will require additional disclosure in the Company's financial
    statements commencing January 1, 2008 about the Company's financial
    instruments as well as its capital and how it is managed. The third
    standard relates to inventory and is effective for interim and annual
    financial statements beginning on or after January 1, 2008. The new
    standard requires that inventory be carried at the lower of cost and net
    realizable value, provides more guidance on cost and requires impairment
    testing as well as expanded disclosures.

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

    NOTE 3 - GOODWILL IMPAIRMENT

    The Company has experienced reduced business activity relating primarily
    to weaker economic fundamentals faced by customers operating in the
    conventional upstream oil and gas industry. Management has determined
    that this represents an event or circumstance that more likely than not
    reduces fair value of the reporting unit below its carrying value. As a
    result, Management has, in accordance with the Company's accounting
    policy for goodwill, begun an analysis of goodwill impairment at
    September 30, 2007. This analysis is not yet complete but is expected to
    be completed in the fourth quarter of this year. In the interim,
    Management has determined an initial estimated goodwill impairment of
    $15 million. Upon the completion of the impairment analysis, this initial
    estimate may be adjusted.

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

    NOTE 4 - ACQUISITION

    On July 1, 2007, the Company acquired the shares of Prairie Wide Safety
    Ltd. (PWS) of Weyburn, Saskatchewan in a business combination to be
    accounted for using the purchase method. PWS serves the hydrocarbon-
    producing region of southeast Saskatchewan by providing complete oilfield
    and industrial safety services to drilling, completion, well servicing
    and field processing operations. The purchase consideration will be
    determined based upon a predetermined formula, not to exceed $2.2 million
    plus the assumption of debt, based upon historical results, with
    additional consideration contingent upon performance measures achieved in
    the first year from the acquisition date. The results of operations are
    included in the accounts from date of acquisition. Estimated
    consideration and acquisition costs were comprised of 100,000 common
    shares of the Company valued at $1.64 per share, $1,974 cash and the
    assumption of debt.

    The purchase price allocation has not been completed, and certain items
    such as fair value of assets and liabilities and estimates for contingent
    consideration as of the acquisition date have not been finalized.


                                                     Prairie Wide Safety Ltd.
    -------------------------------------------------------------------------
    Net assets acquired
    -------------------------------------------------------------------------
      Non-cash working capital                                            96
      Property and equipment                                           1,365
      Intangible assets                                                  494
      Goodwill                                                         1,166
      Bank indebtedness                                                 (119)
      Long-term debt                                                    (400)
      Capital lease obligations                                         (137)
      Future income taxes                                               (327)
    -------------------------------------------------------------------------
                                                                       2,138
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Consideration paid
    -------------------------------------------------------------------------
      Cash                                                             1,974
      Issuance of Common shares                                          164
    -------------------------------------------------------------------------
                                                                       2,138
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    NOTE 5 - PROPERTY AND EQUIPMENT

                                                     September 30, 2007
    -------------------------------------------------------------------------
                                                      Accumulated   Net Book
                                                Cost Amortization      Value
    -------------------------------------------------------------------------
    Land                                   $     356   $       -   $     356
    Buildings and improvements                 1,592         319       1,273
    Safety equipment                          39,856      16,098      23,758
    Vehicles                                  15,234       5,362       9,872
    Vehicles and equipment under capital
     lease                                     6,086       1,823       4,263
    Furniture and equipment                    1,224         441         783
    Other property and equipment               5,820       2,956       2,864
    -------------------------------------------------------------------------
    Total property and equipment           $  70,168   $  26,999   $  43,169
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                     December 31, 2006
    -------------------------------------------------------------------------
                                                      Accumulated   Net Book
                                                Cost Amortization      Value
    -------------------------------------------------------------------------
    Land                                   $     356   $       -   $     356
    Buildings and improvements                 1,410         184       1,226
    Safety equipment                          38,049      13,813      24,236
    Vehicles                                  15,681       5,734       9,947
    Vehicles and equipment under capital
     lease                                     6,554       1,440       5,114
    Other property and equipment               6,589       2,723       3,866
    -------------------------------------------------------------------------
    Total property and equipment           $  68,639   $  23,894   $  44,745
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

    NOTE 6 - OPERATING FACILITIES and LONG-TERM DEBT

    During the previous quarter, the Company entered an agreement with its
    current lender for credit facilities. The credit facilities include a
    $25 million three year interest-only revolving facility and a
    $7.5 million operating facility. The facilities bear interest at the
    bank's prime rate (or U.S. base rate) plus up to 0.75 percent, or at
    bankers' acceptance rates with a variable stamping fee of 1.50 to 2.25
    percent. An additional standby fee ranging between 0.20 to 0.35 percent
    per annum is also required on the unused portion of the credit
    facilities. The revolving facility matures on June 25, 2010, with an
    ability to extend the term at the lender's option. The operating facility
    is renewable annually and is margined to accounts receivable. This
    facility is subject to covenants that are typical for this type of
    facility. The credit facilities are collateralized under a general
    security agreement. Certain costs associated with the new financing
    facilities have been shown as a reduction of the carrying value of long-
    term debt and will be expensed over the term of the debt using the
    effective interest rate method.

    During 2006 and first quarter 2007, the Company had the following bank
    credit facilities:

      a)  a $20,000 non-revolving installment credit facility which amortized
          over five years from date of draw, bearing interest at the bank's
          prime rate, and was subject to an annual cash flow sweep of 25% of
          earnings before interest, amortization and taxes less interest paid
          and repayments of revolving and non-revolving principal.
      b)  A $10,000 (seasonally reduced in June to November to $8,000)
          operating facility bearing interest at the bank's prime rate. This
          facility was subject to margin requirements based on eligible
          accounts receivable.
      c)  A $5,000 revolving installment credit facility which amortized over
          five years from date of draw and bears interest at the bank's prime
          rate. The credit facilities were secured by general security
          agreements and required maintenance of certain financial ratios and
          other covenants.

                                                       September    December
                                                         30 2007     31 2006
                                                       ----------------------
    Equipment financing contracts bearing interest at
    rates averaging 3.48% (2006 - 1.44%), payable in
    blended monthly payments of $31 (2006 - $27)
    secured by specific equipment.                     $     451   $     438

    Non-revolving credit facility loan as noted above,
    payable in quarterly principal payments of $988
    (2006 - quarterly principal payments of $988)              -      15,805

    Three year interest-only revolving credit facility    13,830           -

                                                       ----------------------
                                                          14,281      16,243
    Accrued consideration on share purchase acquisition      790         790
                                                       ----------------------
                                                          15,071      17,033
    Less current portion                                    (231)     (4,199)
                                                       ----------------------
                                                          14,840      12,834
    Less unamortized debt issue costs                        (54)          -
                                                       ----------------------

                                                       $  14,786   $  12,834
                                                       ----------------------
                                                       ----------------------

    Outstanding principal repayments are due as follows:

           2008                                        $     231
           2009                                              936
           2010                                           13,875
           2011                                               29
                                                       ----------
                                                          15,071
           Less: current portion                            (231)
                                                       ----------
                                                       $  14,840
                                                       ----------
                                                       ----------

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

    NOTE 7 - OBLIGATIONS UNDER CAPITAL LEASE

    The amounts due under capital lease arrangements are repayable in blended
    monthly payments of $143 (2006 - $145) and bear interest at rates
    averaging 5.49% (2006 - 5.37%) per annum. On certain leases, the Company
    has options to acquire the leased assets at various times throughout term
    to 2011.

                                                            2007        2006
    -------------------------------------------------------------------------
           2007                                        $       -   $   1,710
           2008                                            1,592       1,690
           2009                                            1,479       1,238
           2010                                              383         291
           2011                                              162          94
           2012                                               10           -
    -------------------------------------------------------------------------
                                                           3,626       5,023
           Less: interest                                   (339)       (526)
    -------------------------------------------------------------------------
                                                           3,287       4,497
           Less: current portion                          (1,403)     (1,458)
    -------------------------------------------------------------------------
                                                       $   1,884   $   3,039
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

    NOTE 8 - SHARE CAPITAL

    a)  Authorized:
          Unlimited number of common shares without par value.
          Unlimited number of preferred shares, issuable in series.

    b)  Issued and outstanding:

                                                             2007
                                                   ------------------------
    Common shares                                      Shares      Amount
                                                   (in thousands)
                                                   ------------------------

    Balance, December 31, 2006                          37,462   $  59,862

      Issued on acquisition of PWS (note 4)                100         164
      Issued on exercise of options                          6          10
                                                   ------------------------
    Balance, end of period                              37,568   $  60,036
                                                   ------------------------
                                                   ------------------------
    c)  Warrants:
                                                             2007
                                                   ------------------------
    Warrants                                          Warrants     Amount
                                                   (in thousands)
                                                   ------------------------
    Balance, December 31, 2006                           3,144   $   1,609
      Forfeited on expiry                               (3,144)     (1,609)
                                                   ------------------------
    Balance, end of period                                   -   $       -
                                                   ------------------------
                                                   ------------------------

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

    NOTE 9 - CONTRIBUTED SURPLUS
                                                  September 30 December 31
                                                          2007        2006
                                                   ------------------------
    Balance, beginning of period                     $   1,423   $     462
    Stock compensation expense - employee options          859         977
    Exercise of stock options                               (4)        (16)
    Warrants - forfeited on expiry                       1,609           -
                                                   ------------------------
    Balance, end of period                           $   3,887   $   1,423
                                                   ------------------------
                                                   ------------------------

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

    NOTE 10 - STOCK-BASED COMPENSATION PLANS

    Incentive stock option plan

    The weighted average fair value of options granted for the periods ended
    September 30, 2007 and December 31, 2006 are $2.14 and $2.24 per option,
    respectively. The fair value of each option granted was estimated on the
    date of grant using the Modified Black-Scholes option-pricing model with
    the following assumptions:

                                             2007          2006
                                        ------------------------------
           Vesting period (years)             3              3
           Risk-free interest rate       3.94 - 4.11%   3.89 - 4.08%
           Expected life (years)              5              5
           Price volatility                135.24%     55.46 - 96.00%
                                        ------------------------------
                                        ------------------------------

    Pursuant to an incentive stock option plan, a maximum of 10% of the
    issued and outstanding common shares of the Company are reserved from
    time to time, for issuance to eligible participants. Option prices and
    vesting terms are determined by the directors at the time of granting at
    an exercise price no less than market on the grant date. The term of
    options granted does not exceed five years.

    Information about outstanding stock options is as follows:

                                    September 30,           December 31,
                                        2007                    2006
                               ----------------------  ----------------------
                                            Weighted                Weighted
                                             Average                 Average
                                            Exercise                Exercise
                                 Options       Price     Options       Price
                               ----------------------------------------------
    Outstanding, beginning of
     period                    1,924,501   $    2.24   1,022,333   $    1.74
    Granted                      667,500        1.71   1,053,000        2.83
    Exercised                     (5,333)       1.06     (47,332)       1.36
    Forfeited                   (157,335)       2.16    (103,500)       2.69
                               ----------------------------------------------
    Outstanding, end of
     period                    2,429,333   $    2.14   1,924,501   $    2.24
                               ----------------------------------------------
                               ----------------------------------------------
    Exercisable at end of
     period                      913,475   $    2.04     445,442   $    1.69
                               ----------------------------------------------
                               ----------------------------------------------

    The following table summarizes information about stock options
    outstanding at September 30, 2007:

                                                        Number
                                            Weighted  exercisable
                                            average       at
                    Options     Exercise   remaining   September
                  outstanding    prices      life      30, 2007
                  -----------------------------------------------
                                   $
                     28,000    0.50-1.05     1.40        28,000
                    292,999    1.06-1.60     2.35       226,320
                  1,268,334    1.61-2.15     3.71       379,169
                    330,000    2.16-2.70     3.30       109,995
                    510,000    2.71-4.50     3.51       169,991
                  -----------------------------------------------
                  2,429,333       2.14       3.42       913,475
                  -----------------------------------------------
                  -----------------------------------------------

    Deferred share unit plan

    Effective November 13, 2006, the Company adopted a deferred share unit
    ("DSU") plan for non-executive directors. Under the terms of the plan,
    DSU's awarded will vest immediately and will be settled with cash in the
    amount equal to the closing price of the Company's common shares on the
    redemption date specified by the Director upon tendering their
    resignation from the Board. The redemption date must be after the date on
    which the notice of redemption is filed with the Company and before
    December 15 of the first calendar year commencing after the Director's
    termination date. On January 16, 2007, 15,000 deferred share units were
    granted to non-executive directors. The units were revalued at September
    30, 2007 and the recovery recorded in income.

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

    NOTE 11 - RELATED-PARTY TRANSACTIONS

    During the quarter, the Company had the following transactions with
    related parties all of which are measured at exchange amounts, which
    approximate an arm's length equivalent at fair market value:

        -  Included in accounts receivable is a promissory note of $49, (2006
           - $54) which is due from an officer and director of the Company.
           This note is payable on demand. In the third quarter of 2007, the
           Company paid rent and property taxes to a corporation related to
           this same officer and director of the Company in the amount of $61
           (2006 - $62). The rent is for a regional office.

        -  In the third quarter of 2007, the Company also paid rent of $12
           (2006 - $15), $79 (2006 - $79), and $11 (2006 - $nil) for regional
           offices to three different corporations. Each corporation is
           controlled by different members of senior management of the
           Company.

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

    NOTE 12 - SEGMENT INFORMATION

    Management has determined that the Company operates in a single industry
    segment, which involves the provision of industrial health, safety and
    environmental monitoring services. Substantially all of the Company's
    operations, assets, revenues, and employees are in Canada. For the
    periods ended September 30, 2007 and 2006, the Company had no customer
    representing more than 10% of revenue.

    Revenue by customer group is as follows:

                                   Three Months ended      Nine Months ended
                                      September 30            September 30
                               ----------------------------------------------
                                    2007        2006        2007        2006
                               ----------------------------------------------
    Oilfield                   $   9,351      18,656   $  30,859      52,357
    Industrial                    11,438       5,984      31,419      16,404
    Environment                    2,789       2,312       8,600       5,579
                               ----------------------------------------------
    Total Revenue              $  23,578      26,952   $  70,878      74,340
                               ----------------------------------------------
                               ----------------------------------------------

    As a % of Revenue:
    Oilfield                       39.7%       69.2%       43.6%       70.4%
    Industrial                     48.5%       22.2%       44.3%       22.1%
    Environment                    11.8%        8.6%       12.1%        7.5%
                               ----------------------------------------------
    Total Revenue                 100.0%      100.0%      100.0%      100.0%
                               ----------------------------------------------
                               ----------------------------------------------

    NOTE 13 - CONTINGENCIES

    In the ordinary course of business activities, the Company may be
    contingently liable for litigation and claims with customers, suppliers,
    former employees, and third parties. Management believes that adequate
    provisions have been recorded in the accounts where required. Although it
    may not be possible to accurately estimate the extent of potential costs
    and losses, if any, management believes that the ultimate resolution of
    such contingencies would not have a material effect on the financial
    position of the Company.

    NOTE 14 - SUBSEQUENT EVENT

    On October 31, 2007, the Company announced a cost reduction initiative. A
    one-time charge of approximately $300 will result. The majority of the
    charge is anticipated to be recorded in fourth quarter 2007.
    





For further information:

For further information: HSE Integrated Ltd., David Yager, Chairman &
CEO, Telephone: (403) 266-1833, E-Mail: dyager@hseintegrated.com; Tony
Hidalgo, Chief Financial Officer, Telephone: (403) 650-6481, E-Mail:
thidalgo@hseintegrated.com

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