Trinidad Drilling Ltd. reports second quarter and year-to-date 2009 results; solid results combined with strategic growth and improved financial flexibility



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

    TSX SYMBOL: TDG and TDG.DB
    

    CALGARY, Aug. 11 /CNW/ - Trinidad Drilling Ltd. ("Trinidad" or the
"Company") reported operating and financial results for the second quarter and
first six months of 2009 today. Despite the weak industry conditions present,
Trinidad reported strong gross margins, utilization levels above industry
average, lower debt levels and continued growth in the second quarter of 2009.
    "Trinidad remained focused on its long-term strategy of value-added
growth, backed by long-term contracts while also managing the challenging
market and industry conditions during the second quarter," said Lyle
Whitmarsh, Trinidad's President and Chief Executive Officer. "We continued our
geographic expansion in two fronts in the quarter, growing our fleet in both
the US and Mexico. Our strong performance and customer-focused approach
allowed us to extend the average term on our long-term, take-or-pay contracts
during a period of historically low demand for oilfield services. In addition,
we were able to preserve our gross margins through re-aligning our cost
structure and added financial flexibility by significantly reducing the
Company's level of indebtedness during the quarter. To have achieved these
advancements in our corporate strategy during a less challenging period would
be commendable on its own but to achieve this during the current environment
shows the commitment of our team and the soundness of our business model."

    
    SECOND QUARTER AND YEAR-TO-DATE HIGHLIGHTS

    (Quarter-over-quarter and year-to-date comparatives all relate to the
    comparable period in 2008)

    -   Trinidad recorded revenue of $125.5 million for the second quarter of
        2009 and $317.1 million year-to-date, down 11.1% and 12.1%
        respectively, largely due to lower utilization rates and weaker
        industry conditions.

    -   Drilling utilization in Canada averaged 14% in the second quarter and
        32% year to date, exceeding industry utilization averages by three
        and nine percent, respectively, but down from the levels recorded in
        2008 of 31% for the quarter and 52% for the first half of the year.
        The US and Mexico drilling operations reported utilization of 61% in
        the quarter and 63% year to date compared to 87% in both comparative
        periods.

    -   Cash flow from operations before changes in non-cash working
        capital (1) was $25.6 million ($0.27 per share (diluted)), in the
        second quarter of 2009 and $77.1 million ($0.81 per share (diluted))
        year-to-date, down 5.8% and 21.1%, respectively, compared to the same
        periods last year. The lower cash flow levels reflect the reduced
        revenue generated, however this impact was largely mitigated through
        improved cost control in the second quarter.

    -   Trinidad's high level of rigs under contract, its deeper capacity
        fleet and its focus on cost control allowed the Company to record a
        strong gross margin(1) percentage of 42% both in the second quarter
        and year to date compared to 38% and 42%, respectively, in 2008.

    -   Net earnings before impairment of intangible asset (1) in the
        second quarter were a loss of $8.6 million ($0.09 per share
        (diluted)) and earnings of $8.9 million ($0.09 per share (diluted))
        year to date, compared to $1.1 million and $40.1 million,
        respectively in 2008. In addition to the items above, net earnings
        were impacted by a foreign exchange loss of $9.5 million and a loss
        on disposal of assets of $5.6 million.

    -   On June 25, 2009, Trinidad closed an equity financing deal where a
        total of 27,184,500 shares were issued for gross proceeds of
        $140 million. The net proceeds were used to reduce the Company's
        indebtedness and to provide additional financial flexibility.

    -   During the second quarter of 2009, Trinidad announced the expansion
        of its Mexican operations, with the redeployment of four existing,
        under-utilized rigs from its Canadian fleet into the Chicontepec
        region under long-term, take-or-pay contracts with 100% utilization.

    (1) Please see the Non-GAAP Measures Definitions section of this MD&A
        (as defined herein) for further details.
    

    MANAGEMENT'S DISCUSSION AND ANALYSIS

    The following management's discussion and analysis (MD&A) of the
financial condition and results of operations is intended to help the reader
understand the current and prospective financial position and operating
results of Trinidad Drilling Ltd. ("Trinidad" or the "Company"). The MD&A
discusses the operating and financial results for the three and six months
ended June 30, 2009 and is dated August 10, 2009 and takes into consideration
information available up to that date. The MD&A is based on the unaudited
consolidated financial statements of Trinidad for the three and six month
periods ended June 30, 2009, which were prepared in accordance with Canadian
Generally Accepted Accounting Principles (GAAP). The MD&A should be read in
conjunction with the annual consolidated financial statements and related
notes for the year ended December 31, 2008. Additional information is
available on Trinidad's website (www.trinidaddrilling.com) and all previous
public filings, including the most recently filed Annual Report and Annual
Information Form, are available through SEDAR (www.sedar.com).
    As a result of Trinidad's conversion from an income trust to a
corporation, effective March 10, 2008, references to the "Company", "shares",
the "Incentive Options Plan", "options" and "dividends" should be read as
references to the "Trust", "units", "Unit Rights Incentive Plan", "rights" and
"distributions" respectively, for the periods prior to March 10, 2008. All
amounts are denominated in Canadian dollars (CDN$) unless otherwise
identified. All amounts are stated in thousands unless otherwise identified.

    
    -------------------------------------------------------------------------
    FINANCIAL HIGHLIGHTS

    ($ thousands except share, per share
     and percentage data)
                                                  Three months ended June 30,
                                                2009        2008    % change
    -------------------------------------------------------------------------
    Revenue                                  125,472     141,179       (11.1)
    Gross margin(1)                           52,461      53,765        (2.4)
    Gross margin percentage(1)                  41.8%       38.1%        9.7
    EBITDA(1)                                 29,044      39,884       (27.2)
      Per share (diluted)(2)                    0.31        0.45       (31.1)
    EBITDA before stock-based
     compensation(1)                          30,714      40,017       (23.2)
      Per share (diluted)(2)                    0.32        0.46       (30.4)
    Cash flow from operations                 79,234      83,777        (5.4)
      Per share (diluted)(2)                    0.83        0.95       (12.6)
    Cash flow from operations before
     change in non-cash working capital(1)    25,616      27,202        (5.8)
      Per share (diluted)(2)                    0.27        0.31       (12.9)
    Net earnings (loss)                       (8,590)      1,141      (852.8)
      Per share (basic)(2)                     (0.09)       0.01    (1,000.0)
      Per share (diluted)(2)                   (0.09)       0.01    (1,000.0)
    Net earnings (loss) before
     impairment of intangible asset(1)        (8,590)      1,141      (852.8)
      Per share (basic)(2)                     (0.09)       0.01    (1,000.0)
      Per share (diluted)(2)                   (0.09)       0.01    (1,000.0)
    Net earnings (loss) before
     stock-based compensation(1)              (6,920)      1,274      (643.2)
      Per share (diluted)(2)                   (0.07)       0.01      (800.0)
    Capital expenditures
     (including deposits)                     31,061      27,492        13.0
    Net debt(1)                              465,519     461,628         0.8
    Shares outstanding - basic
     (weighted average)(2)                95,150,116  86,750,690         9.7
    Shares outstanding - diluted
     (weighted average)(2)                95,150,116  87,825,214         8.3
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                                    Six months ended June 30,
                                                2009        2008    % change
    -------------------------------------------------------------------------

    Revenue                                  317,058     360,830       (12.1)
    Gross margin(1)                          133,965     152,193       (12.0)
    Gross margin percentage(1)                  42.3%       42.2%        0.2
    EBITDA(1)                                 98,357     128,553       (23.5)
      Per share (diluted)(2)                    1.04        1.50       (30.7)
    EBITDA before stock-based
     compensation(1)                         100,718     128,855       (21.8)
      Per share (diluted)(2)                    1.06        1.50       (29.3)
    Cash flow from operations                116,536     130,324       (10.6)
      Per share (diluted)(2)                    1.23        1.52       (19.1)
    Cash flow from operations before
     change in non-cash working capital(1)    77,096      97,712       (21.1)
      Per share (diluted)(2)                    0.81        1.14       (28.9)
    Net earnings (loss)                      (14,239)     40,053      (135.6)
      Per share (basic)(2)                     (0.15)       0.47      (131.9)
      Per share (diluted)(2)                   (0.15)       0.47      (131.9)
    Net earnings (loss) before
     impairment of intangible asset(1)         8,950      40,053       (77.7)
      Per share (basic)(2)                      0.09        0.47       (80.9)
      Per share (diluted)(2)                    0.09        0.47       (80.9)
    Net earnings (loss) before
     stock-based compensation(1)             (11,878)     40,355      (129.4)
      Per share (diluted)(2)                   (0.13)       0.47      (127.7)
    Capital expenditures
     (including deposits)                     91,398      57,833        58.0
    Net debt(1)                              465,519     461,628         0.8
    Shares outstanding - basic
     (weighted average)(2)                94,774,982  85,347,826        11.0
    Shares outstanding - diluted
     (weighted average)(2)                94,774,982  85,916,240        10.3
    -------------------------------------------------------------------------
    (1) Readers are cautioned that gross margin, gross margin percentage,
        EBITDA, EBITDA before stock-based compensation, cash flow from
        operations before change in non-cash working capital, net earnings
        (loss) before impairment of intangible asset, net earnings (loss)
        before stock-based compensation and net debt and the related per
        share information do not have standardized meanings prescribed by
        GAAP - see "Non-GAAP Measures".
    (2) Basic shares include the weighted average number of shares
        outstanding over the period. Diluted shares include the weighted
        average number of shares outstanding over the period and the dilutive
        impact, if any, of the deemed conversion of convertible debentures
        and the number of shares issuable pursuant to the Incentive Option
        Plan.


    -------------------------------------------------------------------------
    OPERATING HIGHLIGHTS

                       Three months ended June 30,  Six months ended June 30,
                           2009     2008 % change     2009     2008 % change
    -------------------------------------------------------------------------
    Land Drilling Market
    Operating days -
     drilling
      Canada                692    1,742    (60.3)   3,237    5,751    (43.7)
      United States
       and Mexico(1)      3,233    3,783    (14.5)   6,476    7,458    (13.2)
    Rate per drilling day
      Canada (CDN$)      23,564   23,219      1.5   24,796   23,711      4.6
      United States and
       Mexico (CDN$)(1)  23,747   21,565     10.1   25,438   21,649     17.5
      United States and
       Mexico (US$)(1)   19,554   21,449     (8.8)  20,759   21,541     (3.6)
    Utilization rate
     - drilling
      Canada                14%      31%    (54.8)     32%      52%    (38.5)
      United States         61%      87%    (29.9)     63%      87%    (27.6)
    CAODC industry
     average                11%      20%    (45.0)     23%      38%    (39.5)
    Number of drilling
     rigs at quarter end
      Canada                 53       62    (14.5)      53       62    (14.5)
      United States and
       Mexico(1)             64       48     33.3       64       48     33.3
    Utilization rate
     for service rigs       19%      29%    (34.5)     30%      45%    (33.3)
    Number of service
     rigs at quarter end     23       20     15.0       23       20     15.0
    Number of coring and
     surface casing rigs
     at quarter end          20       20      0.0       20       20      0.0

    Barge Drilling Market
    Operating days          351      361     (2.8)     596      633     (5.8)
    Rate per drilling
     day (CDN$)          30,250   41,500    (27.1)  34,750   44,428    (21.8)
    Rate per drilling
     day (US$)           24,906   41,268    (39.6)  28,383   44,202    (35.8)
    Utilization rate        96%     100%     (4.0)     82%    99%(2)   (17.2)
    Number of barge
     drilling rigs            1        1      0.0        1        1      0.0
    Number of barge
     drilling rigs under
     Bareboat Charter
     Agreements               3        3      0.0        3        3      0.0
    -------------------------------------------------------------------------
    (1) Trinidad commenced its operations in Mexico effective November 2008.
    (2) During the first quarter of 2008, Trinidad completed significant work
        to one of its barge rigs and as a result it was removed from service
        and not included in the utilization calculation.
    

    FORWARD-LOOKING STATEMENTS

    The MD&A contains certain forward-looking statements relating to
Trinidad's plans, strategies, objectives, expectations and intentions. The use
of any of the words "expect", "anticipate", "continue", "estimate",
"objective", "ongoing", "may", "will", "project", "should", "believe",
"plans", "intends", "confident", "might" and similar expressions are intended
to identify forward-looking information or statements. Various assumptions
were used in drawing the conclusions or making the projections contained in
the forward-looking statements throughout this MD&A. The forward-looking
information and statements included in this MD&A are not guarantees of future
performance and should not be unduly relied upon. Forward-looking statements
are based on current expectations, estimates and projections that involve a
number of risks and uncertainties, which could cause actual results to differ
materially from those anticipated and described in the forward-looking
statements. 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
or statements. In particular, but without limiting the foregoing, this MD&A
may contain forward-looking information and statements pertaining to the
completion of announced rig construction programs on a timely basis and on
economical terms; the assumption that Trinidad's customers will honour their
take-or-pay contracts; fluctuations in the demand for Trinidad's services; the
ability for Trinidad to attract and retain qualified personnel, in particular
field staff to crew the Company's rigs; the existence of competitors,
technological changes and developments in the oilfield services industry; the
existence of operating risks inherent in the oilfield services industry;
assumptions respecting capital expenditure programs and other expenditures by
oil and gas exploration and production companies; assumptions regarding
commodity prices, in particular oil and natural gas; assumptions respecting
supply and demand for commodities, in particular oil and natural gas;
assumptions regarding foreign currency exchange rates and interest rates; the
existence of regulatory and legislative uncertainties; the possibility of
changes in tax laws; and general economic conditions including the capital and
credit markets. Trinidad cautions that the foregoing list of assumptions,
risks and uncertainties is not exhaustive. The forward-looking information and
statements contained in this MD&A speak only as of the date of this MD&A and
Trinidad assumes no obligation to publicly update or revise them to reflect
new events or circumstances, except as may be required pursuant to applicable
securities laws.

    NON-GAAP MEASURES

    This MD&A contains references to certain financial measures and
associated per share data that do not have any standardized meaning prescribed
by Canadian GAAP and may not be comparable to similar measures presented by
other companies. These financial measures are computed on a consistent basis
for each reporting period and include gross margin, gross margin percentage,
EBITDA (as defined in Non-GAAP measures section), EBITDA before stock-based
compensation, cash flow from operations before change in non-cash working
capital, net earnings (loss) before impairment of intangible asset, net
earnings (loss) before stock-based compensation, net debt and working capital.
Please see the Non-GAAP Measures Definitions section of this MD&A for details
with respect to definitions of these non-GAAP measures.

    RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS

    Management is responsible for the information disclosed in this MD&A and
the accompanying consolidated financial statements, and has in place
appropriate information systems, procedures and controls to ensure that
information used internally by management and disclosed externally is
materially complete and reliable. In addition, Trinidad's Audit Committee, on
behalf of the Board of Directors, provides an oversight role with respect to
all public financial disclosures made by the Company, and has reviewed and
approved this MD&A and the accompanying consolidated financial statements.

    PROFILE

    Trinidad is a growth-oriented corporation that trades on the Toronto
Stock Exchange (TSX) under the symbols TDG and TDG.DB. Trinidad's divisions
operate in the drilling, well-servicing, coring and barge-drilling sectors of
the North American oil and natural gas industry. With the completion of the
2009 rig construction program, Trinidad will have 119 land drilling rigs
ranging in depths from 1,000 - 6,500 metres and operations in Canada, the
United States and Mexico. In addition to its land drilling rigs, Trinidad has
23 service rigs, 20 pre-set and coring rigs and four barge rigs currently
operating in the Gulf of Mexico. Trinidad is focused on providing modern,
reliable, expertly designed equipment operated by well-trained and experienced
personnel. Trinidad's drilling fleet is one of the most adaptable,
technologically advanced and competitive in the industry.

    OVERVIEW

    Trinidad's second quarter and year-to-date 2009 results were impacted by
the weak economic and industry conditions. This challenging period, however,
has provided Trinidad with an opportunity to demonstrate the benefits of its
deep-drilling focus, its geographical redeployment, the strength of its
contracts and its flexible cost structure.
    Lower utilization rates and dayrates in both Canada and the US led to a
reduced revenue level of $125.5 million in the second quarter of 2009 compared
to $141.2 million in the previous comparative quarter, a reduction of 11%. For
the first half of 2009, Trinidad recorded revenue of $317.1 million, a 12%
decrease from the same period in 2008. Although overall revenue levels were
lower, Trinidad's focus on cost control and deeper-capacity rig mix allowed
the Company to record a strong gross margin percentage in the quarter. As a
percentage of revenue, gross margin was 42.3% in both the second quarter and
the first six months of 2009, up from 38.1% in the same quarter last year and
consistent with the first half of 2008. Gross margin in the quarter was also
positively impacted by early termination revenue in its coring and pre-setting
division.
    EBITDA (as defined in Non-GAAP measures section) was $29.0 million and
$98.4 million, respectively, for the three and six month periods ending June
30, 2009, a decrease of $10.8 and $30.2 million, respectively, as compared to
2008. EBITDA in the second quarter of 2009 was negatively impacted by the
lower revenue levels generated in the period. EBITDA also decreased due to a
$9.5 million foreign exchange loss recorded in the quarter, reflecting the
impact of the weakening of the US dollar relative to the Canadian dollar.
    Trinidad reported a net loss of $8.6 million or $0.09 per share diluted
for the quarter ended June 30, 2009, a decrease of $9.7 million or $0.10 per
share diluted compared to the second quarter of 2008. For the first half of
2009, Trinidad reported a net loss of $14.2 million or $0.15 per share
diluted, down $54.3 million or $0.62 per share diluted year over year. In
addition to the items mentioned above, net earnings in the second quarter of
2009 were negatively impacted by a $5.6 million loss on disposal of assets
that was recorded in the quarter. Net earnings per share diluted for the
second quarter also reflect a 1.6% increase in the weighted-average diluted
shares outstanding following Trinidad's equity offering in June 2009.
    As a result of the lower activity levels and increased pricing pressure
experienced in the first half of 2009 relative to the third and fourth
quarters of 2008, management took steps to align the Company's cost structure.
The cost cutting initiatives implemented included staff reductions, wage
rollbacks and the reduction of discretionary spending. These changes were made
during the second quarter and are expected to continue to provide support to
the Company's gross margins and result in lower general and administrative
expenditure levels during the ongoing weak industry conditions.
    Overall, industry activity levels continue to be negatively impacted by
global economic and financial market challenges and significant volatility in
commodity markets. Despite this, Trinidad's financial condition remains
strong. During the second quarter of 2009, Trinidad issued approximately 27.2
million shares through a bought deal equity financing for net proceeds of
$133.8 million which were used to reduce the Company's indebtedness. This
increased financial flexibility will allow Trinidad to evaluate, and if
appropriate, capitalize on value creating opportunities in potential new and
existing markets. Trinidad reduced its net debt (as defined in Non-GAAP
measures section) in the quarter by $121.0 million or 21% to $465.5 million
and had $205.0 million available on its revolving credit facility at June 30,
2009.
    Trinidad's business model is based on providing modern, deep-drilling
capacity rigs targeted towards the unconventional shale plays which are in
demand even in tough industry conditions and on securing a substantial portion
of its revenue with long-term, take-or-pay contracts. In line with this
strategy, Trinidad renegotiated the terms with a key US customer on 17
existing contracts, extending the average term by one year. In addition, the
customer agreed to cancel the construction of one of the rigs included in the
2009 rig build program. Trinidad now has approximately 50% of its fleet under
long-term, take-or-pay contracts with an average term remaining of 2.5 years.
    In the second quarter of 2009, Trinidad continued its strategy of
diversifying its operations geographically with two new rigs built under the
2009 rig build program being deployed to the US and four existing rigs being
removed from the Canadian fleet to be upgraded and prepared for drilling in
Mexico. All six of these rigs have long-term, take-or-pay contracts associated
with the work they will be providing. Trinidad will continue to be
opportunistic in deploying rigs to international markets with minimal new
capital investment requirements and contracts that reward high-value, high-
performance drilling rigs.
    Trinidad's earnings are highly dependent upon crude oil and natural gas
commodity prices which drive its customers' cash flow levels and, in turn,
demand for its oilfield services. The Company's strong base of long-term,
take-or-pay contracts and its extensive exposure to the unconventional shale
plays throughout North America have helped mitigate the impact of the reduced
activity levels; however, the non-contracted portion of the fleet remains
vulnerable to these market conditions.
    The sharp decline in the global economy which began in the latter half of
2008 and the ongoing recessionary conditions present in the first half of 2009
continued to keep pressure on crude oil and natural gas commodity prices. In
the second quarter of 2009, oil prices West Texas Instrument (WTI) moved up
45% on average from the first quarter on expectations that global economies
have potentially troughed. Meanwhile, Henry Hub natural gas moved down 22%
from the first quarter of 2009 and down 68% from the same time period of 2008,
as the market remained oversupplied with continued reductions in demand.
Natural gas prices have plunged by close to 70% from summer 2008 highs amidst
robust production from US onshore natural gas fields and slumping demand.
Large industrial consumers have scaled back natural gas use to cut costs
during the recession. In response to falling gas prices, producers have
reduced their development plans due to contracting economics, thus curbing the
flow of new natural gas supplies into the market.
    Trinidad believes that the sharp reduction in natural gas drilling
activity, together with declining existing production levels, will bring
supply back in line with demand and help bolster natural gas prices. Trinidad
has positioned itself with the right style of equipment, in the right
geographic and resource-based locations and with the necessary financial
flexibility to perform strongly once more robust natural gas pricing returns.

    
    QUARTERLY ANALYSIS               2009                    2008
    ($ millions except per
    share and operating data)     Q2      Q1      Q4      Q3      Q2      Q1
    -------------------------------------------------------------------------
    Financial Highlights
    Revenue                    125.5   191.6   205.3   191.7   141.2   219.7
    Gross margin                52.5    81.5    84.2    73.1    53.8    98.4

    Net earnings (loss)         (8.6) (5.6)(1) 21.8(2)  20.4     1.1    38.9
    Depreciation and
     amortization               19.1    24.0    25.8    24.0    20.5    24.0
    Loss (gain) on disposal
     or sale of assets           5.6     4.1   (29.0)      -    (0.2)   (0.1)
    Stock-based compensation     1.7     0.7     0.9     1.2     0.1     0.2
    Future income tax
     (recovery) expense         (2.9)    7.8    19.8    10.3     2.5     9.4
    Effective interest on
     financing costs             1.6     1.1     1.1     1.1     1.1     0.4
    Accretion on convertible
     debentures                  1.3     1.2     1.2     1.2     1.2     1.8
    Unrealized foreign
     exchange loss (gain)        7.8    (5.0)  (22.0)   (6.6)    0.9    (4.1)
    Impairment of intangible
     asset or goodwill             -    23.2    38.2       -       -       -
                               ----------------------------------------------
    Cash flow from operations
     before change in non-cash
     working capital            25.6    51.5    57.8    51.6    27.2    70.5
    Net earnings (loss) per
     share (diluted)           (0.09)  (0.06)   0.23    0.21    0.01    0.44
    Cash flow from operations
     before change in non-cash
     working capital per
     share (diluted)            0.27    0.55    0.60    0.53    0.31    0.75


    QUARTERLY ANALYSIS                  2007
    ($ millions except per
    share and operating data)     Q4      Q3      Q2
    -------------------------------------------------
    Financial Highlights
    Revenue                    145.8   162.2   115.5
    Gross margin                58.8    70.5    42.6

    Net earnings (loss)         17.9    15.0     4.7
    Depreciation and
     amortization               19.0    20.2    14.8
    Loss (gain) on disposal
     or sale of assets           0.2       -     0.1
    Stock-based compensation     0.4     0.5     0.7
    Future income tax
     (recovery) expense         (7.8)    3.3    (3.1)
    Effective interest on
     financing costs             1.1     1.1     0.4
    Accretion on convertible
     debentures                  1.2     1.0       -
    Unrealized foreign
     exchange loss (gain)        0.2     5.3     5.8
    Impairment of intangible
     asset or goodwill             -       -       -
                               ----------------------
    Cash flow from operations
     before change in non-cash
     working capital            32.2    46.4    23.4
    Net earnings (loss) per
     share (diluted)            0.21    0.18    0.05
    Cash flow from operations
     before change in non-cash
     working capital per
     share (diluted)            0.38    0.55    0.27

    (1) Includes impairment of intangible asset charge of $23.2 million.
    (2) Includes impairment of goodwill charge of $38.2 million.

    QUARTERLY ANALYSIS               2009                    2008
                                  Q2      Q1      Q4      Q3      Q2      Q1
    -------------------------------------------------------------------------
    Operating Highlights
    Land Drilling Market
    Operating days - drilling
      Canada                     692   2,545   3,034   3,411   1,742   4,009
      United States and
       Mexico(1)               3,233   3,243   3,757   3,861   3,783   3,675
    Rate per drilling day
      Canada (CDN$)           23,564  25,132  26,358  21,772  23,219  24,517
      United States and
       Mexico (CDN$)(1)       23,747  27,124  26,418  22,668  21,565  21,735
      United States and
       Mexico (US$)(1)        19,554  21,961  22,882  22,049  21,449  21,636
    Utilization rate
     - drilling
      Canada                     14%     51%     61%     63%     31%     72%
      United States and
       Mexico(1)                 61%     64%     80%     85%     87%     87%
    CAODC industry average       11%     36%     43%     48%     20%     56%
    Number of drilling rigs
     at quarter end
      Canada                      53      57      57      60      62      62
      United States and
       Mexico(1)                  64      58      56      50      48      48
    Utilization for service
     rigs                        19%     41%     45%     49%     29%     62%
    Number of service rigs
     at quarter end               23      23      23      20      20      20
    Number of coring and
     surface casing rigs at
     quarter end                  20      20      20      20      20      20
    Barge Drilling Market(2)
    Operating days               351     245     347     305     361     272
    Rate per drilling
     day (CDN$)               30,250  41,183  47,583  40,678  41,500  48,128
    Rate per drilling
     day (US$)                24,906  33,353  41,401  39,620  41,268  47,910
    Utilization rate             96%     68%     94%     83%    100%   98%(3)
    Number of drilling rigs
     at quarter end                1       1       1       1       1       1
    Number of drilling rigs
     under Bareboat Charter
     Agreements at quarter end     3       3       3       3       3       3
    -------------------------------------------------------------------------

    QUARTERLY ANALYSIS                  2007
                                  Q4      Q3      Q2
    -------------------------------------------------
    Operating Highlights
    Land Drilling Market
    Operating days - drilling
      Canada                   2,135   2,718   1,165
      United States and
       Mexico(1)               3,399   3,305   2,944
    Rate per drilling day
      Canada (CDN$)           23,631  21,746  23,527
      United States and
       Mexico (CDN$)(1)       21,404  23,265  24,927
      United States and
       Mexico (US$)(1)        21,650  21,978  21,996
    Utilization rate
     - drilling
      Canada                     37%     47%     20%
      United States and
       Mexico(1)                 83%     85%     88%
    CAODC industry average       37%     39%     17%
    Number of drilling rigs
     at quarter end
      Canada                      64      64      64
      United States and
       Mexico(1)                  46      43      38
    Utilization for service
     rigs                        57%     46%     23%
    Number of service rigs
     at quarter end               20      20      21
    Number of coring and
     surface casing rigs at
     quarter end                  20      20      17
    Barge Drilling Market(2)
    Operating days               352     352       -
    Rate per drilling
     day (CDN$)               47,536  51,904       -
    Rate per drilling
     day (US$)                47,991  49,050       -
    Utilization rate             96%    100%       -
    Number of drilling rigs
     at quarter end                1       1       -
    Number of drilling rigs
     under Bareboat Charter
     Agreements at quarter end     3       3       -
    -------------------------------------------------
    (1) Trinidad commenced its operations in Mexico effective November 2008.
    (2) Trinidad commenced its operations in the barge drilling market with
        its acquisition of Axxis effective July 2007.
    (3) During the first quarter of 2008, Trinidad completed significant work
        to one of its barge rigs and, as a result, it was removed from
        service and not included in the utilization calculation.
    

    An assessment or comparison of Trinidad's quarterly results, at any given
time, requires consideration of crude oil and natural gas commodity prices and
seasonality. Commodity prices ultimately drive the level of exploration and
development activities carried out by the Company's customers and the
associated demand for the oilfield services provided by Trinidad. Generally
speaking, North American markets have greater exposure to natural gas prices
while international markets are more heavily weighted to crude oil projects.
From a seasonality perspective, Trinidad operates a substantial number of rigs
in western Canada and therefore operations are impacted by weather and
seasonal factors. The winter season, which incorporates the first quarter, is
generally a busy period in western Canada as oil and gas companies take
advantage of frozen conditions to move drilling rigs into regions which might
otherwise be inaccessible to heavy equipment due to swampy conditions. The
second quarter normally encompasses a slow period referred to as spring break-
up. During this period, melting conditions result in temporary municipal road
bans that effectively prohibit the movement of drilling rigs. The third and
fourth quarters in western Canada are usually representative of average
activity levels.
    Trinidad's continued expansion into the US and Mexican markets has
reduced the Company's overall exposure to the seasonal factors that are
present in its Canadian operations. Operators in the US and Mexico have more
flexibility to work throughout the year. This increased number of available
operating days has allowed Trinidad to better manage its business with more
sustainable cash flow throughout the annual cycle. This was evident throughout
2007 and 2008 as Trinidad expanded its operations in the US land and barge rig
markets and in the fourth quarter of 2008 into Mexico.
    Throughout 2007, Canadian drilling operations faced declining market
conditions as a result of lower commodity prices and high natural gas storage
levels. Canadian dayrates decreased due to these conditions and the industry
experienced lower utilization levels from the second quarter of 2007 onwards,
in comparison to the same period in the prior year. The fourth quarter of 2007
was particularly impacted in western Canada as the Alberta Government
announced a new royalty regime which resulted in many of Trinidad's key
customers reducing their spending levels.
    Overall, in 2008 Trinidad performed strongly in both the western Canadian
and US drilling markets, as dayrates and utilization levels generally
improved. The Company's revenue also continued to grow as a result of
acquisitions, redeployment of existing under-utilized assets into regions with
higher activity levels, the continued deployment of rigs under previous rig
construction programs and an improvement in market conditions. Upward momentum
in Trinidad's operations was evident throughout 2008 as reflected in the
growth in the Company's revenue, gross margin and EBITDA. However, a goodwill
impairment charge, higher interest, depreciation expense, increased income
taxes and reorganization costs from conversion back to a corporation
downwardly impacted net earnings during the year.
    Trinidad's financial and operating results for the first six months of
2009 have been impacted by the global economic recession. These downward
financial and operational trends in 2009 are directly tied to the global
recession, tight capital markets, and sustained lows for energy commodity
prices, particularly natural gas. Drilling activity levels have not been this
low since 1999, particularly in Alberta, which is seeing the largest portion
of the decrease. Overall demand is down, commodity prices are low, and access
to capital is limited, which in addition to other factors, has caused
exploration and production companies to significantly reduce their spending.
In response to the lower activity levels and reduced margins, Trinidad
significantly reduced its capital expenditure plans, lowered its dividend and
undertook a number of cost reduction measures over the first six months of
2009, including staffing reductions, wage rollbacks, reductions in support
costs and the reduction of discretionary spending.

    
    RESULTS FROM OPERATIONS

    Canadian Drilling Operations

    ($ thousands
    except
    percentages and    Three months ended June 30,  Six months ended June 30,
    operating data)        2009     2008 % change     2009     2008 % change
    -------------------------------------------------------------------------
    Revenue              23,766   44,341    (46.4) 101,994  176,445    (42.2)
    Operating expense    14,465   30,389    (52.4)  61,295  102,651    (40.3)
                        -----------------------------------------------------
    Gross margin          9,301   13,952    (33.3)  40,699   73,794    (44.8)
                        -----------------------------------------------------
    Gross margin
     percentage           39.1%    31.5%             39.9%    41.8%

    Operating days -
     drilling               692    1,742    (60.3)   3,237    5,751    (43.7)
    Rate per drilling
     day (CDN$)          23,564   23,219      1.5   24,796   23,711      4.6
    Utilization rate -
     drilling               14%      31%    (54.8)     32%      52%    (38.5)
    CAODC industry
     average                11%      20%    (45.0)     23%      38%    (39.5)
    Number of drilling
     rigs at quarter end     53       62    (14.5)      53       62    (14.5)

    Utilization rate
     for service rigs       19%      29%    (34.5)     30%      45%    (33.3)
    Number of service
     rigs at quarter end     23       20     15.0       23       20     15.0
    Number of coring and
     surface casing rigs
     at quarter end          20       20        -       20       20        -
    -------------------------------------------------------------------------
    

    The oilfield services industry in Canada continued to experience a slow
down in the second quarter of 2009. Throughout the quarter, the Canadian
drilling market was also impacted by the seasonal conditions typically present
during the period as road bans and wet weather conditions prohibited the
movement of drilling rigs. The challenges present in the Canadian oilfield
services market, which include an oversupply of equipment in the mature and
high-cost Western Canadian Sedimentary Basin (WCSB), continued to be further
exacerbated by depressed commodity prices and declining economic conditions.
These factors resulted in reductions in industry utilization over the first
six months of 2009 to 23% compared to 38% for the same time period of 2008.
However, Trinidad's continued focus on deep drilling and long-term contracts
resulted in the Company generating utilization levels of 14% for the second
quarter and 32% year to date. Trinidad's average second quarter utilization
was three percentage points higher than the industry. This margin expanded to
nine percentage points higher for the six months ended June 30, 2009. For a
large part of this quarter most of the industry was completely shut down due
to spring break-up and significantly reduced capital spending as a result of
global recessionary conditions.
    Coming into 2009, a good portion of Trinidad's customers had announced
reduced drilling budgets, and as a result of this reduced activity, the
Company has seen year-over-year declines in both operating and financial
results. Although the Montney, Bakken and Horn River resource plays in Canada
remain attractive and a focus for several of Trinidad's customers, development
in those areas has also been tempered pending any meaningful, sustainable
increase in natural gas and crude oil commodity prices. Canadian drilling
activity has been deteriorating not only due to the recessionary impact on oil
and gas demand, but also due to weak producers' cash flows and restricted
access to investment capital to help fund new exploration and development
programs. The number of wells rig released in the quarter declined by 52%,
from 1,621 wells to 784 wells year over year. On a year-to-date basis the
decline in wells being rig released reflects the strong impact the current
economic situation is having on drilling activity with 3,754 wells rig
released over the first six months of 2009 as compared to 6,761 wells in 2008,
representing a 44% decline. An industry trend that continues to benefit
Trinidad is the shift towards deeper, more complex drilling and away from
conventional drilling. Directional and horizontal wells increased to 65% of
the total wells drilled in the second quarter compared to 51% in 2008. These
statistics demonstrate the increasing proportion of capital being deployed by
producers towards the unconventional resource plays in the WCSB. Trinidad
anticipates this trend to continue over the long-term as more robust economics
on the deeper plays are driving more activity than the shallower plays, even
in today's challenging environment. Trinidad's rigs are purpose built for
these deeper, more technically-challenging resource plays and this shift in
focus by exploration and production companies continues to differentiate
Trinidad from its competitors. The Company's Canadian drilling segment
experienced a sharp decline in operating days during the second quarter of
2009, with 692 operating days, representing a 60.3% decline year over year for
the quarter. Year to date in 2009, operating days declined by 43.7%, from
5,751 days to 3,237 days year over year due to lower utilization levels, as
well as strategic rig deployments. Although operating days declined, the
Company has been able to maintain relatively stable dayrates year over year.
This was a result of the deeper-capacity drilling rig mix operating in 2009 as
compared to 2008. Trinidad's ability to maintain relatively stable dayrates in
a highly competitive environment reflects the strength of the Company's long-
term, take-or-pay contracts and the high quality of its equipment.
    Revenue decreased by $20.6 million or 46.4% from $44.3 million in the
second quarter of 2008 to $23.8 million for the three months ended June 30,
2009. On a year-to-date basis Trinidad's revenue was $102.0 million, down
$74.5 million or 42.2% as compared to the same time period of 2008. These
declines were due to lower rig utilization, lower operating days and rig
redeployments. The Canadian Drilling segment had nine less rigs in its
fleet(1) on June 30, 2009, as compared to 2008, as a result of redeployments
to the Company's US and Mexico operations. Operating costs as a percentage of
revenue decreased from 68.5% in the second quarter of 2008 to 60.9% in 2009,
thus increasing Trinidad's Canadian drilling segment's gross margin percentage
to 39.1% for the quarter compared to 31.5% in 2008. A driver behind this
increase in gross margin percentage was early termination revenue of
approximately $5.0 million related to the coring and pre-setting division.
Gross margin for the first half of 2009, for the Canadian Drilling segment,
was $40.7 million or 39.9% of revenue compared to $73.8 million or 41.8% of
revenue in the first six months of 2008. Gross margin as a percentage of
revenue on a year-to-date basis has been in line with management's
expectations given Trinidad's strategy towards deeper- capacity rigs with
longer-term contract commitments at stable dayrates.
    (1) As of June 30, 2009, of these nine rigs, seven rigs were redeployed
to Mexico and the remaining two rigs were in the US.
    In response to weak industry conditions, Trinidad undertook a number of
cost reduction measures over the first six months of 2009, including staffing
reductions, wage rollbacks, reductions in support costs and lower
discretionary spending. In addition, the Canadian Association of Oilwell
Drilling Contractors (CAODC) voted to reduce field wages by approximately ten
percent, effective May 1, 2009. While the field staff wage reductions have
lowered operating costs, these cost savings have been passed on to the
customer in the form of reduced rates per drilling day. The Company continues
to take steps to streamline its operations, reduce costs and pursue
opportunities to maximize utilization across the Canadian fleet.
    Utilization for the Company's service rigs was 19% for the quarter and
30% for the six months ended June 30, 2009. These represent declines of 34.5%
and 33.3%, respectively, as compared to the same time periods of 2008. Lower
well servicing activity levels reflect the fewer wells that require completion
work and decreased spending on production maintenance of existing wells. New
well completions continue to account for a good portion of Trinidad's service
rig operating hours, and the associated decline in well completions continues
to impact the Company's service rig results. Trinidad's coring and surface
casing rigs were negatively impacted in the quarter by large cutbacks in oil
sands projects as compared to the first half of 2008. The drastic drop in oil
prices year over year resulted in the reduction of capital spending by oil
sand producers, which has had a significant impact on this division's
financial and operating results in the first six months of 2009.

    
    United States and Mexico Drilling Operations

    ($ thousands
    except
    percentages and    Three months ended June 30,  Six months ended June 30,
    operating data)        2009     2008 % change     2009     2008 % change
    -------------------------------------------------------------------------
    Revenue              87,979   85,970      2.3  182,223  170,283      7.0
    Operating expense    45,536   49,439     (7.9)  96,264   95,881      0.4
                        -----------------------------------------------------
    Gross margin         42,443   36,531     16.2   85,959   74,402     15.5
                        -----------------------------------------------------
    Gross margin
     percentage           48.2%    42.5%             47.2%    43.7%

    Land Drilling Rigs
    Operating days -
     drilling             3,233    3,783    (14.5)   6,476    7,458    (13.2)
    Rate per drilling
     day (CDN$)          23,747   21,565     10.1   25,438   21,649     17.5
    Rate per drilling
     day (US$)           19,554   21,449     (8.8)  20,759   21,541     (3.6)
    Utilization rate -
     drilling               61%      87%    (29.9)     63%      87%    (27.6)
    Number of drilling
     rigs at quarter end     64       48     33.3       64       48     33.3

    Barge Drilling Rigs
    Operating days -
     drilling               351      361     (2.8)     596      633     (5.8)
    Rate per drilling
     day (CDN$)          30,250   41,500    (27.1)  34,750   44,428    (21.8)
    Rate per drilling
     day (US$)           24,906   41,268    (39.6)  28,383   44,202    (35.8)
    Utilization rate -
     drilling               96%     100%     (4.0)     82%    99%(1)   (17.2)
    Number of barge
     drilling rigs at
     quarter end              1        1        -        1        1        -
    Number of barge
     drilling rigs
     under Bareboat
     Charter Agreements
     at quarter end           3        3        -        3        3        -

    (1) During the first quarter of 2008, Trinidad completed significant work
        to one of its barge rigs and as a result it was removed from service
        and not included in the utilization calculation.
    

    The impact of declining economic conditions and depressed commodity
prices has continued to be reflected in Trinidad's US and Mexico drilling
operations segment, most notably in the US during the first six months of
2009. Baker Hughes drilling utilization statistics report that industry
activity levels in the US have declined steeply over the past six months. The
average active land rig count for the second quarter of 2009 was 879 active
rigs, which was down 50% from the same time period of 2008 with 1,772 active
rigs. Over the first six months of 2009 there were on average 1,080 active
rigs, representing a 38% drop from the levels seen in the first half of 2008.
Trinidad's average utilization for the US and Mexico land drilling segment in
the second quarter of 2009 was 61%, representing a 29.9% decline from levels
achieved in 2008. On a year-to-date basis, Trinidad's land drilling rig
utilization was 63%, down 27.6% from the levels achieved over the first six
months of 2008. Trinidad's decline in utilization is largely a reflection of
the change in market fundamentals over the latter part of 2008 and early 2009
on the Company's non-contracted rigs.
    While signs of a slow-down in US activity were evident in the latter
stages of 2008 and well into the first half of 2009, industry sources are
currently beginning to show an upward trend in the number of active rigs in
the US. The Company's long-term contracts and built-for-purpose style fleet
has protected it from the full impact of the downturn, however, as
demonstrated by the lower utilization levels, Trinidad has not been completely
immune to the sharp declines in industry activity. Total land drilling
operating days declined 14.5% in the second quarter and 13.2% year-to-date
compared to 2008. US denominated dayrates were also impacted over the second
quarter falling 8.8% and year-to-date declining 3.6% as compared to the same
time periods of 2008.
    The US and Mexico segment generated revenue of $88.0 million in the
second quarter of 2009 compared with revenue of $86.0 million recorded in the
comparable quarter of 2008, an increase of 2.3%. This growth was driven by the
Company's expansion into Mexico and an increased rig fleet year-over-year, in
addition to a stronger US dollar relative to the same time period last year.
The average Canadian/US dollar foreign exchange rate was 15.6% higher in the
second quarter of 2009 compared with the same time period of 2008. Trinidad
had three rigs in Mexico during the quarter compared to no rigs drilling
during the same three month period of 2008. As well, during the quarter two
new rigs were delivered into US operations as part of the 2009 rig
construction program, bringing the total rig count at quarter end to 64 land
drilling rigs, up 16 rigs as compared to the same time period of 2008.
Furthermore, the active land drilling rig mix changed significantly year-over-
year, with the majority of revenue being driven from the segment's deeper rigs
under long-term contracts. The higher proportion of long-term contracts has
positively impacted dayrates and utilization; however, these gains have been
partially offset by significantly reduced revenue and drilling rig utilization
in the non-contracted rig fleet both on a quarterly basis and year to date due
to depressed industry conditions in the US. Another factor which negatively
impacted revenue in the segment during the quarter and year to date compared
to last year has been a significant reduction in dayrates.
    Operating expenses for the quarter decreased by 7.9% from $49.4 million
in 2008 to $45.5 million in 2009, causing the gross margin percentage to
increase from 42.5% to 48.2%. For the six month period ended June 30, 2009,
gross margin increased 15.5% or $11.6 million from $74.4 million to $86.0
million. These increases were in connection with the increased drilling fleet,
favourable foreign exchange impacts and increased dayrates with the majority
of revenue now being driven from the segment's deeper rigs under long-term
contracts. The Company's gross margins have also been positively impacted by
reduced operating expenses as a result of wage rollbacks, reduced
discretionary spending and cost reduction initiatives. Offsetting some of the
gross margin increase are additional expenses related to start up costs,
improved safety requirements and staffing additional field supervisors to
manage the growing US fleet.
    The 2009 rig build program continues to progress as planned. During the
second quarter of 2009, two new rigs were delivered into operations and an
additional two rigs are under construction with anticipated delivery dates by
the end of the third quarter of 2009. The new builds will operate in the
Haynesville shale under long-term, take-or-pay contracts which will provide a
measure of stability to the Company's cash flows. Following the completion of
its rig build program, including delayed rigs, the Company will have
approximately 65% of its drilling rigs committed under long-term, take-or-pay
contracts in the US and Mexico.
    During the second quarter, Trinidad announced the renegotiation and
extension of long-term, take-or-pay contracts with a key US customer. The
announcement entailed the successful renegotiation and extension of the terms
on 17 long-term, take-or-pay contracts. These rigs had existing contracts that
were due to expire over the next few years, following this renegotiation, the
average remaining term was extended by approximately one year, giving Trinidad
added stability over a substantial portion of its revenue stream. In addition
to changes in term, dayrates on the contracts were adjusted to more accurately
reflect the current operating environment. The impact of somewhat lower
dayrates is expected to be considerably mitigated by specific reductions in
operating costs that Trinidad has identified and continues to implement.
Trinidad believes that the benefit of guaranteed work over the contracted
period more than outweighs the slightly lower gross margins the rigs are
anticipated to achieve. In addition, Trinidad has agreed with the customer to
cancel the construction of one of the rigs included in the 2009 rig
construction program.
    During the first six months of 2009, dayrates for Trinidad's barge
drilling rigs were lower than the first six months of 2008. Although the
Company's utilization was lower in the first quarter of 2009 in comparison to
the first quarter for 2008, the utilization for the barge drilling rigs
returned to levels in the second quarter for 2009 consistent to the second
quarter of 2008. The declines in barge dayrates were a direct result of the
weakening US economy, which in turn suppressed commodity prices, reducing
overall demand for barge drilling activity. During the second quarter of 2009,
Trinidad was able to increase the Company's barge drilling rig utilization
from 68% in the first quarter to 96% for the three-month period ended June 30,
2009. With the softening in the marketplace, the US dollar rate per drilling
day decreased significantly from the first to the second quarter of 2009,
dropping 25.3% from $33,353 to $24,906. Trinidad continued during the quarter
to proactively manage costs, implementing crew wage reductions to partially
offset dayrate reductions. At the end of June 2009, the barge drilling rig
industry utilization in the Gulf of Mexico was approximately 31% (source:
Delta Towing, L.L.C.). Given Trinidad's strong track record for superior
performance and quality customer relationships, the Company was able to
generate utilization of 96% for the quarter, and 82% year-to-date, both well
above industry levels. Moving forward, Trinidad expects the barge rig segment
to continue to be an important component of the Company's business. This
segment continues to add both asset and geographical diversification to
Trinidad and presents a potential opportunity to expand into other
jurisdictions following the return of more robust market conditions.
    The first half of 2009 was very successful for Trinidad in Mexico. The
three land drilling rigs working in Mexico performed extremely well and
exceeded operating and financial performance targets. While onshore drilling
in the US and Canada is down significantly year over year, the average number
of active drilling rigs in Mexico's onshore fields is up close to 70% during
the first six months of 2009 as compared to the same time period of 2008
(source: Baker Hughes). Trinidad's expansion into Mexico is in response to
this growth in drilling programs and the strong demand for quality drilling
equipment. It also allows Trinidad to strategically redeploy rigs from areas
which are subject to the impacts of seasonality or where assets are under
utilized. During the quarter Trinidad announced that it had agreed to move an
additional four existing, under-utilized rigs from its Canadian operations
into Mexico under long-term, take-or-pay contracts. The rigs are contracted to
work at a utilization rate of 100% for an initial term of 18 months, with a
further 18- month extension option. Trinidad's ability to expand its
operations in Mexico is a direct reflection of the superior performance the
Company has shown to date. The rigs selected for redeployment are part of
Trinidad's existing Canadian fleet and are not currently under contract or
working. Minor enhancements will be made to the rigs in order to prepare them
for the Mexican climate and the specific work conditions in which they will be
operating. The rigs are anticipated to be operational in Mexico commencing in
the third quarter of 2009, with all four rigs drilling in Mexico by the end of
the year.

    
    Construction Operations

    ($ thousands
    except             Three months ended June 30,  Six months ended June 30,
    percentage data)       2009     2008 % Change     2009     2008 % Change
    -------------------------------------------------------------------------
    Revenue(1)           32,106   29,541      8.7   70,360   41,132     71.1
    Operating
     expense(1)          31,389   26,259     19.5   63,053   37,135     69.8
                        -----------------------------------------------------
    Gross margin            717    3,282    (78.2)   7,307    3,997     82.8
                        -----------------------------------------------------
    Gross margin
     percentage            2.2%    11.1%             10.4%     9.7%

    (1) Includes inter-segment revenue and operating expenses of $18.4
        million and $18.7 million for the three months ended June 30, 2009
        and 2008, respectively and $37.5 million and $27.0 million for the
        six months ended June 30, 2009 and 2008, respectively.
    

    Revenue from construction operations for the second quarter of 2009
increased by 8.7% or $2.6 million from $29.5 million in 2008 to $32.1 million
in 2009, while on a year-to-date basis revenue improved by 71.1% or $29.2
million from $41.1 million to $70.4 million. Gross margin as a percentage of
revenue decreased from 11.1% for the second quarter of 2008 to 2.2% for the
same time period of 2009. Gross margin for the quarter was also impacted by
continued costs on design and engineering related to the ongoing development
of Trinidad's industry-leading rig technology. For the six month period ended
June 30, 2009, gross margin grew by 82.8 % and as a percentage of revenue was
10.4%, which represented a relatively stable margin year-over-year as compared
to 9.7% for the same time period of 2008.
    Results for the construction division continue to be driven by Trinidad's
2009 rig construction program, with revenue including $37.5 million of inter-
segment construction work performed during the first six months of 2009 in
comparison with $27.0 million in the same period of 2008. On a year-to-date
basis, this impacted gross margin slightly in comparison to 2008, given that a
larger portion of the revenue generated thus far in 2009 was intercompany
related as compared to more profitable third party work. Overall increased
gross margin dollars in the manufacturing division was mostly due to the
construction of three drilling rigs for a third party customer. Two of the
three drilling rigs have been delivered as of the end of the second quarter of
2009, with the third rig expected to be delivered early in the third quarter.
The total build costs for these rigs was lower than originally anticipated and
the revision in cost estimates positively impacted profitability for the
segment in the first half of 2009. Trinidad's Construction segment is
manufacturing six of the nine rigs under its current 2008/2009 rig build
program. The segment completed the construction and delivery of two drilling
rigs to the US in the second quarter of 2009, with four completed now in
total, and the remaining two rigs expected to be deployed by the end of the
third quarter of this year.

    
    GENERAL AND ADMINISTRATIVE EXPENSES

    ($ thousands
    except             Three months ended June 30,  Six months ended June 30,
    percentage data)       2009     2008 % Change     2009     2008 % Change
    -------------------------------------------------------------------------
    General and
     administrative
     expenses            12,266   12,749     (3.8)  28,663   24,172     18.6
    % of revenue           9.8%     9.0%              9.0%     6.7%
    

    General and administrative (G&A) expenses decreased 3.8% to $12.3 million
in the second quarter of 2009 from $12.7 million for the same period in 2008.
The decline is the result of the numerous cost reduction measures implemented
in the second quarter. Similar to reductions introduced in operating expenses
during the quarter, these include administrative and office staff reductions,
wage rollbacks and further reductions in support costs. Partly offsetting
these reductions were the incremental G&A expenses from the acquisition of
Victory Rig Equipment Corporation and the Company's expansion into Mexico.
    The increase of 18.6% on a year-to-date basis is attributable to the
acquisition of Victory and the expansion into Mexico, neither of which were
factors during the first half of 2008, as well as an increase in allowance for
doubtful accounts of $2.7 million set up during the first quarter.

    
    INTEREST

                       Three months ended June 30,  Six months ended June 30,
    ($ thousands)          2009     2008 % Change     2009     2008 % Change
    -------------------------------------------------------------------------
    Interest on
     long-term debt       4,919    5,793    (15.1)   9,551   12,550    (23.9)
    Effective interest
     on deferred
     financing costs        933      422    121.1    1,372      840     63.3
                        -----------------------------------------------------
                          5,852    6,215     (5.8)  10,923   13,390    (18.4)

    Interest on
     convertible
     debentures           6,862    6,830      0.5   13,723   13,658      0.5
    Effective interest
     on deferred
     financing costs        665      660      0.8    1,329    1,318      0.8
    Accretion on
     convertible
     debentures           1,308    1,195      9.5    2,584    2,363      9.4
                        -----------------------------------------------------
                          8,835    8,685      1.7   17,636   17,339      1.7
    

    Interest on long-term debt decreased by $0.9 million in the quarter and
by $3.0 million for the year-to-date period as compared to the same periods in
the prior year. These decreases were a result of lower average long-term debt
levels in addition to declines in both the BA and LIBOR rates compared to the
same periods of 2008.
    Interest and accretion expenses on the convertible debentures are
consistent during both the quarter and year-to-date period as compared to the
consistent periods in the prior year. Please refer to the section of the MD&A
titled "Liquidity and Capital Resources - Convertible Debentures" for details
of Trinidad's ability to acquire up to ten percent of the convertible
debentures' public float by way of normal course issuer bid (NCIB).

    
    STOCK-BASED COMPENSATION

                       Three months ended June 30,  Six months ended June 30,
    ($ thousands)          2009     2008 % Change     2009     2008 % Change
    -------------------------------------------------------------------------
    Stock-based
     compensation         1,670      133  1,155.6    2,361      302    681.8
    

    Stock-based compensation expense increased by $1.5 million quarter over
quarter to $1.7 million, and by $2.1 million, to $2.4 million, on a year-to-
date basis as compared to the same period in the prior year. The majority of
this increase is directly related to Trinidad establishing and issuing units
under two new incentive programs, the Performance Share Unit Plan (PSU Plan)
and the Deferred Share Unit Plan (DSU Plan) during 2008. The PSUs generated an
expense of $1.5 million, while the DSU expense was $0.5 million for the six
months ended June 30, 2009. These costs represent revised estimates which are
subject to the fair value method using the Company's higher closing share
price at June 30, 2009 in comparison to prior periods. There were no costs
associated with either of these option plans in the comparative period of the
prior year.

    
    FOREIGN EXCHANGE (GAIN) LOSS

                       Three months ended June 30,  Six months ended June 30,
    ($ thousands)          2009     2008 % Change     2009     2008 % Change
    -------------------------------------------------------------------------
    Foreign exchange
     (gain) loss          9,481      859  1,003.7    4,584   (3,523)  (230.1)
    

    Trinidad's US and Mexican operations have continued to grow and
contributed significantly to the overall operations of the Company. As a
result, upon consolidation Trinidad's US and Mexican operations are considered
to be self-sustaining and therefore, gains and losses due to fluctuations in
the foreign currency exchange rates are recorded in Other Comprehensive Income
("OCI") on the balance sheet as a component of equity. However, gains and
losses in the Canadian entity on US denominated intercompany balances continue
to be recognized in the statement of operations. For the first six months of
2009, Trinidad recognized a loss of $4.6 million in comparison with a gain of
$3.5 million in 2008. In an effort to minimize the impact on foreign exchange
fluctuations for the Company, during the first quarter of 2009, Trinidad
capitalized a significant portion of the Company's intercompany balances to
equity within the US and Mexico reporting segment. These intercompany balances
are the result of rig funding from Canada for the US and Mexico operations and
the ongoing US rig construction program. The depreciation of the US dollar as
compared to 2008's year-end rate has resulted in foreign exchange losses. The
$9.5 million loss, in the second quarter of 2009, corresponds to an equal and
offsetting unrealized gain from the US and Mexico operations included in OCI.

    
    DEPRECIATION AND AMORTIZATION

                       Three months ended June 30,  Six months ended June 30,
    ($ thousands)          2009     2008 % Change     2009     2008 % Change
    -------------------------------------------------------------------------
    Depreciation         18,991   20,509     (7.4)  42,825   44,501     (3.8)
    Amortization of
     intangible assets      145        -        -      289        -        -
    (Gain) loss on sale
     of assets            5,642     (224)(2,618.8)   9,749     (317)(3,175.4)
    

    Depreciation decreased 7.4% to $19.0 million in the second quarter of
2009 from $20.5 million in the same time period of 2008; and for the six
months ended June 30, 2009 there was a decrease of 3.8% to $42.8 million. As a
percentage of revenue, depreciation increased from 14.5% to 15.1% for the
quarter and increased from 12.3% to 13.5% over the six month period. The
increasing proportion of drilling rigs with deeper depth capacities has
resulted in higher capital asset costs and therefore higher depreciation
expense as a percentage of revenue. In addition, the stronger US dollar in
relation to the Canadian dollar during 2009 versus 2008 resulted in higher
depreciation expense within the US and Mexico, when translated into Canadian
dollars. These factors have been more than offset by the decline in drilling
rig utilization and resultant lower operating days, thereby reducing the
depreciation expense in both the Canadian and US drilling divisions compared
to the same period of 2008.
    The acquisition of Victory included intangible assets of $4.4 million,
which are comprised of patent technology, customer relationships, trade name,
non-compete agreements and engineering and design costs. Amortization expense
related to these intangibles was $0.1 million for the quarter and $0.3 million
for the six months ended June 30, 2009.
    During the first six months of 2009, Trinidad recognized a loss on
disposal of assets of $9.7 million. This loss on disposal was related to the
replacement of 33 diesel engines on 11 US based rigs, six of which occurred
during the second quarter. Trinidad has filed a warranty claim related to
these engines. At June 30, 2009, Trinidad is unable to conclude on the
likelihood or quantify the proceeds related to this warranty claim.

    
    IMPAIRMENT OF INTANGIBLE ASSET

                       Three months ended June 30,  Six months ended June 30,
    ($ thousands)          2009     2008 % Change     2009     2008 % Change
    -------------------------------------------------------------------------
    Impairment of
     intangible assets        -        -        -   23,189        -        -
    

    During the first quarter, the Company recorded an intangible impairment
charge of $23.2 million related to the Bareboat Charters. The intangible asset
was recognized in connection with the acquisition of Axxis on July 5, 2007.
The original value of $39.6 million was related to the US$12.5 million annual
payments to be paid to the former owners of Axxis in relation to the Bareboat
Charters. The intangible asset was being amortized over the period of payment
term, ending July 2010. Management concluded the remaining value of $23.2
million was fully impaired based on the outlook for the barge drilling market
and its adverse effect on the Bareboat Charters up until July 2010. The entire
amount has been recognized as an impairment of intangible assets in the
statement of operations for the six months ended June 30, 2009.

    
    REORGANIZATION COSTS

                       Three months ended June 30,  Six months ended June 30,
    ($ thousands)          2009     2008 % Change     2009     2008 % Change
    -------------------------------------------------------------------------
    Reorganization costs      -      140        -        -    2,689        -
    

    Trinidad incurred one-time costs of $0.14 million for the second quarter
of 2008 and $2.7 million for the six months ended 2008 relating to its
conversion from an income trust to a corporation. Reorganization costs
included charges for shareholder communication, legal counsel, development and
execution of fairness opinions and charges in relation to revising and
updating necessary legal documents for Trinidad's new corporate structure.

    
    INCOME TAXES
                       Three months ended June 30,  Six months ended June 30,
    ($ thousands)          2009     2008 % Change     2009     2008 % Change
    -------------------------------------------------------------------------
    Current tax expense   1,102    1,066      3.4    3,113    1,697     83.4
    Future tax expense
     (recovery)          (2,933)   2,492   (217.7)   4,872   11,890    (59.0)
    

    Current tax expense has increased by 3.4% to $1.1 million in the current
quarter and by 83.4%, to $3.1 million in the year-to-date period as compared
to the same periods in the prior year. This increase is related to the
increase in profits in Trinidad's construction operations. The increased
profitability in this segment, coupled with a declining tax shield on
earnings, has resulted in increased current taxes.
    The future tax recovery of $2.9 million in the current quarter, as well
as the 59% decrease to an expense of $4.8 million over the six month period
ended June 30, 2009 as compared to the same periods in the prior year, is the
result of several factors. The reduction of net income and the graduated
reduction of the federal corporate tax rate are the main drivers. In addition,
the future tax expense was further decreased by the reversal of future tax
assets sooner than anticipated within the construction operations due to their
increasing profitability.

    
    NET EARNINGS (LOSS) AND CASH FLOW

    ($ thousands
    except per         Three months ended June 30,  Six months ended June 30,
    share data)            2009     2008 % Change     2009     2008 % Change
    -------------------------------------------------------------------------
    Net earnings (loss)  (8,590)   1,141   (852.8) (14,239)  40,053   (135.6)
      Per share
       (diluted)          (0.09)    0.01 (1,000.0)   (0.15)    0.47   (131.9)
    Net earnings (loss)
     before impairment
     of intangible
     assets(1)           (8,590)   1,141   (852.8)   8,950   40,053    (77.7)
      Per share
       (diluted)          (0.09)    0.01 (1,000.0)   (0.15)    0.47   (131.9)
    Cash flow from
     operations          79,234   83,777     (5.4) 116,536  131,949    (11.7)
      Per share
       (diluted)           0.83     0.95    (12.6)    1.23     1.54    (20.1)
    Cash flow from
     operations before
     change in non-cash
     working capital(1)  25,616   27,202     (5.8)  77,096   97,712    (21.1)
      Per share
       (diluted)           0.27     0.31    (12.9)    0.81     1.14    (28.9)

    (1) Readers are cautioned that net earnings (loss) before impairment of
        intangible assets and cash flow from operations before change in non-
        cash working capital and the related per share information do not
        have standardized meanings prescribed by GAAP - see "Non-GAAP
        Measures".
    

    For the three months ended June 30, 2009, Trinidad's consolidated net
loss was $8.6 million, representing a decline of $9.7 million compared to net
earnings of $1.1 million in the same period of 2008. Net earnings declined
quarter over quarter as a result of reduced revenues and gross margin as
explained above, incremental foreign exchange losses of $8.6 million and a
$5.6 million loss on asset disposal compared to a gain of $0.2 million.
    Year to date the Company's consolidated net loss of $14.2 million
decreased by 135.6% over the 2008 year-to-date net earnings of $40.0 million.
These declines were primarily the result of reduced dayrates company wide,
reducing overall revenues from the prior-year period. Slightly offsetting the
decrease in revenue was the decrease in operating costs of $24.7 million, or
11.8%, the result of cost-cutting initiatives implemented during the second
quarter. Additional items which impacted the net loss was the loss on foreign
exchange of $4.6 million as compared to a gain of $3.5 million in the prior
period and loss on sale of assets of $9.7 million related to the replacement
of diesel engines on US rigs. The most significant factor impacting net
earnings was a $23.2 million impairment of intangible assets charge; excluding
this amount, Trinidad would have reported year-to-date net earnings of $9.0
million.
    Cash flow from operations for the second quarter decreased by 5.4% from
$83.7 million ($0.95 per share (diluted)) in 2008 to $79.2 million ($0.83 per
share (diluted)) in 2009 and cash flow from operations before changes in non-
cash working capital for the same period decreased by 5.8% from $27.2 million
($0.31 per share (diluted)) in the second quarter of 2008 to $25.6 million
($0.27 per share (diluted)) in 2009. The decrease in both cash flow from
operations and cash flow from operations before change in non-cash working
capital was primarily a result of the current period's net loss of $8.6
million as compared to the net earnings of $1.1 million in 2008. Year-to-date
cash flow from operations was $116.5 million ($1.23 per share (diluted)),
representing a decrease of $15.4 million or 11.7% as compared to $131.9
million ($1.54 per share (diluted)) for the same period of 2008. Cash flow
from operations before changes in non-cash working capital also decreased by
$20.6 million, or 21.1%, to $77.1 million ($0.81 per share (diluted)) from
$97.7 million ($1.14 per share (diluted)) for the same period in 2008.

    
    -------------------------------------------------------------------------
    LIQUIDITY AND CAPITAL RE

SOURCES June 30, December 31, ($ thousands except percentage data) 2009 2008 ------------------------------------------------------------------------- Working capital(1) 137,552 85,789 Current portion of long-term debt 128 16,844 Long-term debt(2) 275,869 321,768 Convertible debentures(2) 327,202 323,381 ------------------------ Total debt 603,199 661,993 ------------------------ Total debt as a percentage of assets 33.3% 35.6% Net debt(1) 465,519 559,360 Net debt as a percentage of assets 25.7% 30.0% Total assets 1,810,470 1,862,064 Total long-term liabilities 697,852 742,692 Total long-term liabilities as a percentage of assets 38.5% 39.9% Shareholders' equity 991,672 919,471 Total debt to shareholders' equity 60.8% 72.0% Net debt to shareholders' equity 46.9% 60.8% ------------------------------------------------------------------------- (1) Readers are cautioned that working capital and net debt do not have standardized meanings prescribed by GAAP - see "Non-GAAP Measures". (2) Convertible debentures and long-term debt is reflected net of associated transaction costs. In the current quarter, Trinidad's long-term debt decreased by $45.9 million or 14.2% from $321.8 million at year end to $275.9 million at June 30, 2009. This reduction in debt is directly related to the closing of an equity financing completed during the second quarter of 2009 whereby 27,184,500 shares were issued for gross proceeds of $140.0 million. Net proceeds from the equity issuance were used to reduce outstanding indebtedness under the Company's credit facilities. A total of $141.0 million, the majority of which was related to the equity proceeds, was applied to reduce debt, of which $71.0 million was applied in late June 2009 to reduce amounts outstanding under the revolving facility and $70 million was applied subsequent to quarter end in early July of 2009 to reduce outstanding term indebtedness. Working capital also increased by $51.8 million or 60.3% as at June 30, 2009 compared to the year ended December 31, 2008, as a result of the Company's cash position increasing by $72.6 million due to proceeds from the equity financing portion that were not applied to debt until subsequent to the end of the quarter. This increase was offset by lower accounts receivable balances which are typical after the completion of the slower second quarter where receivables and payables tend to decrease at the completion of spring break-up as a result of lower activity levels leading up to the end of the quarter. In order to fund the acquisition of Axxis in 2007, Trinidad issued $354.3 million in convertible debentures (see below). The classification of the convertible debentures as debt on the face of the balance sheet has resulted in the Company's leverage appearing much higher than some of its peers. However, at maturity or redemption, to the extent the convertible debentures have not previously been converted by the holders, the Company may elect to satisfy its obligation to repay the principal by issuing shares at a price equal to 95.0% of the weighted average trading price of the shares. As a result, Trinidad has the ability, at its option, to eliminate any cash requirements in respect of the principal amount owing on the convertible debentures. Shareholders' equity increased by $72.2 million compared to December 31, 2008 mostly due to the equity offering of $140.0 million, $14.2 million of net losses and $10.7 million of dividends declared to shareholders during the first six months of 2009. Accumulated Other Comprehensive Income, which is comprised of gains and losses on the translation of the Company's foreign subsidiaries and the fair value of Trinidad's interest rate swaps, reduced shareholders' equity by $30.9 million over the period as a result of strengthening of the Canadian dollar and reductions in future expected interest rates, respectively. Current financial performance is well in excess of the financial ratio covenants under the revolving and term facilities (the "Facilities") as reflected in the table below: RATIO June 30, 2009 December 31, 2008 THRESHOLD ------------------------------------------------------------------------- Current Ratio(1) 1.35:1 1.71:1 1.20:1 minimum Leverage(2) 1.32:1 1.43:1 2.5:1 maximum Interest Coverage(3) 10.55:1 10.14:1 5.0:1 minimum Fixed Charge Coverage(4) 9.21:1 9.03:1 1.25:1 minimum Distribution Payout(5) 41.23% 36.25% 85% maximum (1) Current Ratio means, the ratio of consolidated current assets (excluding cash and cash equivalents) to consolidated current liabilities (excluding the current portion of the Facilities outstanding). (2) Leverage Ratio means, the ratio of (i) consolidated total debt (excluding convertible debentures) to (ii) consolidated EBITDA for the trailing twelve months (TTM). (3) Interest Coverage Ratio means, calculated on a TTM basis, the ratio of (i) consolidated EBITDA to (ii) consolidated Cash Interest Expense (excluding interest paid under the convertible debentures) for the TTM. (4) Fixed Charge Coverage Ratio means, calculated on a TTM basis, the ratio of (i) consolidated EBITDA minus (a) capital expenditures which are not financed under the Facilities and (b) current taxes to (ii) consolidated Fixed Charges. Fixed Charges are defined as the sum of (a) Cash Interest Expense (excluding interest paid on the convertible debentures), (b) scheduled principal repayments due during the period and (c) commitment fees relating to the issuance of debt. (5) Distribution Payout Ratio means, calculated on a TTM, the ratio of Restricted Payments to Excess Cash Flow. Restricted Payments include dividends, distributions, purchase of stock or stock equivalents under NCIB and interest payments on convertible debentures. Excess Cash Flow is calculated as consolidated net earnings (loss) adjusted for items including depreciation and amortization, future income taxes, unrealized foreign exchange gains (losses), stock-based compensation and interest expense on the convertible debentures. Readers are cautioned that the ratios noted above do not have standardized meanings prescribed in GAAP. More specific information regarding the debt covenants is available in the credit facility agreement which has been filed with SEDAR and can be accessed at www.sedar.com. Following the renewal of the Revolver, Trinidad has no significant term-debt repayment required until April 2011. The following table summarizes Trinidad's existing term-debt facilities: Repayment Debt Facility Currency Amount Maturity requirements ------------------------------------------------------------------------- Revolving credit $225.0 Next renewal in If not renewed, facility CDN $ million April 2010 repayment due 364 days later Five-year term $100.0 1% amortization, facility CDN $ million May 1, 2011 balloon repayment at maturity Five-year term $125.0 1% amortization, facility US $ million May 1, 2011 balloon repayment at maturity The Facilities are secured by a general guarantee over the assets of the Company and its subsidiaries. Convertible debentures On July 5, 2007, Trinidad issued $354.3 million in unsecured subordinated convertible debentures, which are convertible into shares of Trinidad at the option of the holder at any time prior to maturity at a conversion price of $19.30 per share. They have a face value of $1,000, a coupon rate of 7.75%, and mature on July 31, 2012, with interest being paid semi-annually on June 30 and December 31. Trinidad has the option to redeem the debentures in whole or in part at a redemption price of $1,000 after December 31, 2010 and before their maturity date. On redemption or maturity, Trinidad may elect to satisfy its obligation to repay the principal by issuing common shares. As at June 30, 2009, there had been a conversion in the first quarter of 2009 of $195,000 principle amount of the convertible debentures which equated to 10,102 common shares of Trinidad Drilling Ltd. On March 23, 2009, Trinidad announced its intent to acquire for cancellation, by way of NCIB convertible unsecured subordinated debentures of the Company in the principal amount of up to $35,417,934, which represents approximately ten percent of the Company's public float. The bid commenced on March 25, 2009 and terminates on the earlier of March 24, 2010 or the date upon which the Company acquires the maximum amount of debentures to be purchased pursuant to the NCIB. As of June 30, 2009 there have been no convertible debentures purchased and cancelled under this NCIB plan. ------------------------------------------------------------------------- SHAREHOLDERS' EQUITY June 30, December 31, ($ thousands) 2009 2008 ------------------------------------------------------------------------- Common shares 948,354 828,882 During the quarter ended June 30, 2009, the Company closed a bought deal equity financing whereby 27,184,500 shares were issued for gross proceeds of $140.0 million. Net of transaction costs, the amount received was $133.8 million. A total of $141.0 million, the majority of which was related to the equity proceeds was applied to reduce debt, of which $71.0 million was applied in late June 2009 to reduce amounts outstanding under the revolving facility and $70.0 million was applied subsequent to quarter end in early July of 2009 to reduce outstanding term indebtedness. In September 2008, Trinidad announced its intent to acquire for cancellation up to ten percent (9,373,221 common shares) of the Company's public float by way of NCIB. During the first six months of 2009, Trinidad repurchased 1,576,100 shares ($14.4 million of book value) by way of the NCIB. Partly offsetting this was a conversion of convertible debentures during the quarter of 5,181 shares ($0.1 million of book value). At June 30, 2009, under this NCIB plan, Trinidad has acquired and cancelled a total of 2,763,500 shares at a cost of $12.0 million, at an average cost of $4.34 per share. Shareholders' equity on August 10, 2009 was $948.4 million (120,840,962 shares). GOING CONCERN The Company's MD&A and financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Trinidad's ability to continue as a going concern is substantially dependent on, but not limited to, the successful execution of the Company's objectives and strategies outlined in this MD&A, as well as the Company's ability to be proactive in managing these objectives and strategies in a timely manner. This financial information does not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to the amounts and classification of liabilities that may be necessary should Trinidad be unable to continue as a going concern. SEASONALITY Trinidad operates a substantial number of rigs in western Canada, and therefore operations are heavily dependent upon the seasons. The winter season, which incorporates the first quarter, is a busy period as oil and natural gas companies take advantage of frozen conditions to move drilling rigs into regions which might otherwise be inaccessible to heavy equipment due to swampy conditions. The second quarter normally encompasses a slow period referred to as spring break-up. During this period melting conditions result in temporary municipal road bans that effectively prohibit the movement of drilling rigs. The third and fourth quarters are usually representative of average activity levels. Trinidad's expansion to the US and Mexican market has reduced its overall exposure to the seasonal factors that are present in its Canadian operations. These seasonal conditions typically limit Canadian drilling activity, whereas in the United States and Mexico operators have more flexibility to work throughout the year. This increased number of operating days throughout the year has allowed Trinidad to better manage its business with more sustainable cash flow throughout the annual cycle. CRITICAL ACCOUNTING ESTIMATES The preparation of the unaudited interim consolidated financial statements requires that certain estimates and judgements be made with regard to the reported amount of revenues and expenses and the carrying values of assets and liabilities. These estimates are based on historical experience and management judgement. Anticipating future events involves uncertainty and consequently the estimates used by management in the preparation of the unaudited interim consolidated financial statements may change as future events unfold, additional experience is acquired or Trinidad's operating environment changes. Depreciation and amortization The accounting estimate that has the greatest impact on Trinidad's financial results is depreciation and amortization. Depreciation and amortization of Trinidad's capital assets and intangible assets incorporates estimates of useful lives and residual values. These estimates may change as more experience is obtained or as general market conditions change impacting the operation of Trinidad's capital assets. In addition, these estimates are reviewed at least annually, to ensure they are still valid. Stock-based compensation Compensation expense associated with options at grant date are estimates based on various assumptions such as volatility, annual dividend yield, risk free interest rate and expected life using the Black-Scholes methodology to produce an estimate of the fair value of such compensation. In addition, the deferred share units and the performance share units are subject to estimates of their fair values using the appropriate market rates at period end. Allowance for doubtful accounts receivable Trinidad performs credit evaluations of its customers and grants credit based on past payment history, financial conditions and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based on specific situations and overall industry conditions. Trinidad's history of bad debt losses has been minimal and generally limited to specific customer circumstances; however, given the cyclical nature of the oil and natural gas industry, the credit risks can change suddenly and without notice. Goodwill In accordance with Canadian GAAP, Trinidad performs a goodwill impairment test at least annually and will conduct the test at an earlier date if changing circumstances indicate a possible impairment exists. Trinidad updated its year end test at June 30, 2009, and determined that no impairment existed in the carrying value of goodwill. Fair value of interest rate swaps The fair value of the interest rate swaps are estimated based on future projected interest rates and adjusted on a quarterly basis for monthly settlements and changes in projections. Trinidad receives the valuation from the contract counterparty on a quarterly basis, reviews it for reasonability, and records the associated change in fair value at each reporting period. Convertible debentures The proceeds from the July 2007 issuance were bifurcated into separate liability and equity components. The value of the conversion feature has been determined based on the Black-Scholes option pricing model and recorded as equity on the consolidated balance sheets. Future Income Taxes The recording of future income tax involves the use of various assumptions to estimate the amounts and timing of the reversals of temporary differences between assets and liabilities recognized for accounting and tax purposes. It also involves the estimation of the effective tax rates for future fiscal years. The assumptions used (which include, but are not limited to, estimated results of operations, tax pool claims and accounting deductions) are based on management's current estimates and will likely change in future periods based on actual results and accordingly so will the estimates. CHANGES IN ACCOUNTING POLICY In the first half of 2009, there were no new accounting standards issued by the Canadian Institute of Chartered Accountants (CICA) for adoption with respect to Trinidad's accounting. FUTURE CHANGES IN ACCOUNTING POLICIES Canadian Generally Accepted Accounting Policies In December 2008, the CICA issued section 1582 Business Combinations which will replace CICA section 1581 of the same name. Under this new guidance, the purchase price used is based on the fair value as of the date of acquisition. Furthermore, the new guidance generally requires all acquisition costs to be expensed, rather than the current practice of capitalizing them as part of the purchase price; contingent liabilities are to be recognized at fair value at the acquisition date and revalued at fair value with the change flowing through earnings until settled. Lastly, negative goodwill is required to be recognized immediately into earnings, unlike the current requirement to eliminate it by deducting it from non-current assets in the purchase price allocation. Entities adopting section 1582 will also be required to adopt CICA section 1601 Consolidated Financial Statements and section 1602 Non- Controlling Interests. Sections 1601 and 1602 will require a change in the measurement of non-controlling interest and will require the change to be presented as part of shareholders' equity on the balance sheet. In addition, the income statement of the controlling parent will include one hundred percent of the subsidiary's results and present an allocation of net income between controlling interest and non-controlling interest. These three standards will be effective for Trinidad on January 1, 2011 and the change from adopting section 1582 will be applied on a prospective basis while the changes from adopting sections 1601 and 1602 will be applied retrospectively. International Financial Reporting Standards In February 2008, the Canadian Accounting Standards Board (AcSB) announced that Canadian public reporting issuers will be required to report under International Financial Reporting Standards (IFRS) beginning January 1, 2011. Consequently, the transition date of January 1, 2011 will require restatement for comparative purposes of amounts reported by the Company for the year ended December 31, 2010. Trinidad has started to determine the potential effects of the changeover to IFRS by: - Researching and documenting expected differences between its current accounting policies that are in accordance with Canadian GAAP and those to be adopted under IFRS; - Considering financial statement presentation and disclosure options available to Trinidad upon initial changeover to IFRS; - Developing a timeline for key milestones on the changeover project; - Raising awareness of the change with accounting staff and the Audit Committee of Trinidad's Board of Directors; - Considering the impacts on the Company's financial reporting systems, performance metrics, staff training, and internal/external communications; and - Concluding that the Company will not early adopt IFRS. The changeover will affect the presentation and valuation of balances and transactions presented in Trinidad's interim and annual consolidated financial statements and related notes; however it is too early in the changeover process for the Company to provide quantification of those effects. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING There have been no significant changes in the Company's disclosure controls and procedures (DC&P) and internal controls over financial reporting (ICFR) for the three or six month periods ended June 30, 2009 and no material weaknesses or significant deficiencies have been identified in the design and operating effectiveness of these controls, that could materially affect or are reasonably likely to affect Trinidad's internal controls over financial reporting. In accordance with the provisions of section 3.3 of NI 52-109, in relation to the acquisition of Victory effective August 18, 2008, Trinidad has limited its assessment of the design of DC&P and ICFR to exclude controls, policies and procedures of Victory. Management is in the process of aligning Victory's systems, processes and controls with corporate standards and has not concluded on the design of DC&P or ICFR for this subsidiary as at June 30, 2009. Also in accordance with the provision of section 3.3 of NI 52-109, given that Trinidad has limited the design of DC&P and ICFR in relation to Victory, the Company is disclosing summary financial information with respect to this acquisition in the following tables: ------------------------------------------------------------------------- VICTORY RIG EQUIPMENT CORPORATION Three months Six months ended ended June 30, June 30, ($ thousands) 2009 2009 ------------------------------------------------------------------------- Revenue 4,806 25,704 Net earnings (loss) (771) 5,247 ------------------------------------------------------------------------- ------------------------------------------------------------------------- VICTORY RIG EQUIPMENT CORPORATION As at June 30, 2009 ($ thousands) ------------------------------------------------------------------------- Current assets 10,109 Non-current assets 6,721 Current liabilities 3,400 Non-current liabilities 583 ------------------------------------------------------------------------- RELATED PARTY TRANSACTIONS All related party transactions were incurred during the normal course of operations on similar terms and conditions to those entered into with unrelated parties. These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Trinidad engages Blake, Cassels & Graydon LLP, a law firm in which a director is a partner, to provide legal advice. During the three and six month periods ended June 30, 2009, Trinidad incurred legal fees of $0.3 million and $0.8 million, respectively (2008 - $0.5 million and $0.9 million, respectively) to Blake, Cassels & Graydon LLP. On June 30, 2009 there were no amounts outstanding and on June 30, 2008 there was $0.2 million outstanding. During the first quarter of 2009, Trinidad purchased a parcel of land from 1010460 Alberta Ltd, a company owned by an executive officer within Trinidad's Canadian operations. The land proceeds on purchase of $1.6 million, as well as all of the purchase agreement's conditions, were representative of an unrelated party transaction. This property currently houses a facility used in the Coring division of the Canadian Drilling Operations. BUSINESS RISKS The business of Trinidad Drilling Ltd. is subject to certain risks and uncertainties. Prior to making any investment decision regarding Trinidad investors should carefully consider, among other things, the risks described herein (including the risks and uncertainties listed in the Forward-Looking Statements section in this MD&A) and the risk factors set forth in the most recently filed Annual Information Form of the Company which are incorporated by reference herein. The Annual Information Form has been filed with SEDAR and can be accessed at www.sedar.com. Copies of the Annual Information Form may be obtained, on request without charge, by contacting Trinidad at (403) 265-6525. OUTLOOK Industry activity continues to be weak in both Canada and the US and the timing of a sustained recovery remains unclear. Trinidad expects to see ongoing pricing pressure and lower industry rig utilization for the remainder of 2009, with a potential return to more robust conditions in early to mid 2010. Utilization levels in Canada have begun to increase largely due to the seasonal aspect of drilling, however they remain well below historic levels. Trinidad continues to record utilization levels that are above the industry average and this differential is increasing as more equipment becomes available through improved weather conditions and the removal of seasonal environmental restrictions. In the US, the active rig count appears to have troughed and is beginning to show an upward trend, particularly in oil-related drilling. Trinidad has been experiencing an increased amount of inquiry regarding potential drilling programs in both countries. Although this is a positive indicator, it appears to be largely related to operators testing pricing levels and it is unclear whether this will lead to increased activity levels. Overall industry cost structures have come down substantially over the past six months in an attempt by oilfield service companies to provide their services at attractive prices. These changes are allowing exploration and production companies to re-evaluate the viability of their projects under reduced commodity prices. The Company is cautious regarding the near to medium-term impact of the global financial crisis, the ensuing economic challenges and low commodity prices and expects the next several quarters to be challenging. In particular, high natural gas storage levels in North America give rise to expectations for lower natural gas prices over the coming months. Demand for energy in North America had decreased dramatically, however the impact of lower supply levels from vastly reduced drilling activity is expected to be felt in the near future. Coupled with falling imports from Canada, Trinidad expects US supply weakness to bring the market into balance over the next six months. Further, any meaningful return of demand presents the risk that the market could move into undersupply, supporting a higher price level and stimulating increased demand for oilfield services. Trinidad understands the risk that the oilfield services market could remain weak well into 2010 and has taken several steps to ensure that the Company is able to face the challenges that may lie ahead. The Company's reduced dividend level, lower cost structure and expected capital expenditures, along with its improved balance sheet all position Trinidad well and provide additional financial flexibility. Trinidad will continue to focus on cost control and cash management to ensure that it has the resources available to weather a prolonged downturn in the market. In addition, Trinidad's high proportion of long-term contracts provides a strong level of stability to the Company's revenue stream. Trinidad's fleet is known in the industry for its focus on deep drilling and for its use of advanced technology. These attributes position the fleet well for drilling in the unconventional shale plays where activity levels remain relatively strong. Trinidad has established a solid reputation for exceptional performance in these areas and has developed strong relationships with some of the key operators in these regions. Based on existing contracts and current drilling programs, Trinidad has approximately 45% of its fleet operating in the North American shale plays, providing the Company with more stable utilization and gross margins. In addition to operating in the shale plays in North America, Trinidad has shown its ability to develop into other expanding areas of drilling activity, such as Mexico. The company has moved three rigs and is in the process of moving four additional existing underutilized rigs from Canada into the Chicontepec region where they are guaranteed work at attractive dayrates and strong margins. Trinidad is also pursuing opportunities to further expand its Mexican operations in addition to opportunities in some areas of South America and select international locations. These expansion opportunities present the Company with the ability to add incremental revenue and profitability without the need to spend extensive amounts of capital. As always, any such opportunities are evaluated with consideration of any increased risk to the Company's people, assets or capital. Trinidad recognizes the challenges that confront the drilling industry currently and in the near term. The Company has taken the necessary steps to ensure it is financially and operationally positioned to not only withstand these challenges but to outperform once stronger market conditions return. Trinidad Drilling Ltd. is a growth-oriented, dividend-paying oil and natural gas services provider based in Calgary, Alberta. Focusing on deep drilling, modern rig fleets, in-house design and technology-based advancement, Trinidad has positioned itself as a premium service provider. Trinidad's growth is driven by chasing and capturing new horizons - advancing technologies, offering new services, entering new markets and performing strategic acquisitions. With the completion of the current rig construction programs, the Company will have 119 land drilling rigs ranging in depth capacities from 1,000 - 6,500 metres and four barge drilling rigs operating in the Gulf of Mexico. In addition to its drilling rigs, Trinidad will have 23 well servicing rigs that have been completely retrofitted or were constructed within the past five years and 20 pre-setting and coring rigs. Trinidad is focused on providing modern, reliable, expertly designed equipment operated by well-trained and experienced personnel. Trinidad's drilling fleet is one of the most highly capable, expertly designed, well-equipped, adaptable and competitive in the industry. NON-GAAP MEASURES DEFINITIONS This MD&A contains references to certain financial measures and associated per share data that do not have any standardized meaning prescribed by Canadian GAAP and may not be comparable to similar measures presented by other companies. These financial measures are computed on a consistent basis for each reporting period and include gross margin, gross margin percentage, EBITDA, EBITDA before stock-based compensation, cash flow from operations before change in non-cash working capital, net earnings before impairment of intangible asset, net earnings (loss) before stock-based compensation, net debt and working capital. These non-GAAP measures are identified and defined as follows: "Gross margin" is used by management to analyze overall and segmented operating performance. Gross margin is not intended to represent operating income nor should it be viewed as an alternative to net earnings or other measures of financial performance calculated in accordance with Canadian GAAP. Gross margin is calculated from the consolidated statements of operations and retained earnings (deficit) and from the segmented information contained in the notes to the consolidated financial statements and is defined as revenue less operating expenses. "Gross margin percentage" is used by management to analyze overall and segmented operating performance. Gross margin percentage is calculated from the consolidated statements of operations and retained earnings (deficit) and from the segmented information in the notes to the consolidated financial statements and is defined as gross margin divided by revenue. "EBITDA" is a measure of the Company's operating profitability. EBITDA provides an indication of the results generated by the Company's principal business activities prior to how these activities are financed, assets are depreciated, amortized and impaired, or how the results are taxed in various jurisdictions. EBITDA is derived from the consolidated statements of operations and retained earnings (deficit) and is calculated as follows: Three months ended June 30, Six months ended June 30, ($ thousands) 2009 2008 2009 2008 ------------------------------------------------------------------------- Net earnings (loss) (8,590) 1,141 (14,239) 40,053 Plus: Interest on long-term debt 5,852 6,215 10,923 13,390 Interest on convertible debentures 8,835 8,685 17,636 17,339 Depreciation and amortization 19,136 20,509 43,114 44,501 Impairment of intangible assets - - 23,189 - Loss (gain) on disposal or sale of assets 5,642 (224) 9,749 (317) Income taxes (1,831) 3,558 7,985 13,587 --------------------------------------------------- EBITDA 29,044 39,884 98,357 128,553 --------------------------------------------------- "EBITDA before stock-based compensation" is used by management to analyze EBITDA (as defined above) prior to the effect of stock-based compensation. "Cash flow from operations before change in non-cash working capital" is used to assist management and investors in analyzing Trinidad's liquidity and ability to generate cash to finance investing and financing activities. Cash flow from operations before change in non-cash working capital is derived from the consolidated statements of cash flows and is defined as cash flow from operating activities plus or minus the change in non-cash operating working capital. "Net earnings before impairment of intangible asset" and "net earnings (loss) before stock-based compensation" are used by management to analyze net earnings prior to the effect of intangible impairment or stock-based compensation charges, respectively, and are not intended to represent net earnings as calculated in accordance with Canadian GAAP. Net earnings (loss) before impairment of intangible asset is derived from the consolidated statements of operations and retained earnings (deficit) and is calculated as follows: Three Six months ended June 30, months ended June 30, ($ thousands) 2009 2008 2009 2008 ------------------------------------------------------------------------- Net earnings (loss) (8,590) 1,141 (14,239) 40,053 Plus: Impairment of intangible assets - - 23,189 - --------------------------------------------------- Net earnings (loss) before impairment of intangible asset (8,590) 1,141 8,950 40,053 --------------------------------------------------- Net earnings (loss) before stock-based compensation is derived from the consolidated statements of operations and retained earnings (deficit) and is calculated as follows: Three Six months ended June 30, months ended June 30, ($ thousands) 2009 2008 2009 2008 ------------------------------------------------------------------------- Net earnings (loss) (8,590) 1,141 (14,239) 40,053 Plus: Stock-based compensation 1,670 133 2,361 302 --------------------------------------------------- Net earnings (loss) before stock-based compensation (6,920) 1,274 (11,878) 40,355 --------------------------------------------------- "Net debt" is used by management and the investment community to analyze the amount of debt less the working capital of the Company. Net debt is derived from the consolidated balance sheets and is calculated as follows: June 30, December 31, 2009 2008 ($ thousands) ------------------------------------------------------------------------- Convertible debentures 327,202 323,381 Long-term debt 275,869 321,768 Less: Working capital: Current assets 258,498 285,690 Current liabilities (120,946) (199,901) ------------------------- Net debt 465,519 559,360 ------------------------- "Working capital" is used by management and the investment community to analyze the operating liquidity available to the Company. Working capital is derived from the consolidated balance sheets and is calculated as follows: June 30, December 31, 2009 2008 ($ thousands) ------------------------------------------------------------------------- Current Assets 258,498 285,690 Less: Current liabilities 120,946 199,901 ------------------------- Working capital 137,552 85,789 ------------------------- References to gross margin, gross margin percentage, EBITDA, EBITDA before stock-based compensation, cash flow from operations before changes in non-cash working capital, net earnings (loss) before impairment of intangible asset, net earnings (loss) before stock-based compensation, net debt and working capital throughout this MD&A have the meanings set out above. "signed" Lyle C. Whitmarsh "signed" Brent J. Conway ------------------------------ ------------------------- President and Chief Executive Executive Vice President and Officer Chief Financial Officer The Toronto Stock Exchange has neither approved nor disapproved the information contained herein. Trinidad will be holding a conference call and webcast to discuss its second quarter 2009 results on August 11, 2009 beginning at 9:00 a.m. MT (11:00 a.m. ET). To participate, please dial (800) 733-7560 (toll-free in North America) or (416) 644-3414 approximately 10 minutes prior to the conference call. An archived recording of the call will be available from approximately 12:00 p.m. MT on August 11 until midnight August 18, 2009 by dialling (877) 289-8525 or (416) 640-1917 and entering replay access code 21311218 followed by the pound sign. A live audio webcast of the conference call will also be available on the investor relations page of Trinidad's website www.trinidaddrilling.com. ------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS ($ thousands - Unaudited) June 30, December 31, 2009 2008 ------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents 103,847 31,202 Accounts receivable 120,515 225,744 Inventory (note 5) 24,141 14,834 Prepaid expenses 9,934 13,811 Future income taxes 61 99 ------------------------- 258,498 285,690 Deposit on capital assets 1,365 11,581 Capital assets (note 6) 1,385,250 1,375,661 Intangible assets (note 7) 3,864 26,959 Goodwill 161,493 162,173 ------------------------- 1,810,470 1,862,064 ------------------------- Liabilities Current liabilities Accounts payable and accrued liabilities 83,561 134,764 Dividends payable 6,042 14,305 Current portion of deferred revenue 25,067 28,241 Current portion of long-term debt 128 16,844 Current portion of fair value of interest rate swap 6,148 5,747 ------------------------- 120,946 199,901 Deferred revenue - 1,572 Long-term debt, net of transaction costs 275,869 321,768 Convertible debentures, net of transaction costs 327,202 323,381 Fair value of interest rate swaps 4,277 7,144 Future income taxes 90,504 88,827 ------------------------- 818,798 942,593 Shareholders' equity Common shares (note 8(a)) 948,354 828,882 Convertible debentures 28,208 28,215 Contributed surplus (note 8(b)) 27,591 19,043 Accumulated other comprehensive income 10,063 40,932 Retained earnings (deficit) (22,544) 2,399 ------------------------- 991,672 919,471 ------------------------- 1,810,470 1,862,064 ------------------------- (See notes to the unaudited interim consolidated financial statements) Commitments (note 12) ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT) ($ thousands except share and per share data - Unaudited) Three months ended June 30, Six months ended June 30, 2009 2008 2009 2008 ------------------------------------------------------------------------- Revenue Oilfield services 123,844 141,859 314,059 362,876 Bareboat Charter income (loss) (note 12) 1,233 (881) 1,924 (2,305) Other 395 201 1,075 259 --------------------------------------------------- 125,472 141,179 317,058 360,830 --------------------------------------------------- Expenses Operating 73,011 87,414 183,093 208,637 General and administrative 12,266 12,749 28,663 24,172 Interest on long-term debt 5,852 6,215 10,923 13,390 Interest on convertible debentures 8,835 8,685 17,636 17,339 Stock-based compensation 1,670 133 2,361 302 Foreign exchange loss (gain) 9,481 859 4,584 (3,523) Depreciation and amortization 19,136 20,509 43,114 44,501 Loss (gain) on disposal or sale of assets 5,642 (224) 9,749 (317) Impairment of intangible assets (note 7) - - 23,189 - Reorganization costs - 140 - 2,689 --------------------------------------------------- 135,893 136,480 323,312 307,190 --------------------------------------------------- Earnings (loss) before income taxes (10,421) 4,699 (6,254) 53,640 Income taxes Current tax expense 1,102 1,066 3,113 1,697 Future tax (recovery) expense (2,933) 2,492 4,872 11,890 --------------------------------------------------- (1,831) 3,558 7,985 13,587 --------------------------------------------------- Net earnings (loss) (8,590) 1,141 (14,239) 40,053 Dividends (6,042) (14,442) (10,704) (18,644) Trust distributions - - - (8,362) Retained earnings (deficit) - beginning of period (7,912) 2,367 2,399 (23,981) --------------------------------------------------- Retained earnings (deficit) - end of period (22,544) (10,934) (22,544) (10,934) --------------------------------------------------- Earnings (loss) per share Basic (0.09) 0.01 (0.15) 0.47 Diluted (0.09) 0.01 (0.15) 0.47 Weighted average number of shares Basic 95,150,116 86,750,690 94,774,982 85,347,826 Diluted 95,150,116 87,825,214 94,774,982 85,916,240 (See notes to the unaudited interim consolidated financial statements) ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) ($ thousands - Unaudited) Three months ended June 30, Six months ended June 30, 2009 2008 2009 2008 ------------------------------------------------------------------------- Net earnings (loss) (8,590) 1,141 (14,239) 40,053 Other comprehensive income (loss) Change in fair value of derivatives designated as cash flow hedges, net of income tax (note 11) 641 1,340 1,079 (245) Foreign currency translation adjustment (54,729) (2,902) (31,948) 12,560 --------------------------------------------------- Total other comprehensive income (loss) (54,088) (1,562) (30,869) 12,315 --------------------------------------------------- Comprehensive income (loss) (62,678) (421) (45,108) 52,368 --------------------------------------------------- (See notes to the unaudited interim consolidated financial statements) ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ($ thousands - Unaudited) Three months ended June 30, Six months ended June 30, 2009 2008 2009 2008 ------------------------------------------------------------------------- Accumulated other comprehensive income (loss) - beginning of period 64,151 (47,911) 40,932 (61,788) Other comprehensive income (loss) during the period (54,088) (1,562) (30,869) 12,315 --------------------------------------------------- Accumulated other comprehensive income (loss) - end of period 10,063 (49,473) 10,063 (49,473) --------------------------------------------------- (See notes to the unaudited interim consolidated financial statements) ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands - Unaudited) Three months ended June 30, Six months ended June 30, 2009 2008 2009 2008 ------------------------------------------------------------------------- Cash provided by (used in) Operating activities Net earnings (loss) for the period (8,590) 1,141 (14,239) 40,053 Items not affecting cash Effective interest on financing costs (note 11) 1,598 1,082 2,701 2,158 Accretion on convertible debentures (note 11) 1,308 1,195 2,584 2,363 Stock-based compensation 1,670 133 2,361 302 Unrealized foreign exchange loss (gain) 7,785 874 2,765 (3,238) Depreciation and amortization 19,136 20,509 43,114 44,501 Loss (gain) on sale of assets 5,642 (224) 9,749 (317) Impairment of intangible asset - - 23,189 - Future income tax (recovery) expense (2,933) 2,492 4,872 11,890 --------------------------------------------------- 25,616 27,202 77,096 97,712 Change in non-cash operating working capital 53,618 56,575 39,440 32,612 --------------------------------------------------- 79,234 83,777 116,536 130,324 --------------------------------------------------- Investing activities (Increase) decrease in deposits on capital assets 4,561 (752) 10,216 (918) Purchase of capital assets (35,622) (26,740) (101,614) (56,915) Purchase of intangibles (75) - (75) - Proceeds from dispositions 1,468 519 1,560 3,260 Change in non-cash investing working capital (11,998) 13,162 (10,863) (11,483) --------------------------------------------------- (41,666) (13,811) (100,776) (66,056) --------------------------------------------------- Financing activities Decrease in long-term debt, net (91,646) (164,816) (61,403) (149,553) Proceeds from share issuance (note 8), net 134,343 158,038 134,343 158,038 Repurchased shares (note 8) 486 - (6,120) - Proceeds from exercise of options (note 8) - 1,071 - 1,189 Dividends paid (4,683) (4,202) (18,967) (4,202) Debt financing costs (1,929) (600) (2,619) (600) Trust unit distribution - - - (17,978) --------------------------------------------------- 36,571 (10,509) 45,234 (13,106) --------------------------------------------------- Cash flow from operating, investing and financing activities 74,139 59,457 60,994 51,162 Effect of translation on foreign currency cash 9,438 40 11,651 234 --------------------------------------------------- Increase in cash for the period 83,577 59,497 72,645 51,396 Cash - beginning of period 20,270 9,920 31,202 18,021 --------------------------------------------------- Cash - end of period 103,847 69,417 103,847 69,417 --------------------------------------------------- Interest paid 18,656 19,546 23,453 26,763 Interest received 13 169 93 293 Taxes paid 1,836 2,052 1,872 2,100 (See notes to the unaudited interim consolidated financial statements) NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. STRUCTURE OF THE CORPORATION Organization Trinidad Drilling Ltd. ("Trinidad" or the "Company") is incorporated under the laws of the Province of Alberta. The Company was formed by way of an arrangement under the Business Corporations Act of Alberta pursuant to an arrangement agreement dated January 9, 2008 between the Company and Trinidad Energy Services Income Trust (the "Trust"). The Arrangement involved the exchange, on a one-for-one basis of trust units and exchangeable shares, after accounting for the conversion factor applicable to the exchangeable shares, for common shares of Trinidad. The effective date of the Arrangement was March 10, 2008 - see note 8(a). Operations Trinidad operates in the land and barge drilling, coring and surface casing and well-servicing sectors of the North American oil and natural gas industry. Trinidad owns 117 land drilling rigs ranging in depths from 1,000 - 6,500 metres and operates in Canada, the United States and Mexico. In addition to its land drilling rigs, Trinidad has 23 service rigs, 20 pre-set and coring and surface casing rigs and 4 barge rigs currently operating in the Gulf of Mexico. Trinidad is focused on providing modern, reliable, expertly-designed equipment operated by well-trained and experienced personnel. 2. ACCOUNTING POLICIES AND ESTIMATES These unaudited interim consolidated financial statements are prepared by management, in accordance with Canadian Generally Accepted Accounting Principles (GAAP), and follow the same accounting policies and methods as the audited consolidated financial statements for the year ended December 31, 2008, and therefore do not contain all of the disclosures required for the annual financial statements. As a result, the unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Trinidad contained in the annual report for the year ended December 31, 2008. FUTURE CHANGES IN ACCOUNTING POLICIES Canadian Generally Accepted Accounting Policies In December 2008, the Canadian Institute of Chartered Accountants (the "CICA") issued section 1582 Business Combinations which will replace CICA section 1581 of the same name. Under this new guidance, the purchase price used is based on the fair value as of the date of acquisition. Furthermore, the new guidance generally requires all acquisition costs to be expensed, rather than the current practice of capitalizing them as part of the purchase price; contingent liabilities including contingent consideration are to be recognized at fair value at the acquisition date and revalued at fair value with the change flowing through earnings until settled. Lastly, negative goodwill is required to be recognized immediately into earnings, unlike the current requirement to eliminate it by deducting it from non-current assets in the purchase price allocation. Entities adopting section 1582 will also be required to adopt CICA section 1601 Consolidated Financial Statements and section 1602 Non-Controlling Interests. Sections 1601 and 1602 may require a change in the measurement of non-controlling interest and will require the change to be presented as part of shareholders' equity on the balance sheet. In addition, the income statement of the controlling parent will include one hundred percent of the subsidiary's results and present an allocation of income between controlling interest and non-controlling interest. These three standards will be effective for Trinidad on January 1, 2011 and the change from adopting section 1582 will be applied on a prospective basis while the changes from adopting sections 1601 and 1602 will be applied retrospectively. International Financial Reporting Standards In February 2008, Canada's Accounting Standards Board (AcSB) announced that Canadian public reporting issuers will be required to report under International Financial Reporting Standards (IFRS) beginning January 1, 2011. Consequently, the transition date of January 1, 2011 will require restatement for comparative purposes of amounts reported by the Company for the year ended December 31, 2010. The adoption of IFRS is intended to increase transparency and bring a higher degree of global comparability as IFRS has been adopted in more than 100 countries. Management is currently evaluating the effects of adopting IFRS on its consolidated financial statements and is in the design stage, including evaluation of key differences between Canadian GAAP and IFRS and creating new accounting policies. Trinidad cannot at this time reasonably estimate the impact of adopting IFRS on its consolidated financial statements. 3. SEASONALITY Trinidad operates a substantial number of rigs in western Canada and therefore, Canadian Drilling Operations are heavily dependent upon the seasons. The winter season, which incorporates the first quarter, is typically a busy period as oil and gas companies take advantage of frozen conditions to move drilling rigs into regions which might otherwise be inaccessible to heavy equipment due to swampy conditions. The second quarter normally encompasses a slow period referred to as spring break-up. During this period melting conditions result in temporary municipal road bans that effectively prohibit the movement of drilling rigs. The third and fourth quarters are usually representative of average activity levels. Trinidad's expansion to the US and Mexican markets has reduced its overall exposure to the seasonal factors that are present in its Canadian operations. These seasonal conditions typically limit Canadian drilling activity, whereas in the US and Mexico, operators have increased flexibility to work throughout the year. This increased number of operating days throughout the year has allowed Trinidad to better manage its business with more sustainable cash flows throughout the annual cycle. 4. ACQUISITION Acquisition of the outstanding shares of Victory Rig Equipment Corporation Effective August 18, 2008, Trinidad purchased all of the outstanding shares, operating assets and assumed all of the related obligations of Victory Rig Equipment Corporation (Victory), a Red Deer, Alberta- based, privately-held fabrication company for consideration of $16.7 million. All earnings of Victory have been included in Trinidad's consolidated statements of operations since August 18, 2008. The consideration paid for this acquisition has been allocated under the purchase method as follows: ($ thousands) 2009 --------------------------------------------------------------------- Purchase price allocated as follows: Capital assets 1,334 Other long-term assets 73 Intangible assets 4,290 Goodwill 15,901 Working capital deficiency (491) Long-term liabilities (4,413) ------------------------- 16,694 ------------------------- Financed as follows: Cash 12,694 Contingent consideration 4,000 ------------------------- 16,694 ------------------------- The purchase price allocation has not been finalized as it is subject to contingent payments. During the first quarter of 2009, an additional $4.0 million of purchase consideration was accrued. As per the share purchase agreement, additional consideration to a maximum of $4.0 million was payable to the former shareholders of Victory Rig Equipment Corporation based on the achievement of certain earnings level targets. Contingency payments have been accrued based on conditions at June 30, 2009 and have caused an increase in goodwill and the purchase price of $4.0 million. Changes to the contingency payments in the future will be offset by changes in goodwill. 5. INVENTORY June 30, December 31, ($ thousands) 2009 2008 --------------------------------------------------------------------- Parts and materials 18,394 10,378 Work-in-progress 5,747 4,456 ------------------------- Total inventory 24,141 14,834 ------------------------- All inventory balances are carried at the lower of cost or net realizable value. The construction operations regularly utilizes inventory in the construction and recertification of rigs and rig related equipment. For the three and six months ended June 30, 2009, there were no material write-downs or reversals of previously written-down amounts (2008 - no material write- downs). Throughout the period the amount of inventories recognized as an expense were: Three months ended June 30, Six months ended June 30, ($ thousands) 2009 2008 2009 2008 --------------------------------------------------------------------- Raw materials and consumables purchased 32,593 17,121 60,266 27,287 Labour costs 3,093 3,991 11,803 7,308 Other costs 89 118 291 218 Net change in inventory (4,386) 5,029 (9,307) 2,322 --------------------------------------------------- Amount of inventories expensed in period 31,389 26,259 63,053 37,135 --------------------------------------------------- 6. CAPITAL ASSETS As at June 30, 2009 Accumulated ($ thousands) Cost Depreciation Net Book Value --------------------------------------------------------------------- Rigs and rig-related equipment 1,458,522 289,670 1,168,852 Automotive equipment and other equipment 27,957 15,265 12,692 Construction equipment 3,049 589 2,460 Building 39,017 3,796 35,221 Land 15,818 - 15,818 Assets under construction 150,207 - 150,207 ---------------------------------------------- 1,694,570 309,320 1,385,250 ---------------------------------------------- As at December 31, 2008 Accumulated ($ thousands) Cost Depreciation Net Book Value --------------------------------------------------------------------- Rigs and rig-related equipment 1,440,511 262,242 1,178,269 Automotive equipment and other equipment 28,266 13,020 15,246 Construction equipment 1,776 326 1,450 Building 33,306 3,047 30,259 Land 12,740 - 12,740 Assets under construction 137,697 - 137,697 ---------------------------------------------- 1,654,296 278,635 1,375,661 ---------------------------------------------- 7. INTANGIBLE ASSETS As at June 30, 2009 Accumulated ($ thousands) Cost Amortization Net Book Value --------------------------------------------------------------------- Customer contracts 30,964 30,964(1) - Patents 3,000 261 2,739 Customer relationships 370 64 306 Trade name 790 137 653 Non-compete agreements 130 38 92 Engineering and design costs 75 1 74 ---------------------------------------------- 35,329 31,465 3,864 ---------------------------------------------- (1) Amount includes impairment of $23,189 recorded at March 31, 2009. As at December 31, 2008 Accumulated ($ thousands) Cost Amortization Net Book Value --------------------------------------------------------------------- Customer contracts 30,964 8,083 22,881 Patents 3,000 111 2,889 Customer relationships 370 27 343 Trade name 790 58 732 Non-compete agreements 130 16 114 ---------------------------------------------- 35,254 8,295 26,959 ---------------------------------------------- There are no internally developed intangible assets. The aggregate amortization expense for the intangible assets for the three and six months ended June 30, 2009 is $0.2 million and $0.3 million, respectively (2008 - $3.4 million and $5.5 million, respectively) and is included in depreciation and amortization. Engineering and design costs are being amortized over 5 years, with no residual value. 8. SHAREHOLDERS' EQUITY AND CONTRIBUTED SURPLUS a) Common shares Authorized Unlimited number of common shares, voting, participating ($ thousands except share data) June 30, 2009 December 31, 2008 --------------------------------------------------------------------- Number Number of Shares Amount $ of Shares Amount $ --------------------------------------------------- Common shares - opening balance 95,227,381 828,882 - - Shares issued for cash, net of transaction costs 27,184,500 133,800 12,132,353 158,010 Shares issued on conversion of convertible debentures 5,181 99 4,921 95 Shares repurchased under NCIB (defined herein) (1,576,100) (14,427) (1,048,800) (9,122) Shares issued on exercise of options - - 241,634 1,851 Contributed surplus transferred on exercised options - - - 279 Shares issued pursuant to the Arrangement - - 84,035,873 678,282 --------------------------------------------------- 120,840,962 948,354 95,365,981 829,395 Shares repurchased, but not cancelled - - (138,600) (513) --------------------------------------------------- Common shares - closing balance 120,840,962 948,354 95,227,381 828,882 --------------------------------------------------- During the quarter ended June 30, 2009, the Company closed a bought deal equity financing whereby 27,184,500 shares were issued for gross proceeds of $140.0 million. Net of transaction costs, the amount received was $133.8 million. The net proceeds of the issuance were used to reduce overall indebtedness. A total of $141.0 million, the majority of which was related to the equity proceeds, was applied to reduce debt, of which $71.0 million was applied in late June 2009 to reduce amounts outstanding under the revolving facility and $70.0 million was applied subsequent to quarter end in early July of 2009 to reduce outstanding term indebtedness. Effective September 2, 2008, Trinidad announced its intent to acquire, for cancellation, up to ten percent (9,373,221 common shares) of the Company's public float by way of normal course issuer bid (NCIB) commencing September 4, 2008 and extending to the earlier of September 3, 2009 or the date upon which the Company acquires the maximum number of common shares to be purchased pursuant to the NCIB. At June 30, 2009, Trinidad acquired and cancelled 2,763,500 shares at an average cost of $4.34 per share. As the purchase price was lower than the carrying amount of the common shares acquired and cancelled, the difference between cost and carrying value at repurchase was recorded as contributed surplus. On March 10, 2008, unitholders of the Trust and holders of the exchangeable shares (the "Securityholders") voted, and overwhelmingly approved, reorganizing the Trust, by way of a plan of arrangement under the Business Corporations Act (Alberta), into a corporation (the "Arrangement") pursuant to an arrangement agreement dated January 9, 2008 between Trinidad and the Trust. The purpose of the Arrangement was to convert the Trust back into a corporate structure that was better suited to its core business model of growth and capital appreciation for its Securityholders. Management and the Board of Directors believe that the best opportunity for creating value is by reinvesting a significant portion of overall cash flow back into the business and to focus on increasing overall per share earnings, cash flow, net asset value, as well as overall debt reduction and they believe that a corporate structure better positions Trinidad to pursue these initiatives. For financial reporting presentation purposes, these changes are being treated as if they occurred on January 1, 2008. The Arrangement resulted in: (i) unitholders receiving Trinidad shares in exchange for their trust units on a one-for-one basis; and (ii) exchangeable shareholders receiving Trinidad shares on the same basis as unitholders based on the number of trust units into which such shares were exchangeable into on the effective date of the Arrangement. b) Contributed surplus ($ thousands) June 30, December 31, 2009 2008 --------------------------------------------------------------------- Contributed surplus - opening balance 19,043 13,843 Stock-based compensation expense, from Incentive Option Plan 241 1,713 Contributed surplus transferred on exercise of options - (289) Effect of NCIB 8,307 3,776 ------------------------- Contributed surplus - ending balance 27,591 19,043 ------------------------- c) Exchangeable shares Pursuant to the Arrangement all the exchangeable shares of Trinidad were converted based on the exchange ratio in effect at the time of conversion to trust units and subsequently exchanged on a one-for-one basis for common shares. The initial series exchangeable shares were exchanged at a ratio of 1.39024 providing for 352,328 trust units upon conversion. Series C exchangeable shares were exchanged at a ratio of 1.27001 providing for 59,905 trust units upon conversion. 9. STOCK-BASED COMPENSATION PLANS a) Incentive Option Plan The Incentive Option Plan was created to assist directors, officers, employees and consultants of Trinidad and its affiliates to participate in the growth and development of the Company. Options granted vest 50% immediately and 25% on the first and second anniversaries of the date of grant (unless otherwise determined by the Board of Directors at the time of issuance) and shall be exercisable for a period of five years from the date of grant. The options will have an exercise price not exceeding the closing trading price for the common shares on the TSX on the date immediately preceding the date of grant and not less than the price permitted by applicable securities law. The following summarizes the options that are outstanding under Trinidad's Incentive Option Plan as at June 30, 2009 and December 31, 2008 and the changes during the periods: June 30, 2009 December 31, 2008 --------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Number Price Number Price of Options ($) of Options ($) --------------------------------------------------------------------- Outstanding - opening balance 8,259,495 12.66 7,965,670 12.55 Granted during the period - - 823,810 11.95 Exercised during the period - - (249,484) 7.69 Forfeited during the period (475,008) 9.26 (280,501) 11.83 --------------------------------------------------- Outstanding - ending balance 7,784,487 12.87 8,259,495 12.66 --------------------------------------------------- Trinidad uses the Black-Scholes option-pricing model to determine the estimated fair value of the options granted subsequent to January 1, 2003. The per share weighted average fair value of options granted during the period ended June 30, 2009 was nil, as no options were granted over this period (June 30, 2008 - nil). b) Deferred Share Unit Plan In 2008, Trinidad established a Deferred Share Unit Plan (DSU) to provide a compensation system for members of the Board of Directors of Trinidad that is reflective of the responsibility, commitment and risk accompanying Board membership. Each DSU granted permits the holder to receive a cash payment equal to the fair value of the volume weighted-average Trinidad share price for the five days preceding payment. DSUs granted are exercisable upon resignation or termination from the Board of Directors. When dividends are paid, the value is credited as additional DSUs on the dividend payment date. As at June 30, 2009, there were 140,294 (December 31, 2008 - 40,732) DSUs outstanding. Trinidad recognized compensation expense of $0.5 million for the six months ended June 30, 2009, with an accumulated mark-to-market liability of $0.7 million (June 30, 2008 - nil), which is included in accounts payable and accrued liabilities. The expense related to the DSUs is recognized in stock- based compensation in the consolidated statement of operations. c) Performance Share Unit Plan In 2008, Trinidad established a Performance Share Unit Plan (PSU) to provide an opportunity for officers and employees of Trinidad and its subsidiaries to promote further alignment of interests between employees and the shareholders and to participate in the growth and development of the Company. Each PSU granted permits the holder to receive a cash payment equal to the fair value of the volume weighted-average Trinidad share price for the five days preceding payment. PSUs granted have various vesting periods, of which none exceed three years from the date of grant. When dividends are paid, the value is credited as additional PSUs on the dividend payment date. As at June 30, 2009, there were 877,096 (December 31, 2008 - 237,000) PSUs outstanding, with an accumulated mark-to-market liability of $2.2 million (June 30, 2008 - nil), which is included in accounts payable and accrued liabilities. The expense related to the PSUs is recognized in stock-based compensation in the consolidated statement of operations. 10. CAPITAL MANAGEMENT Trinidad's capital is comprised of debt, convertible debentures and shareholders' equity, less cash and cash equivalents. Management regularly monitors total capitalization to ensure flexibility in the pursuit of ongoing initiatives, while ensuring that shareholder returns are being maximized. The overall capitalization of the Company is outlined below: June 30, December 31, ($ thousands) 2009 2008 --------------------------------------------------------------------- Long-term debt (1) 279,936 316,564 Convertible debentures (1) 335,521 333,029 ------------------------- Total debt 615,457 649,593 Shareholders' equity 991,672 919,471 Less: cash and cash equivalents (103,847) (31,202) ------------------------- Total capitalization 1,503,282 1,537,862 ------------------------- (1) Balance outstanding without consideration of transaction costs. Management is focused on several objectives while managing the capital structure of the Company. Specifically: a) Ensuring Trinidad has the financing capacity to continue to execute on opportunities to increase overall market share through strategic acquisitions and fleet construction programs that add value for our shareholders; b) Maintaining a strong capital base to ensure that investor, creditor and market confidence is secured; c) Maintaining balance sheet strength, ensuring Trinidad's strategic objectives are met, while retaining an appropriate amount of leverage; d) Providing shareholder return through dividends to ensure that income-oriented investors are provided a cash yield; and e) Safeguarding the entity's ability to continue as a going concern, such that it continues to provide returns for shareholders and benefits for other stakeholders. Trinidad manages its capital structure based on current economic conditions, the risk characteristics of the underlying assets, and Trinidad's planned capital requirements, within guidelines approved by its Board of Directors. Total capitalization is maintained or adjusted by drawing on existing debt facilities, issuing new debt or equity securities when opportunities are identified and through the disposition of underperforming assets to reduce debt or equity when required. On March 23, 2009, Trinidad announced its intent to acquire, for cancellation, by way of normal course issuer bid (the "Bid"), convertible unsecured subordinated debentures (the "Debentures") of the Corporation in the principal amount of up to $35,417,934, which represents approximately ten percent of the Corporation's public float. The Bid commenced on March 25, 2009 and will terminate on the earlier of March 24, 2010 or the date upon which the Corporation acquires the maximum amount of Debentures pursuant to the Bid. There were no debentures repurchased under the Bid as at June 30, 2009. The Company's syndicated loan facility is subject to five financial covenants, which are reported to the bank on either a monthly or quarterly basis. These covenants are used by management to monitor capital, with increased focus on the Consolidated Leverage Ratio, which is a non-GAAP measure. This ratio is calculated as the consolidated debt balance divided by consolidated net earnings, adjusted by interest on the long-term debt, depreciation and amortization, income taxes, gain/loss on sale of assets and unrealized foreign exchange for the rolling four quarters, and must be maintained below 2.5:1. For the rolling four quarters ending June 30, 2009, this ratio was 1.32:1 (December 31, 2008 - 1.43:1). Trinidad remains in compliance with all of the banking syndicate's financial covenants. 11. FINANCIAL INSTRUMENTS Carrying Value and Fair Value Disclosures on Financial Instruments Trinidad's financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, interest rate swaps, long-term debt, and the convertible debentures. The carrying amounts of these financial instruments, reported on the Company's unaudited interim consolidated balance sheets, approximates their fair values due to their short-term nature, with the exception of the interest rate swaps, the long-term debt and the convertible debentures. The carrying values of Trinidad's financial instruments are as follows: June 30, 2009 Total Held for Loans and Other Carrying ($ thousands) Trading Receivables Liabilities Value --------------------------------------------------------------------- Cash and cash equivalents 103,847 - - 103,847 Accounts receivable - 120,515 - 120,515 Accounts payable and accrued liabilities - - 83,561 83,561 Interest rate swaps - - 10,425 10,425 Long-term debt - - 261,389 261,389 Convertible debentures - - 355,410 355,410 --------------------------------------------------- December 31, 2008 Total Held for Loans and Other Carrying ($ thousands) Trading Receivables Liabilities Value --------------------------------------------------------------------- Cash and cash equivalents 31,202 - - 31,202 Accounts receivable - 225,744 - 225,744 Accounts payable and accrued liabilities - - 134,764 134,764 Interest rate swaps - - 12,891 12,891 Long-term debt - - 315,731 315,731 Convertible debentures - - 351,596 351,596 --------------------------------------------------- The fair values and carrying values of Trinidad's financial instruments are as follows: June 30, 2009 December 31, 2008 Carrying Carrying ($ thousands) Fair Value Value Fair Value Value --------------------------------------------------------------------- Interest rate swaps 10,425 10,425 12,891 12,891 Credit facilities (1) Canadian Revolving Credit Facility 20,000 20,000 62,980 65,000 Canadian Term Facility 92,589 96,833 91,937 97,333 US Term Facility 134,601 140,771 139,974 148,190 Convertible debentures (1) 318,764 363,728 214,317 361,245 Other debt 7,983 7,723 6,168 7,959 --------------------------------------------------- 584,362 639,480 528,267 692,618 --------------------------------------------------- (1) The convertible debentures and credit facilities are recorded at their gross amounts and do not include transaction costs incurred on their issuance and the convertible debentures' carrying value includes both the debt and equity components. Trinidad has estimated the fair value amounts using appropriate valuation methodologies and information available to management as of the valuation dates. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it was practicable to estimate that value: - Cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities - The carrying amounts approximate fair value because of the short maturity of these instruments. - Interest rate swaps - The fair value of the interest rate swaps is based on the quoted market prices at period end. - Long-term debt - The fair value of the various pieces of long-term debt are based on values quoted from third-party financial institutions using current market price indicators. - Convertible debentures - The fair value is based on the closing market price at period end. Interest rate swaps Trinidad has two cash flow hedges using interest rate swap arrangements to hedge the floating interest rate on 50 % of the outstanding balance of the US and Canadian term debt facilities. These contracts have been recorded at their fair values on the Company's unaudited interim consolidated financial statements. During the three and six months ended June 30, 2009, Trinidad recorded gains of $0.7 million and $1.1 million, respectively, (2008 - $1.3 million gain and a loss of $0.2 million, respectively) in Other Comprehensive Income (OCI), net of taxes of $0.8 million and $1.1 million for each respective period (2008 - $1.6 million and $0.8 million, respectively), due to the change in fair value of the cash flow hedge. Trinidad has assessed 100% hedge effectiveness; hence the entire change in fair value has been recorded in OCI. Financing costs The carrying value of the long-term debt and convertible debentures was recorded net of debt issuance costs. Under the effective interest rate method Trinidad recorded interest expense of $1.0 million and $1.4 million (2008 - $0.4 million and $0.8 million, respectively) for the three and six months ended June 30, 2009 relating to costs under the debt facility. In addition, Trinidad also recognized interest expense of $0.6 million and $1.3 million (2008 - $0.6 million and $1.3 million, respectively) relating to costs associated with the convertible debentures for the same period using the effective interest method. Nature and Extent of Risks Arising from Financial Instruments Trinidad is exposed to a number of market risks arising through the use of financial instruments in the ordinary course of business. Specifically, Trinidad is subject to credit risk, currency risk, interest rate risk and liquidity risk. Credit Risk Trinidad is exposed to credit risk as a result of extending credit to customers prior to receiving payment for services performed, creating exposure on accounts receivable balances with trade customers. This exposure to credit risk is managed through a corporate credit policy whereby upfront evaluations are performed on all customers and credit is granted based on payment history, financial conditions and anticipated industry conditions. In the instance that a customer does not meet initial credit evaluations, work may be performed subject to a prepayment of services. Customer accounts are continuously monitored to ensure the creditworthiness of all customers with outstanding balances and when collectability becomes questionable a provision for doubtful accounts has been established. The following is a reconciliation of the change in the reserve balance: Six months ended Year ended June 30, December 31, ($ thousands) 2009 2008 --------------------------------------------------------------------- Opening reserve balance 4,849 4,364 Increase in reserve recorded in the income statement in the current period 2,670 2,534 Write-offs charged against the reserve (109) (1,122) Recoveries of amounts previously written-off (175) (927) ------------------------- Reserve allowance at period end 7,235 4,849 ------------------------- As at June 30, 2009, Trinidad had accounts receivable of $17.7 million that were greater than 90 days for which no provision had been established, as the Company believes that these amounts will be collected. Currency Risk Trinidad's operations are affected by fluctuations in currency exchange rates due to the Company's expansion into the US marketplace and reliance on US suppliers to deliver components used by its manufacturing subsidiaries. Over the last two years, the Canadian dollar has experienced significant volatility, ranging from an exchange low of $0.77 US/Canadian to an exchange high of $1.10 US/Canadian. The exposure to realized foreign currency fluctuations from its US and Mexican subsidiaries is mitigated due to the independence of the US and Mexican operations from its Canadian parent company for cash flow requirements to satisfy daily operations, creating a natural hedge. However, upon consolidation, Trinidad is exposed to unrealized fluctuations in the gains and losses on consolidation and US dollar-denominated intercompany balances with the Canadian entities. As at June 30, 2009, the Company did not have any foreign currency hedges in place and does not intend to enter into any new currency hedges. The Company may, however, hedge foreign currency rates in the future, depending on the business environment and growth opportunities. As at June 30, 2009, portions of Trinidad's cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities were denominated in US dollars and Mexican Pesos. In addition, Trinidad's US and Mexican subsidiaries are subject to translation gains and losses upon consolidation. Based on these foreign currency financial instrument closing balances, net income for the three and six months ended June 30, 2009, would have fluctuated by approximately $0.1 million and $0.1 million, respectively, and OCI would have fluctuated by $4.4 million for the quarter ended June 30, 2009, for every $0.01 variation in the value of the US/Canadian exchange rate. Interest Rate Risk Trinidad is subject to risk exposure related to changes in interest rates on borrowings under the credit facilities which are subject to floating interest rates. In order to hedge this overall risk exposure Trinidad entered into interest rate swaps on 50 % of the outstanding borrowings under the US and Canadian term credit facilities, rendering them partially fixed. As at June 30, 2009, Trinidad had $257.6 million outstanding under the credit facilities. A change of one percent in the interest rates would cause a $0.5 million and a $1.1 million change in the interest expense for the three and six months ended June 30, 2009, respectively (2008 - $0.6 million and $1.3 million, respectively). Liquidity Risk Liquidity risk is the risk that Trinidad will not be able to meet its financial obligations as they become due. The Company actively manages its liquidity through daily, weekly and longer-term cash outlook and debt management strategies. Trinidad's policy is to ensure that sufficient resources are available either from cash balances, cash flows or undrawn committed bank facilities, to ensure all obligations are met as they fall due. To achieve this objective, the Company: - Maintains cash balances and liquid investments with highly-rated counterparties; - Limits the maturity of cash balances; and - Borrows the bulk of its debt needs under committed bank lines or other term financing. The following maturity analysis shows the remaining contractual maturities for Trinidad's financial liabilities: There- As at June 30, 2009 2009 2010 2011 2012 2013 after --------------------------------------------------------------------- Accounts payable and accrued liabilities 83,561 - - - - - Interest rate swaps 3,185 5,939 1,302 - - - Canadian revolving debt(1)(3) - 20,000 - - - - Canadian term debt(3) 500 1,000 95,333 - - - US term debt(3) 727 1,454 138,591 - - - Other debt 245 491 6,987 - - - Convertible debentures(2)(3) - - - 354,142 - - Interest payments on contractual obligations 17,366 34,692 29,743 13,723 - - ------------------------------------------------ Total 105,584 63,576 271,956 367,865 - - ------------------------------------------------ (1) This revolving debt facility is renewable annually subject to the mutual consent of the lenders. To the extent that it is not renewed, the drawn-down balance would become due 364 days later. Trinidad anticipates this debt facility to be renewed into the future. (2) The financial liability of the convertible debentures represents the face value at maturity in 2012. (3) The convertible debentures and credit facilities are recorded at their gross amounts and do not include transaction costs incurred on their issuance. 12. COMMITMENTS Rig Construction Program In 2008, Trinidad announced its intent to expand its existing drilling fleet through the construction of an additional nine drilling rigs which are expected to be deployed in the US. These drilling rigs will have depth capacities ranging from 16,000 feet to 18,000 feet and are backed by three to five year long-term, take-or- pay contracts with three major North American oil and natural gas exploration and production companies which provides Trinidad with a guaranteed utilization rate of 100% on these rigs over their respective contract terms. Four rigs were deployed in the six months ended June 30, 2009 and the remaining two rigs are expected to be delivered throughout the remainder of 2009, in addition to the three rigs which were deployed during 2008. Bareboat Charters As a part of the Axxis acquisition, Trinidad entered into an Assignment Agreement in which the contracts to operate three barge rigs (the "Bareboat Charters" or "Charter") were transferred to Trinidad. Under the Bareboat Charters, Trinidad is committed to operate the rigs on behalf of a third party. In turn, as the owners of the rigs, this third party is entitled to receive 25% of the net operating revenues and 50% of the net margin earned under each charter. Under the original agreement any earnings in excess of this payment were to be retained as compensation for the operation of the barge rigs; however, as part of the purchase agreement Trinidad committed to pay the former owners of Axxis US$12.5 million per year for the three years subsequent to acquisition, of which one-third of the payment, or US$4.2 million, shall be attributable to each of the three Bareboat Charters. This payment is contingent on the continued operation of the rigs and to the extent that the contract is terminated by the rigs' owner, no further payments will be required. This fixed payment was structured to represent the residual earnings in excess of the payment to the third party. In the instance that dayrates or expenses fluctuate from the original provisions in the Bareboat Charters, Trinidad is exposed to the residual gain or loss. Trinidad has disclosed all transactions pertaining to the Bareboat Charters on a net basis. Trinidad does not bear the significant risks and rewards of the arrangement nor does it absorb the associated credit risk or asset risk. 13. SEGMENTED INFORMATION Since Trinidad announced its intention to expand operations into the US marketplace in 2005, its operations have been diversified from its primary geographical focus in western Canada to include various locations in the US, such that a significant proportion of Trinidad's operations now occur in the US marketplace. The acquisitions of Cheyenne Drilling and Axxis Drilling, as well as Trinidad's rig construction programs have provided additional rigs of varying depths and capabilities for the US operations, which complemented the drilling fleet operating in the Canadian market and expanded Trinidad's overall drilling operations. Despite the similarities in the identified assets, the increased management depth in the US and the varying conditions between the Canadian and US markets have resulted in management evaluating Trinidad's drilling performance on a geographically segmented basis. Trinidad's newly established operations in Mexico have been combined with the US operations as these operations did not meet the requirement for disclosure as a separate segment. The acquisition of Mastco in 2006 and Victory in 2008 further broadened the operations of Trinidad to include the capability to design, manufacture, sell and refurbish drilling rigs and related equipment. The unique characteristics of this subsidiary, which are different from Trinidad's core drilling operations, have resulted in management's separate evaluation of its results. Transactions between the segments are recorded at cost and have been eliminated upon consolidation. --------------------------------------------------------------------- Three months United ended States/ Inter- June 30, Canadian Mexico Constr- segment 2009 Drilling Drilling uction Elimin- ($ thousands) Operations Operations Operations ations Total --------------------------------------------------------------------- Revenue 23,766 87,979 32,106 (18,379) 125,472 Operating expense 14,465 45,536 31,389 (18,379) 73,011 ------------------------------------------------------ Gross margin 9,301 42,443 717 - 52,461 Interest on long-term debt 3,450 2,368 34 - 5,852 Interest on convertible debentures 8,835 - - - 8,835 Depreciation and amortization 4,564 14,056 516 - 19,136 (Gain) loss on sale of assets (152) 5,794 - - 5,642 Impairment of intangible assets - - - - - ------------------------------------------------------ Income (loss) before corporate items (7,396) 20,225 167 - 12,996 General and administrative 12,266 Stock-based compensation 1,670 Foreign exchange (gain) loss 9,481 Reorganization costs - Income tax recovery (1,831) ------------------------------------------------------ Net loss (8,590) ------------------------------------------------------ Capital expenditures (including acquisitions and deposits) 18,291 12,413 357 - 31,061 --------------------------------------------------------------------- --------------------------------------------------------------------- Three months ended United Inter- June 30, Canadian States Constr- segment 2008 Drilling Drilling uction Elimin- ($ thousands) Operations Operations Operations ations Total --------------------------------------------------------------------- Revenue 44,341 85,970 29,541 (18,673) 141,179 Operating expense 30,389 49,439 26,259 (18,673) 87,414 ------------------------------------------------------ Gross margin 13,952 36,531 3,282 - 53,765 Interest on long-term debt 3,820 2,363 32 - 6,215 Interest on convertible debentures 8,685 - - - 8,685 Depreciation and amortization 6,874 13,469 166 - 20,509 (Gain) loss on sale of assets (75) (177) 28 - (224) Impairment of intangible assets - - - - - ------------------------------------------------------ Income (loss) before corporate items (5,352) 20,876 3,056 - 18,580 General and administrative 12,749 Stock-based compensation 133 Foreign exchange (gain) loss 859 Reorganization costs 140 Income tax expense 3,558 ------------------------------------------------------ Net earnings 1,141 ------------------------------------------------------ Capital expenditures (including acquisitions and deposits) 13,979 13,277 236 - 27,492 --------------------------------------------------------------------- --------------------------------------------------------------------- Six months United ended States/ Inter- June 30, Canadian Mexico Construc- segment 2009 Drilling Drilling tion Elimi- ($ thousands) Operations Operations Operations nations Total --------------------------------------------------------------------- Revenue 101,994 182,223 70,360 (37,519) 317,058 Operating expense 61,295 96,264 63,053 (37,519) 183,093 ----------------------------------------------------- Gross margin 40,699 85,959 7,307 - 133,965 Interest on long-term debt 6,198 4,685 40 - 10,923 Interest on convertible debentures 17,636 - - - 17,636 Depreciation and amortization 12,996 29,163 955 - 43,114 (Gain) loss on sale of assets (133) 9,882 - - 9,749 Impairment of intangible assets - 23,189 - - 23,189 ----------------------------------------------------- Income before corporate items 4,002 19,040 6,312 - 29,354 General and administrative 28,663 Stock-based compensation 2,361 Foreign exchange (gain) loss 4,584 Reorganization costs - Income tax expense 7,985 ----------------------------------------------------- Net loss (14,239) ----------------------------------------------------- Capital expenditures (including acquisitions and deposits) 6,483 84,319 596 - 91,398 --------------------------------------------------------------------- --------------------------------------------------------------------- Six months ended United Inter- June 30, Canadian States Construc- segment 2008 Drilling Drilling tion Elimi- ($ thousands) Operations Operations Operations nations Total --------------------------------------------------------------------- Revenue 176,445 170,283 41,132 (27,030) 360,830 Operating expense 102,651 95,881 37,135 (27,030) 208,637 ----------------------------------------------------- Gross margin 73,794 74,402 3,997 - 152,193 Interest on long-term debt 8,510 4,881 (1) - 13,390 Interest on convertible debentures 17,339 - - - 17,339 Depreciation and amortization 17,693 26,474 334 - 44,501 Gain on sale of assets (60) (14) (243) - (317) Impairment of intangible assets - - - - - ----------------------------------------------------- Income before corporate items 30,312 43,061 3,907 - 77,280 General and administrative 24,172 Stock-based compensation 302 Foreign exchange (gain) loss (3,523) Reorganization costs 2,689 Income tax expense 13,587 ----------------------------------------------------- Net earnings 40,053 ----------------------------------------------------- Capital expenditures (including acquisitions and deposits) 9,790 47,789 254 - 57,833 --------------------------------------------------------------------- --------------------------------------------------------------------- United As at States/ Inter- June 30, Canadian Mexico Construc- segment 2009 Drilling Drilling tion Elimi- ($ thousands) Operations Operations Operations nations Total --------------------------------------------------------------------- Total assets 686,060 1,148,345 109,208 (133,143) 1,810,470 Goodwill - 98,972 62,521 - 161,493 Future income tax asset (liability) 3,802 (92,082) (2,163) - (90,443) --------------------------------------------------------------------- --------------------------------------------------------------------- United As at States/ Inter- December 31, Canadian Mexico Construc- segment 2008 Drilling Drilling tion Elimi- ($ thousands) Operations Operations Operations nations Total --------------------------------------------------------------------- Total assets 634,499 1,184,827 42,738 - 1,862,064 Goodwill - 103,652 58,521 - 162,173 Future income tax asset (liability) (14,279) (72,522) (1,927) - (88,728) --------------------------------------------------------------------- 14. RELATED PARTY TRANSACTIONS All related party transactions were incurred during the normal course of operations on similar terms and conditions to those entered into with unrelated parties. These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Trinidad engages Blake, Cassels & Graydon LLP, a law firm in which a director is a partner, to provide legal advice. During the three and six month periods ended June 30, 2009, Trinidad incurred legal fees of $0.3 million and $0.8 million, respectively (2008 - $0.5 million and $0.9 million, respectively) to Blake, Cassels & Graydon LLP. On June 30, 2009 there were no amounts outstanding, and on June 30, 2008 there was $0.2 million outstanding. During the first quarter of 2009, Trinidad purchased a parcel of land from 1010460 Alberta Ltd, a company owned by an executive officer within Trinidad's Canadian operations. The land purchase of $1.6 million, as well as all of the purchase agreement's conditions, were representative of an unrelated party transaction. This property currently houses a facility used in the coring and surface casing division of the Canadian Drilling Operations. 15. COMPARATIVE FIGURES Certain of the comparative figures have been reclassified to conform to current year's presentation. Such reclassification did not impact previously reported net earnings (loss) or retained earnings (deficit).

For further information:

For further information: Lyle Whitmarsh, President & Chief Executive
Officer or Brent Conway, Chief Financial Officer or Lisa Ciulka, Director of
Investor Relations at: Phone: (403) 265-6525, Fax: (403) 265-4168, E-mail:
lciulka@trinidaddrilling.com

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Trinidad Drilling Ltd.

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