Cathedral Energy Services reports results for the three and six months ended June 30, 2007



    /NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

    CALGARY, Aug. 2 /CNW/ - Cathedral Energy Services Income Trust (TSX:
CET.UN) is pleased to report its results for the three and six months ended
June 30, 2007.

    
    FINANCIAL HIGHLIGHTS

    $ in 000's except per        Three months ended       Six months ended
     Trust Unit amounts               June 30                 June 30
                               ----------------------  ----------------------
                                  2007        2006        2007        2006
    -------------------------------------------------------------------------

    Revenues                   $  24,985   $  26,204   $  67,697   $  64,886
    EBITDA(1)                  $   4,837   $   8,370   $  19,249   $  23,737
      Per Trust Unit - diluted $    0.15   $    0.27   $    0.61   $    0.76
    Income before taxes        $   1,112   $   5,033   $  12,145   $  17,435
    Net Income (loss)          $  (2,415)  $   4,963   $   7,372   $  15,825
      Per Trust Unit - basic   $   (0.08)  $    0.16   $    0.24   $    0.52
      Per Trust Unit - diluted $   (0.08)  $    0.16   $    0.23   $    0.50
    Cash distributions
     declared per Trust Unit   $    0.21   $   0.185   $    0.42   $   0.345
    Distributable income(2)    $   3,132   $   6,251   $  16,203   $  20,472
    Cash distributions
     declared                  $   6,600   $   5,667   $  13,130   $  10,505
    Payout ratio(3)                 211%         91%         81%         51%
    Property and equipment
     additions and corporate
     acquisitions:
      Paid or payable in cash  $   4,483   $   6,255   $  10,288   $  15,038
      Paid or payable in Trust
       Units                           -           -           -       1,500
                               ----------  ----------  ----------  ----------
                               $   4,483   $   6,255   $  10,288   $  16,538
                               ----------  ----------  ----------  ----------

    Weighted average Trust
     Units outstanding:
      Basic ('000)                31,405      30,595      31,219      30,372
      Diluted ('000)              31,893      31,438      31,744      31,339
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                                                     June 30     December 31
                                                        2007            2006
    -------------------------------------------------------------------------
    Working capital                                $  10,795       $  15,051
    Long-term debt and capital lease obligations
     excluding current portion                     $  15,543       $  15,552
    Unitholders' equity                            $  73,690       $  76,223
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) EBITDA is defined as earnings before interest on long-term debt and
        capital lease obligations, taxes, non-cash compensation expense and
        depreciation and amortization and is provided to assist investors in
        determining the ability of the Trust to generate cash from
        operations. EBITDA does not have any standardized meaning within
        Canadian Generally Accepted Accounting Principles and therefore may
        not be comparable to similar measures presented by other companies
        and/or trusts.

    (2) Distributable income is defined as funds from operations before
        changes in non-cash working capital less required principal
        repayments on long-term debt and capital lease obligations and
        maintenance capital expenditures. Distributable income does not have
        any standardized meaning within Canadian Generally Accepted
        Accounting Policies and therefore may not be comparable to similar
        measures presented by other trusts. Distributable income is a main
        performance measurement used by management and investors to evaluate
        the performance of the Trust.

    (3) Cash distributions declared as a percentage of distributable income.
    


    MANAGEMENT'S DISCUSSION & ANALYSIS

    This Management's Discussion & Analysis ("MD&A") for the three and six
months ended June 30, 2007 should be read in conjunction with the annual
audited consolidated financial statements and notes thereto for the year ended
December 31, 2006, as well as the MD&A in the Trust's 2006 Annual Report, and
with the unaudited interim consolidated financial statements for the three and
six months ended June 30, 2007.  This MD&A has been prepared as of August 2,
2007. Dollar amounts are in '000's except for day rates and per Trust Unit
amounts.

    FORWARD-LOOKING INFORMATION

    Certain statements in this MD&A including (i) statements that may contain
words such as "anticipate", "could", "expect", "seek", "may" "intend", "will",
"believe", "should", "project", "forecast", "plan" and similar expressions,
including the negatives thereof, (ii) statements that are based on current
expectations and estimates about the markets in which the Trust/Cathedral
operates and (iii) statements of belief, intentions and expectations about
developments, results and events that will or may occur in the future,
constitute "forward-looking statements" and are based on certain assumptions
and analysis made by the Trust/Cathedral. Forward-looking statements in this
MD&A include, but are not limited to, statements with respect to future
capital expenditures, including the amount, nature and timing thereof; oil and
natural gas prices and demand; other development trends within the oil and
natural gas industry; business strategy; expansion and growth of the
Trust's/Cathedral's business and operations and other such matters. Such
forward-looking statements are subject to important risks and uncertainties,
which are difficult to predict and that may affect the Trust's/Cathedral's
operations, including, but are not limited to: the impact of general economic
conditions; industry conditions; government and regulatory developments; oil
and natural gas product supply and demand; competition; and the
Trust's/Cathedral's ability to attract and retain qualified personnel. The
Trust's/Cathedral's actual results, performance or achievements could differ
materially from those expressed in, or implied by, these forward-looking
statements and, accordingly, no assurance can be given that any of the events
anticipated by the forward-looking statements will transpire or occur, or if
any of them do transpire or occur, what benefits the Trust/Cathedral will
derive therefrom. Subject to applicable law, the Trust disclaims any intention
or obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
    All forward-looking statements contained in this document are expressly
qualified by this cautionary statement. Further information about the factors
affecting forward-looking statements is available in the Trust's current
Annual Information Form and Annual Report which have been filed with Canadian
provincial securities commissions and are available on www.sedar.com.

    NON-GAAP FINANCIAL MEASUREMENTS

    This MD&A refers to certain financial measurements that do not have any
standardized meaning within Canadian Generally Accepted Accounting Principles
("GAAP") and therefore may not be comparable to similar measures provided by
other companies and/or trusts. These measures are provided to assist investors
in determining the Trust's ability to generate cash from operations and to
provide additional information regarding the use of its cash resources. The
specific measures being referred to include the following i) "EBITDA" -
defined as earnings before interest on long-term debt and capital lease
obligations, taxes, non-cash compensation expense and depreciation and
amortization; ii) "distributable income" - defined as cash flow from
operations before changes in non-cash working capital less required principal
repayments on long-term debt and capital lease obligations and maintenance
capital expenditures; iii) "gross margin" - calculated as revenues less
operating expenses; iv) "maintenance capital expenditures" - refers to capital
expenditures required to maintain existing levels of service but excludes
replacement cost of lost-in-hole equipment to the extent the replacement
equipment is financed from the proceeds on disposal of the equipment
lost-in-hole; and v) "payout ratio" - calculated as cash distributions
declared divided by distributable income.

    OVERVIEW

    Despite a significant decline in drilling activity in western Canada, the
Trust was able to increase revenues on a Q2 year-to-date basis from $64,886 in
2006 to $67,697 in 2007 - 4.3% increase. The major items contributing to these
results have been the strong performance of the U.S. operations, exposure to
drilling for oil, particularly in southeastern Saskatchewan, and the provision
of specialty directional drilling services that has resulted in an increase in
the average day rate obtained for such services. For Q2, revenues declined
$1,219 or 4.7% from $26,204 in 2006 to $24,985 in 2007. EBITDA for the six
months ended June 30, 2007 was $19,249 which compares to $23,737 in 2006 - an
18.9% decrease. As a result of recording a non-cash $3,318 ($0.10 per diluted
Trust Unit) provision for future income taxes related to the tax legislation
included in Bill C-52, the Budget Implementation Act, 2007 (the "Bill"), that
was substantively enacted in 2007 Q2 which results in the taxation of existing
income and royalty trusts, other than real estate investment trusts, at
effective rates similar to Canadian corporations, the Trust incurred a net
loss for 2007 Q2 of $2,415 or $0.08 per diluted Trust Unit (2006 net income
was $4,963 or $0.16 per diluted Trust Unit). On a 2007 Q2 year-to-date basis,
the Trust's net income was $7,372 ($0.23 per diluted Trust Unit) which
compares to $15,825 ($0.50 per diluted Trust Unit) in 2006.

    RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2007

    Revenues

    Traditionally, Q2 results are affected by seasonal fluctuations related
to spring break-up. In 2007 Q2, the seasonality factor was further impacted by
lower Canadian drilling activity as a result of concerns related to natural
gas commodity prices. Continued strength in the directional drilling portion
of the Trust's operations resulted in 2007 Q2 revenues of $20,453 from the
directional drilling division. Directional drilling activity days decreased
5.8% or 134 to 2,194, however the average day rate received for providing
directional drilling services increased 10.1% on a quarter-over-quarter basis
to $9,160 (2006 - $8,322). The largest portion of the increase in the average
day rate is related to a shift towards providing premium services such as
underbalanced and Steam-Assisted Gravity Drainage ("SAGD") drilling services
as opposed to an increase in the overall base day rate. In the Canadian market
the Trust's 2007 Q2 activity levels decreased by 16% which was significantly
less than the overall decline in drilling activity in the Canadian market.
Despite the decline in natural gas drilling in western Canada, the Trust was
able to minimize the market decline from prior year activity levels due to the
continuing strength of the Trust's client base and involvement in multi-well
programs. The Rocky Mountain region of the United States remains a very active
area and the Trust's U.S. operations have now been expanded into North Dakota.
The Trust's revenues from the U.S. were $9,640 in 2007 Q2, which represents an
increase of $1,139 or 13.4% on a quarter-over-quarter basis. Due to demand in
the U.S. market, 5 Measurement-While-Drilling ("MWD") systems were transferred
to the U.S. at the end of Q1 and the Trust now has 23 MWD systems in the U.S.
market. The Trust's geographic diversification, by way of providing
directional drilling services in southeast Saskatchewan and U.S., has been a
significant factor in its ability to organically grow its revenues within the
directional division.
    The continued decline in natural gas drilling expenditures in the western
Canada market resulted in lower revenues for both of the Trust's production
testing and wireline divisions. The Trust's production testing division, Tier
One, contributed $1,340 in revenues during 2007 Q2 which is a 39.9% decline
from 2006 Q2 revenues. Advance Wireline and Xtreme Wireline combined to
generate revenues of $3,079 for 2007 Q2 compared to $4,228 for 2006 Q2, a
27.2% quarter-over-quarter decline. Late in 2007 Q2, one wireline unit was
transferred from the Canadian operations to the newly formed U.S. division of
Advance Wireline but revenue generating operations did not commence until 2007
Q3. A second wireline unit will be transferred to the U.S. operation in mid
2007 Q3.

    Gross margin

    The gross margin for 2007 Q2 was 44.2% which compares to 50.2% in 2006
Q2. The decrease is attributed to a number of factors including: i) shift to
providing more horizontal drilling services (versus directional) which provide
a lower gross margin than from directional drilling; ii) increases in
directional field labour rates; iii) increase in wireline field labour costs
as a percentage of revenues due to the continuation of the Trust's build out
of its wireline fleet and related field staff that will enable the Trust to
take advantage of increased activity levels; and iv) offsetting the previous
items was an increase in the average day rate for directional drilling
services.

    General and administrative expenses

    General and administrative expenses increased from $5,311 in 2006 Q2 to
$6,082 in 2007 Q2 - an increase of $771. The increase was primarily related to
increased personnel and office/shop rental costs. As a percentage of revenues,
general and administrative expenses were 24.3% in 2007 Q2 and 20.3% in 2006

    Depreciation and amortization

    Depreciation for 2007 Q2 was $2,943 which compares to $2,577 in 2006 Q2.
This increase is related to expansion of the Trust's depreciable asset base
over the past 12 months. As a percentage of revenues, depreciation amounted to
11.8% for 2007 and 9.8% for 2006.

    Interest expense

    Interest expense related to long-term debt and capital leases increased
from $226 in 2006 Q2 to $260 in Q2 2007 due to the combined net effect of: i)
an increase in the average level of debt outstanding; and ii) a decrease in
the effective interest rate on the related debt.

    Foreign exchange

    The Trust's foreign exchange loss increased from $66 in 2006 Q2 to $237
in 2007 Q2. The increased foreign exchange loss is due to: i) the U.S. dollar
weakening against the Canadian dollar to a larger extent in 2007 Q2 versus
2006 Q2; and ii) an overall increase in the Trust's U.S. operations which has
resulted in an increase in the Trust's net monetary assets that are
denominated in U.S. dollars.

    Non-cash compensation expense

    For 2007 Q2 the Trust had non-cash compensation expense of $522 which
compares to $534 for the comparable quarter in 2006. The value of Trust Unit
options is being amortized against income over their three-year vesting
period.

    Gain on disposal of property and equipment

    During 2007 Q2 the Trust had a gain on disposal of property and equipment
of $187, which compares to $710 in 2006 Q2. These gains are mainly due to
recoveries of lost-in-hole equipment costs including previously expensed
depreciation on the related assets. The timing of lost-in-hole recoveries is
not in the control of the Trust and therefore can fluctuate significantly from
quarter-to-quarter.

    Taxes

    In 2007 Q2 tax legislation included in Bill C-52, the Budget
Implementation Act, 2007 (the "Bill"), was substantively enacted and this will
result in the taxation of existing income and royalty trusts, other than real
estate investment trusts, at effective rates similar to Canadian corporations.
Substantive enactment of the Bill resulted in the recognition of future income
tax amounts based on estimated net taxable temporary differences of $10,533
which are expect to reverse after 2010 and for which no tax has previously
been recorded in the Trust's financial statements. Accordingly, a non-cash
future income tax expense and net future income tax liability of $3,318 ($0.10
per diluted Trust Unit) were recognized in 2007 Q2. In the Trust's 2007 Q1
MD&A this amount was estimated to be approximately $3,800.

    RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2007

    Revenues

    2007 Q2 year-to-date revenues were $67,697 which represented an increase
of $2,811 or 4.3% over 2006 Q2 year-to-date revenues of $64,886. Ongoing
activity reductions in the Canadian markets were offset by continued growth
and expansion in the U.S. operations.
    The directional drilling division revenues have increased from $43,946 in
2006 to $50,387 in 2007. This increase is the result of: i) an increase in
activity days from 5,310 in 2006 to 5,517 in 2007; and ii) an increase in the
average day rate from $8,275 in 2006 to $9,134 in 2007. The decrease in
Canadian activity days from 3,435 to 3,194 were more than offset by the growth
in U.S. activity days from 1,875 to 2,323. The U.S. Q2 year-to-date revenues
increased from $15,361 in 2006 to $20,363 in 2007, a 32.6% increase.
    The continued decline in natural gas drilling expenditures in the western
Canada market resulted in lower revenues for both of the Trust's production
testing and wireline divisions. The Trust's production testing division, Tier
One, contributed $5,806 in revenues during 2007 Q2 year-to-date which is a
21.3% decline from 2006 revenues of $7,382. Advance Wireline and Xtreme
Wireline combined to generate revenues of $10,145 for 2007 Q2 year-to-date
which compares to $12,417 for 2006 which represents an 18.3% decline.

    Gross margin

    The gross margin (revenues less operating expenses) for 2007 was 48.0%,
which compares to 52.2% in 2006. The decrease is attributed to a number of
factors including: i) shift to providing more horizontal drilling services
(versus directional) which provide a lower gross margin than from directional
drilling; ii) increases in directional field labour rates; iii) increase in
wireline field labour costs as a percentage of revenues due to the
continuation of the Trust's build out of its wireline fleet and related field
staff that will enable the Trust to take advantage of increased activity
levels; and iv) offsetting the previous items was an increase in the average
day rate for directional drilling services.

    General and administrative expenses

    General and administrative expenses increased from $10,573 in 2006 to
$13,014 in 2007 - an increase of $2,441. The increase was related to the
Trust's directional/horizontal drilling business and the contributing factors
to that increase were the result of increased personnel and office/shop rental
costs as well as an overall increase in directional drilling activity levels
both in western Canada and the Rocky Mountain region of the U.S. As a
percentage of revenues, general and administrative expenses were 19.2% in 2007
and 16.3% in 2006.

    Depreciation and amortization

    Depreciation and amortization for 2007 was $5,699 compared to $4,906 in
2006. The $793 increase is related to the Trust's investment in property and
equipment over the past 12 months. As a percentage of revenues, depreciation
and amortization amounted to 8.4% for 2007 and 7.6% for 2006.

    Interest expense

    Interest on long-term debt has increased from $436 in 2006 to $523 in
2007. The major factor contributing to this increase is that late in 2006 Q3
the Trust accessed an additional $3,000 of its available non-reducing
revolving term loan facility; proceeds of which were used to finance the
Trust's acquisition of land and buildings. Other interest expense has
increased mainly due to the increased utilization of the Trust's operating
line of credit.

    Foreign exchange

    The Trust's foreign exchange loss has increased from $58 in 2006 to $284
in 2007. The increased foreign exchange loss is due to: i) the U.S. dollar
weakening against the Canadian dollar to a larger extent in 2007 Q2 versus
2006 Q2; and ii) an overall increase in the Trust's U.S. operations which has
resulted in an increase in the Trust's net monetary assets that are
denominated in U.S. dollars.

    Non-cash compensation expense

    Non-cash compensation expense for 2007 was $882 which compares to $960 in
2006. The Trust Unit options granted are valued using the Black-Scholes option
pricing model and such value is being amortized against income over their
three-year vesting period.

    Gain on disposal of property and equipment

    During 2007 Q2 YTD the Trust had a gain on disposal of property and
equipment of $184 which compares to $710 in 2006. These gains are mainly due
to recoveries of lost-in-hole equipment costs, including previously expensed
depreciation on the related assets. The timing of lost-in-hole recoveries is
not in the control of the Trust and therefore can fluctuate significantly from
quarter-to-quarter and year-to-year basis.

    Taxes

    For 2007, the Trust had a tax expense of $4,773 (effective tax rate of
39.3%) which compares to $1,610 (effective tax rate of 9.2%) in 2006. As noted
in the above discussion under the result of operations for the three months
ended June 30, 2007, the 2007 Q2 tax provision includes a non-cash adjustment
of $3,318 ($0.10 per diluted Trust Unit) related to the substantive enactment
of the previously announced changes to the taxation of income and royalty
trusts, other than real estate investment trusts. Removing the 2007 Q2
adjustment noted above the effective tax rate for 2007 Q2 year-to-date is
12.0% which is higher than the 2006 effective tax rate of 9.2% due to the
continuing growth in the U.S. operations which are taxed at a higher rate.

    LIQUIDITY AND CAPITAL RE

SOURCES The Trust's principal source of liquidity is cash generated from operations. The Trust also has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. At June 30, 2007, the Trust had an operating line of credit with a major Canadian bank in the amount of $12,500 (December 31, 2006 - $12,500) of which $2,230 (December 31, 2006 - $6,460) was drawn. In addition, the Trust has a non-reducing revolving term loan facility in the amount of $25,000 (December 31, 2006 - $25,000) of which $15,000 (December 31, 2006 - $15,000) was drawn as at June 30, 2007. In addition, at June 30, 2007 the Trust had obligations under capital leases in the amount of $545 (December 31, 2006 - $664) and other long-term debt of $271 (December 31, 2006 - $171). Operating activities Cash flow from operating activities for the three and six months ended June 30, 2007 was $14,297 (2006 - $13,645) and $24,073 (2006 - $21,782) respectively. The Trust has a strong working capital position at June 30, 2007 at $10,795 which compares to $15,051 at December 31, 2006. Investing activities Cash used in investing activities for the three and six months ended June 30, 2007 amounted to $5,320 and $8,346, respectively which compares to $7,191 and $14,841 for the same period in 2006. During 2007 Q2 the Trust invested an additional $4,483 (2006 - $6,255) for a total Q2 year-to-date $10,288 (2006 - $15,038) increase in property and equipment. For 2007 Q2 the major items added to property and equipment were 5 MWD systems, expansion of mud motor and drilling collar fleet, progress payments on upgrade of low pressure production testing units to higher pressure units and the addition of 3 slickline units. At June 30, 2007, the Trust's operating entities had 73 MWD systems, 19 production testing units and 28 wireline units. All of the 2007 Q2 year-to-date additions to property and equipment have been financed from cash flow from operations except for $173 of automotive equipment additions. Fluctuations in non-cash working capital related to investing activities are a function of when proceeds on disposal of property and equipment are received and when payments for property and equipment purchases are made. Financing activities Cash used in financing activities for the three and six months ended June 30, 2007 amounted to $9,670 and $16,500, respectively, which compares to $4,876 and $6,847 for the same periods in 2006. Distributions paid to Unitholders for 2007 Q2 amounted to $6,585 (2006 - $5,502) bringing year-to-date distributions for the six months ended June 30, 2007 to $14,642 (2006 - $10,014). The increase in distributions paid are related to a combination of: i) increases in the per Trust Unit "regular" distribution level; ii) the payment of a "special" $0.05 per Trust Unit cash distribution declared in December 2006 ($1,549) and payable January 15, 2007; and iii) an increase in the number of Trust Units outstanding. Since January 2006 the Trust has increased it's per Trust Unit distribution level from $0.05 per Trust Unit to $0.07 per Trust Unit for June 2007 - a 40% increase. Cash distributions paid have been financed from cash flow from operations and management currently expects future cash distributions will also be financed from cash flow from operations. For the six months ended June 30, 2007 financing cash inflows resulted from: i) $2,392 (2006 - $2,394) cash received on the exercise of Trust Unit options, and ii) an $173 increase in new long-term debt. Offsetting these inflows were cash outflows of: i) a $4,230 reduction in bank indebtedness (2006 - cash provided by bank indebtedness was $1,110); and ii) a $193 (2006 - $337) repayment of long-term debt and capital lease obligations. At August 2, 2007, the Trust had 31,499,350 Trust Units and 2,395,173 Trust Unit options outstanding. Contractual obligations In the normal course of business, the Trust incurs contractual obligations and those obligations are disclosed in the Trust's MD&A for the year ended December 31, 2006. As at June 30, 2007 the Trust's commitment to purchase property and equipment is approximately $5,236. Included in this commitment is $3,360 related to the cost of building a new mud motor repair facility in Nisku, Alberta of which approximately $3,000 is expected to be financed by way of a draw on the Trust's non-reducing revolving term loan facility. The remaining commitments are expected to be financed from cash flows from operations. CONTROLS AND PROCEDURES Management is responsible for establishing and maintaining adequate disclosure controls and internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with GAAP. Internal control over financial reporting may not prevent or detect fraud or misstatements because of limitations inherent in any system of internal control. There were no significant changes in the design or effectiveness of the Trust's disclosure controls or internal controls over financial reporting in the second quarter of 2007. CHANGES IN ACCOUNTING POLICIES Effective January 1, 2007, The Trust adopted the Canadian Institute of Chartered Accountants ("CICA") section 3855, "Financial Instruments - Recognition and Measurement", section 3865, "Hedges", and section 1530, "Comprehensive Income". These standards have been adopted prospectively. For the 6 months ended June 30, 2007, the adoption of these standards did not have an effect on the Trust's consolidated financial statements. A general summary of these accounting standards were included in the Trust's 2006 annual MD&A. BUSINESS RISKS The MD&A for the year ended December 31, 2006, which is included in the Trust's 2006 Annual Report, includes an overview on business risks associated with the Trust and its operating entities. Those business risks remain in effect as at June 30, 2007. DISTRIBUTABLE INCOME Distributable income is calculated as follows: Three months ended Six months ended June 30 June 30 ---------------------- ---------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- Cash flows from operating activities $ 14,297 $ 13,645 $ 24,073 $ 21,782 Add: - changes in non-cash operating working capital(1) (11,071) (7,193) (7,683) (814) Less: - required principal repayments on long-term debt and capital lease obligations (83) (157) (176) (337) - maintenance capital expenditures (11) (44) (11) (159) ------------------------------------------------------------------------- Distributable income $ 3,132 $ 6,251 $ 16,203 $ 20,472 ------------------------------------------------------------------------- Cash distributions declared $ 6,600 $ 5,667 $ 13,130 $ 10,505 ------------------------------------------------------------------------- Payout ratio 211% 91% 81% 51% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Changes in non-cash operating working capital have been added back as such changes are financed using the Trust's bank indebtedness/line of credit facility. In addition, if changes in non-cash operating capital were excluded it would introduce cash flow variability and affect underlying cash flow from operating activities. Cathedral's operations in western Canada are subject to seasonality as activity levels in the oilfield services industry are generally lower during "spring breakup" which normally commences in late March and continues through to May. It is the Trust's policy to pay consistent distributions throughout the year despite the seasonality of a portion of Cathedral's business. As a result of the Trust's equipment being relatively new and the extensive maintenance program for its equipment (such repairs and maintenance cost are expensed in operating expenses), expenditures for maintenance capital are currently minimal. Current maintenance capital expenditure levels may not be indicative of future maintenance capital expenditure levels. The Administrator of the Trust (Cathedral Energy Services Ltd.) reviews the level and nature of distributions on an on-going basis giving consideration to current performance, historical and future trends in the business and the expected sustainability of those trends as well as required long-term debt repayments, maintenance capital expenditures required to sustain performance and future growth capital expenditures. Currently cash distributions declared are less than distributable income as the Trustees, on the recommendation of management of the Administrator, have decided to retain a portion of distributable income to finance capital expenditures and debt repayment. It is not management's intent to distribute 100% of distributable income. Distributable income is not a standardized measure under Canadian GAAP and distributable income cannot be assured. The Trust's calculation of distributable income may differ from similarly titled measures used by other trusts. Distributable income is a main performance measurement used by management and investors to evaluate the performance of the Trust. EBITDA: EBITDA is calculated as follows: Three months ended Six months ended June 30 June 30 ---------------------- ---------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- EBITDA as reported $ 4,837 $ 8,370 $ 19,249 $ 23,737 Deduct: - depreciation and amortization 2,943 2,577 5,699 4,906 - interest - long-term debt and capital lease obligations 260 226 523 436 - non-cash compensation expense 522 534 882 960 - provision for taxes 3,527 70 4,773 1,610 ------------------------------------------------------------------------- Net income (loss) for the period $ (2,415) $ 4,963 $ 7,372 $ 15,825 ------------------------------------------------------------------------- ------------------------------------------------------------------------- GOVERNANCE The Audit Committee of the Board of Directors of the Administrator has reviewed this MD&A and the related unaudited interim consolidated financial statements and recommended they be approved to the Board of Directors. Following a review by the full Board, the MD&A and financial statements were approved. SUMMARY OF QUARTERLY RESULTS ------------------------------------------------------------------------- Three month period ended ($ in 000's except June Mar Dec Sep per Trust Unit amounts) 2007 2007 2006 2006 ------------------------------------------------------------------------- Revenues $ 24,985 $ 42,712 $ 35,327 $ 38,041 EBITDA 4,837 14,412 13,046 16,010 Net income (loss) (2,415) 9,787 8,127 11,396 Net income (loss) per Trust Unit - basic (0.08) 0.32 0.26 0.37 Net Income (loss) per Trust Unit - diluted (0.08) 0.31 0.26 0.36 Cash distributions declared per Trust Unit 0.21 0.21 0.26 0.20 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three month period ended ($ in 000's except June Mar Dec Sept per Trust Unit amounts) 2006 2006 2005 2005 ------------------------------------------------------------------------- Revenues $ 26,204 $ 38,682 $ 32,101 $ 22,826 EBITDA 8,370 15,367 12,090 9,026 Net income (loss) 4,963 10,862 7,762 6,179 Net income (loss) per Trust Unit - basic 0.16 0.36 0.26 0.21 Net Income (loss) per Trust Unit - diluted 0.16 0.35 0.25 0.21 Cash distributions declared per Trust Unit 0.185 0.16 0.1375 0.0925 ------------------------------------------------------------------------- OUTLOOK Industry analysts continue to forecast strong oil prices for the balance of 2007 and into 2008 but a significant amount of uncertainty exists with respect to the timing of a rebound in natural gas prices. This uncertainty has created a situation in which producers (in particular, Canadian producers) have reconsidered the current economics of drilling natural gas wells which in turn has resulted in the significant decline in drilling activity in western Canada on a year-over-year basis. During Q3 the Trust expects to add 5 MWD systems to its Canadian fleet to replace the systems transferred to the U.S. On the technology forefront we continue to push forward the development of our 2nd generation Electro-Magnetic ("EM") MWD system and initial field testing during 2007 Q2 was very successful. The 2nd generation EM-MWD system will increase the tools capabilities by allowing it to operate at deeper levels and at lower operating costs. The Trust's wireline and production testing divisions have been affected by the decline in drilling activity in western Canada and a rebound in their revenue generation ability will be tied to natural gas prices. During 2007 Q3 the Trust's new formed U.S. wireline operations will start to produce revenues and a second wireline unit will be transferred from the Canadian wireline fleet to the U.S. operations in mid August 2007. On the production testing side of the Trust's business, we continue to expand into the high-end testing market including critical sour service work. With the capital expenditure budget for 2007 the Trust expects to exit 2007 with 78 MWD systems, 28 wireline units and 19 production testing units. The Trust continues to actively pursue opportunities to offer an expanded range of services to its customers, increase its market share, enter new geographic territories, and make strategic acquisitions. CONSOLIDATED BALANCE SHEETS $ in 000's June 30 December 31 2007 2006 (unaudited) ------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 781 $ 1,554 Accounts receivable 25,923 37,693 Inventory 3,810 3,050 Prepaid expenses and deposits 572 892 ------------------------------------------------------------------------- 31,086 43,189 Property and equipment 65,820 61,488 Intangibles 662 736 Goodwill 19,775 19,775 Other assets 110 33 ------------------------------------------------------------------------- $ 117,453 $ 125,221 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND UNITHOLDERS' EQUITY Current liabilities: Bank Indebtedness $ 2,230 $ 6,460 Accounts payable and accrued liabilities 15,295 16,446 Distribution payable to Unitholders 2,204 3,717 Taxes payable 289 1,232 Current portion of capital lease obligations 193 212 Current portion of long-term debt 80 71 ------------------------------------------------------------------------- 20,291 28,138 Capital lease obligations 352 452 Long-term debt 15,191 15,100 Future income taxes 7,929 5,308 ------------------------------------------------------------------------- 43,763 48,998 ------------------------------------------------------------------------- Unitholders' equity: Unitholders' capital 47,326 44,667 Contributed surplus 1,728 1,162 Retained earnings 24,636 30,394 ------------------------------------------------------------------------- 73,690 76,223 ------------------------------------------------------------------------- $ 117,453 $ 125,221 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS $ in 000's except per Three months ended Six months ended Trust Unit amounts June 30 June 30 (unaudited) ---------------------- ---------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- Revenues $ 24,985 $ 26,204 $ 67,697 $ 64,886 Expenses: Operating 13,950 13,042 35,172 31,020 General and administrative 6,082 5,311 13,014 10,573 Depreciation and amortization 2,943 2,577 5,699 4,906 Interest - long-term debt and capital lease obligations 260 226 523 436 Interest - other 66 125 162 208 Foreign exchange loss 237 66 284 58 Non-cash compensation expense 522 534 882 960 ------------------------------------------------------------------------- 24,060 21,881 55,736 48,161 ------------------------------------------------------------------------- 925 4,323 11,961 16,725 Gain on disposal of property and equipment 187 710 184 710 ------------------------------------------------------------------------- Income before taxes 1,112 5,033 12,145 17,435 Taxes: Current 1,062 946 2,050 1,581 Future (reduction) 2,465 (876) 2,723 29 ------------------------------------------------------------------------- 3,527 70 4,773 1,610 ------------------------------------------------------------------------- Net income (loss) for the period (2,415) 4,963 7,372 15,825 Retained earnings, beginning of period 33,651 27,789 30,394 21,765 Less: Distributions declared (6,600) (5,667) (13,130) (10,505) ------------------------------------------------------------------------- Retained earnings, end of period $ 24,636 $ 27,085 $ 24,636 $ 27,085 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net income (loss) per Trust Unit: Basic $ (0.08) $ 0.16 $ 0.24 $ 0.52 Diluted $ (0.08) $ 0.16 $ 0.23 $ 0.50 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS $ in 000's Three months ended Six months ended (unaudited) June 30 June 30 ---------------------- ---------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Net income (loss) for the period $ (2,415) $ 4,963 $ 7,372 $ 15,825 Items not involving cash: Depreciation and amortization 2,943 2,577 5,699 4,906 Future taxes (reduction) 2,465 (876) 2,723 29 Unrealized foreign exchange gain (102) (36) (102) (42) Non-cash compensation expense 522 534 882 960 Gain on disposal of property and equipment (187) (710) (184) (710) ------------------------------------------------------------------------- 3,226 6,452 16,390 20,968 Changes in non-cash operating working capital 11,071 7,193 7,683 814 ------------------------------------------------------------------------- 14,297 13,645 24,073 21,782 ------------------------------------------------------------------------- Investing activities: Property and equipment additions (4,483) (6,255) (10,288) (15,038) Proceeds on disposal of property and equipment 490 1,219 514 1,219 Expenditure on other assets (110) - (110) - Changes in non-cash investing working capital (1,217) (2,155) 1,538 (1,022) ------------------------------------------------------------------------- (5,320) (7,191) (8,346) (14,841) ------------------------------------------------------------------------- Financing activities: Distributions paid to Unitholders (6,585) (5,502) (14,642) (10,014) Advances under long-term debt - - 173 - Repayment of long-term debt (27) (79) (73) (155) Repayment of capital lease obligations (56) (78) (120) (182) Proceeds on exercise of Trust Unit options 1,033 868 2,392 2,394 Increase (decrease) in bank indebtedness (4,035) (85) (4,230) 1,110 ------------------------------------------------------------------------- (9,670) (4,876) (16,500) (6,847) ------------------------------------------------------------------------- Change in cash and cash equivalents (693) 1,578 (773) 94 Cash and cash equivalents, beginning of period 1,474 607 1,554 2,091 ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 781 $ 2,185 $ 781 $ 2,185 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Certain statements in this news release including (i) statements that may contain words such as "anticipate", "could", "expect", "seek", "may" "intend", "will", "believe", "should", "project", "forecast", "plan" and similar expressions, including the negatives thereof, (ii) statements that are based on current expectations and estimates about the markets in which the Trust/Cathedral operates and (iii) statements of belief, intentions and expectations about developments, results and events that will or may occur in the future, constitute "forward-looking statements" and are based on certain assumptions and analysis made by the Trust/Cathedral. Forward-looking statements in this news release include, but are not limited to, statements with respect to future capital expenditures, including the amount, nature and timing thereof; oil and natural gas prices and demand; other development trends within the oil and natural gas industry; business strategy; expansion and growth of the Trust's/Cathedral's business and operations and other such matters. Such forward-looking statements are subject to important risks and uncertainties, which are difficult to predict and that may affect the Trust's/Cathedral's operations, including, but are not limited to: the impact of general economic conditions; industry conditions; government and regulatory developments; oil and natural gas product supply and demand; competition; and the Trust's/Cathedral's ability to attract and retain qualified personnel. The Trust's/Cathedral's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do transpire or occur, what benefits the Trust/Cathedral will derive therefrom. Subject to applicable law, the Trust disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained in this document are expressly qualified by this cautionary statement. Further information about the factors affecting forward-looking statements is available in the Trust's current Annual Information Form and Annual Report which have been filed with Canadian provincial securities commissions and are available on www.sedar.com. %SEDAR: 00018316E

For further information:

For further information: Mark L. Bentsen, President and Chief Executive
Officer or P. Scott MacFarlane, Chief Financial Officer, Cathedral Energy
Services Ltd., 1700, 715 - 5th Avenue S.W., Calgary, Alberta, T2P 2X6,
Telephone: (403) 265-2560, Fax: (403) 262-4682,
www.cathedralenergyservices.com


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