High Arctic Announces Second Quarter Results



    Strong international revenue growth continues

    RED DEER, AB, Aug. 15 /CNW/ - High Arctic Energy Services Inc. (TSX: HWO)
(the "Corporation" or "High Arctic") today announced its results for the
second quarter ended June 30, 2007.

    
    Second Quarter Highlights:

    -   Successful reorganization from High Arctic Energy Services Trust (the
        "Trust") to a growth-oriented energy services corporation effective
        June 29, 2007

    -   Billable operations commenced on Papua New Guinea contract announced
        in August 2007

    -   Start up of operational base and underbalanced drilling equipment to
        Mexico

    -   In July 2007 High Arctic announced it had secured a commitment on a
        fully underwritten basis for up to $155 million of financing. This
        financing will be used to refinance the existing credit facility and
        fund new opportunities. It is progressing through final due diligence
        and is now not expected to close until after August 31

    -   International revenue grew by 75% to $9.3 million during the 3 months
        ended June 30 2007 compared to $5.3 million for the same period in
        2006. For the six months ended June 30, international revenue grew by
        136% to $21.5 million in 2007 from $9.1 million in 2006

    -   Canadian revenues in 2007 continued to suffer from reduced industry
        activity, and the corresponding reduced demand for the Corporation's
        services, declining to $8.3 million in the second quarter of 2007
        from $14.5 million in the same period in 2006 and to $40.8 million
        for the six months ended June 30, 2007 compared to $49.3 million for
        the six months ended June 30, 2006. Rig utilization rates in Canada
        during the quarter were 23 per cent compared to Canadian industry
        average rates of 24 per cent
    

    "Our Canadian customers have continued to constrain their spending due to
concerns over high natural gas inventory levels. The lack of price growth in
the US coupled with a stronger Canadian dollar has hurt their net cash flows,"
said Jed Wood, President and CEO of High Arctic. "I am, however, pleased at
the opportunities High Arctic has pursued to profitably deploy additional
equipment outside Canada."
    Net earnings (loss) in the three months ended June 30, 2007 were
$(7.2) million, compared to $(2.2) million in the same period last year. For
the six months ended June 30, 2007, net earnings (loss) was $(0.4) million
compared to $7.0 million for the six months ended June 30, 2006
    The earnings (loss) before interest, taxes, depreciation and amortization
(EBITDA) in the three months ended June 30, 2007 were $(9.1) million, compared
to EBITDA of $2.5 million in the same period last year. For the six months
ended June 30, 2007, EBITDA was $2.9 million compared to $16.5 million for the
six months ended June 30, 2006. EBITDA in 2007 has been negatively affected by
lower domestic revenues, costs associated with the start-up of new
international projects and a large provision for doubtful accounts.
    "We have expended significant time, effort and expense to transition
internationally to offset the downturn in the Canadian market" added Mr. Wood.
"This important investment, combined with a softer market in Canada and a
one-time problem collecting a major receivable, has created some short-term
financial challenges. The support offered by our bankers through their bought
deal financing offer has been a key element in the landing of new, important
international contracts. I am very proud of how quickly the High Arctic team
has adapted to meet the challenges of these new operating areas. We are
confident that our success in attaining important long-term contracts in Papua
New Guinea, Tunisia and Kuwait is already starting to pay off. We expect that,
with the commencement of billable operations on these contracts in the third
quarter, we will see a corresponding and substantial increase in EBITDA in the
fourth quarter 2007 and beyond."

    Non-GAAP Measure

    EBITDA (being earnings before the deduction of depreciation,
amortization, interest expense or income taxes) is not a recognized measure
under GAAP. Management believes that, in addition to net earnings, EBITDA is a
useful supplemental measure of the Corporation's performance prior to
consideration of how operations are financed or how results are taxed.
Investors are cautioned that this should not be construed as an alternative to
net earnings determined in accordance with GAAP as an indicator of the
Corporation's performance. The Corporation's method of calculating EBITDA may
differ from the methods used by other issuers and, accordingly, it may not be
comparable to similarly titled measures used by other issuers.

    Forward-Looking Statements

    This news release may contain forward-looking statements relating to
expected future events and financial and operating results of the Corporation
that involve risks and uncertainties. Actual results may differ materially
from management expectations as projected in such forward-looking statements
for a variety of reasons, including market and general economic conditions and
the risks and uncertainties detailed in the Corporation's Management
Discussion and Analysis for the six months ended June 30, 2007 and in the
Trust's Annual Information Form for the year ended December 31, 2006 and the
Trust's Information Circular dated May 29, 2007, all found on SEDAR
(www.sedar.com). Due to the potential impact of these factors, the Corporation
disclaims any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise, unless required by applicable law.

    About High Arctic

    The Corporation, through its subsidiaries, is a global provider of
specialized oilfield equipment and services, including drilling, completion
and workover operations. High Arctic's new underbalanced drilling technology
and equipment is recognized for its ability to improve oil and gas production
capabilities and is expected to develop greater acceptance in international
markets. Based in Red Deer, High Arctic has domestic operations in Alberta,
British Columbia and the Northwest Territories. International operations are
currently active in the Middle East and Asia.

    
                      High Arctic Energy Services Inc.
                (formerly High Arctic Energy Services Trust)
                     Management Discussion and Analysis
                       Six months ended June 30, 2007
    

    The following is Management's Discussion and Analysis ("MD&A") of the
financial condition and results of operations of High Arctic Energy Services
Inc. (the "Corporation") for the six months ended June 30, 2007, as compared
to the same period in 2006. It also contains information on the Corporation's
future outlook based upon currently available information. This MD&A should be
read in conjunction with the unaudited consolidated financial statements and
accompanying notes for the same periods and the audited consolidated financial
statements and accompanying notes for the year ended December 31, 2006.
    The discussion and analysis of the financial condition and results of
operations presented herein is presented using a continuity of interest
accounting basis that recognizes the Corporation is a successor to High Arctic
Energy Services Trust (the "Trust").
    All amounts are reported in Canadian dollars unless otherwise stated. The
financial data presented has been prepared in accordance with Canadian
Generally Accepted Accounting Principles ("GAAP") on a going concern basis.
The going concern basis presumes the realization of assets and discharge of
liabilities in the normal course of business for the foreseeable future. The
Corporation has breached a significant banking covenant at June 30, 2007 (see
note 5 to the unaudited consolidated financial statements) by not generating
sufficient cash flows from operations. The Corporation's ability to continue
as a going concern is dependent upon achieving profitable operations and upon
obtaining additional financing. While the Corporation is focusing its best
efforts on these matters, the outcome cannot be predicted at this time. These
financial statements do not include any adjustments to the amounts and
classification of assets and liabilities that might be necessary should the
Corporation be unable to continue in business and therefore be unable to
realize its assets and discharge its liabilities in the normal course of
business. Such adjustments could be material.
    The MD&A is dated August 13, 2007.

    Formation of the Corporation

    The Corporation is incorporated under the laws of Alberta, Canada and
commenced operations on June 29, 2007 as a consequence of reorganization
through a Plan of Arrangement approved by the securityholders of the Trust.
The reorganization resulted in the Corporation acquiring the business of the
Trust through the exchange of each outstanding Trust Unit or Exchangeable
Share of the Trust on a one-for-one basis, after accounting for the conversion
factor applicable to certain Exchangeable Shares, for common shares of the
Corporation.
    The Corporation's principal focus is to engage in the global oilfield
services business by providing specialized drilling and production services,
equipment, design and development and technical support and training to the
Canadian and International oil and gas industry. The Corporation's business
plan is focused on providing high quality services to its customers by
supplying leading edge technology and knowledgeable, well-trained personnel
that provide solutions to both its customers and the industry.

    Forward-Looking Statements

    This MD&A contains forward-looking statements. When used in this
document, the words "may", "would", "could", "will", "intend", "plan",
"anticipate", "believe", "seek", "propose", "estimate", "expect", and similar
expressions are intended to identify forward-looking statements. Such
statements reflect the Corporation's current views with respect to future
events and are subject to certain risks, uncertainties and assumptions. Many
factors could cause the Corporation's actual results, performance or
achievements to vary from those described in this MD&A. Should one or more of
these risks or uncertainties materialize, or should assumptions underlying
forward-looking statements prove incorrect, actual results may vary materially
from those described in this MD&A as intended, planned, anticipated, believed,
estimated or expected.
    Specific forward-looking statements in this MD&A include, among others,
statements pertaining to the following:

    
    -   expectations regarding the Corporation's ability to raise capital and
        restructure its long-term debt obligations;
    -   commodity prices and the impact that they have on industry activity;
    -   estimated capital expenditure programs for fiscal 2007 and subsequent
        periods;
    -   projections of market prices and costs;
    -   factors upon which the Corporation will decide whether or not to
        undertake a specific course of operational action or expansion;
    -   world-wide supply and demand for oilfield services;
    -   amounts to be retained by the Corporation and its subsidiaries for
        capital expenditures;
    -   treatment under governmental regulatory regimes; and
    -   general economic conditions.

    With respect to forward-looking statements contained in this MD&A, the
Corporation has made assumptions regarding, among other things:

    -   the Corporation's ability to obtain equity and debt financing on
        satisfactory terms;
    -   the Corporation's ability to market successfully to current and new
        customers;
    -   the Corporation's ability to obtain equipment from suppliers;
    -   the Corporation's ability to construct property and equipment
        according to anticipated schedules and budgets;
    -   the impact of competition; and
    -   the Corporation's ability to attract and retain skilled employees.

    The Corporation's actual results could differ materially from those
anticipated in these forward-looking statements as a result of the risk
factors set forth below, elsewhere in this MD&A and in the Trust's Annual
Information Form for the year ended December 31, 2006 and the Trust's
Information Circular dated May 29, 2007, including:

    -   liquidity risks, which may be exacerbated if the Corporation is
        unable to renegotiate its debt obligations and complete new equity
        financings on terms acceptable to the Corporation or at all;
    -   changes in legislation and the regulatory environment, including
        uncertainties with respect to implementing the Kyoto Protocol;
    -   income tax matters including restrictions on non-resident ownership
        and the unanticipated tax and other expenses and liabilities of the
        Corporation;
    -   the world-wide demand for oilfield services in connection with the
        underbalanced drilling, workover and completion of oil and gas wells;
    -   volatilities in global supply and demand and market prices for oil
        and natural gas and the effect of these volatilities on the demand
        for oilfield services generally;
    -   general economic conditions in Canada, the United States, Southeast
        Asia and the Middle East, including variations in exchange rates and
        interest rates;
    -   regional and international competition;
    -   risks inherent in foreign operations, including political and
        economic risk;
    -   liabilities and risks, including environmental liabilities and risks,
        global political stability and other risks, inherent in oil and gas
        operations;
    -   sourcing, pricing and availability of raw materials, component parts,
        equipment, suppliers, facilities, and skilled personnel;
    -   continuing success in developing and integrating technological
        advances and the ability to match advances of competitors;
    -   uncertainties in weather and temperature affecting the duration of
        the service periods and the activities that can be completed;
    -   credit risks associated with customers in the oil and gas industry,
        including the inability of a significant customer of the Corporation
        to pay for goods and services that have been provided;
    -   the risks investors have through investing in a Corporation,
        including changes in taxation laws, share status and investment
        eligibility, the nature of shares and the ability to redeem them and
        Shareholder limited liability;
    -   the cancellation of industry-standard type contract arrangements used
        by the Corporation including written contacts, that are cancellable
        by customers at any time, and verbal agreements; and
    -   the Corporation's inability to successfully address potential
        material weaknesses in internal controls or other control
        deficiencies that would affect its ability to report its financial
        results on a timely and accurate basis and to comply with disclosure
        and other requirements.
    

    The forward-looking statements contained in this MD&A are expressly
qualified in their entirety by this cautionary statement. These statements
speak only as of the date of this MD&A. The Corporation does not assume any
obligation, to update these forward-looking statements to reflect new
information, subsequent events or otherwise, except as required by law.

    Non-GAAP Terms

    EBITDA (being earnings before the deduction of depreciation,
amortization, interest expense or income taxes), "Oilfield Services Operating
Margin", "Oilfield Services Operating Margin %", "Gain on sale of property,
equipment and investments" and "market capitalization" are not recognized
measures under GAAP. Management believes that, in addition to net earnings,
these items are useful supplemental measures of the Corporation's performance
prior to consideration of how operations are financed or how results are
taxed. Investors are cautioned that these measures should not be construed as
an alternative to net earnings determined in accordance with GAAP as an
indicator of the Corporation's performance. The Corporation's method of
calculating these measures may differ from the methods used by other issuers
and, accordingly, they may not be comparable to similarly titled measures used
by other issuers.

    Capitalization

    The Corporation's authorized share capital consists of an unlimited
number of common shares and an unlimited number of preferred shares.
    As at June 30, 2007 and August 13, 2007 there were 42,442,325 issued and
outstanding common shares.
    The common shares trade on the Toronto Stock Exchange under the symbol
HWO. The closing price of the shares on August 13, 2007 was $2.20 per share.
Based upon 42,442,325 issued common shares, the Corporation has an approximate
market capitalization of $93 million.

    Consolidated Financial Review Highlights

    The Corporation's business is considered to have some seasonality, with
Canadian peak levels generally in the first and fourth quarters. Financial
highlights for the three and six months ending June 30, 2007 are as follows:

    
    -   An 11% decrease in second quarter revenue from $19.8 million in the
        three months ended June 30, 2006 to $17.6 million in the same period
        in 2007 and a reduction in EBITDA from $2.5 million in the three
        months ended June 30, 2006 to $(9.1) million in the same period in
        2007.
    -   The Corporation has taken an additional provision for bad debts of
        $4.6 million in the second quarter of 2007 and $5.7 million for the
        six months ended June 30, 2007;
    -   Rig utilization rates of 23.4% for the three month period ended
        June 30, 2007 compared to 39.2% for the three months ended
        June 30, 2006. These are compared to the Canadian Association of
        Oilfield Drilling Contractors ("CAODC") averages of 24.3% and 41% for
        the three month periods ended June 30, 2007 and June 30, 2006
        respectively.

    Selected Information
    --------------------

                                                             Three     Three
                                                            months    months
                                                             ended     ended
                                                           June 30,  June 30,
    $million except per unit amounts                          2007      2006

    Total revenue                                          $  17.6   $  19.8
    EBITDA                                                    (9.1)      2.5
    EBITDA per share                                       $ (0.22)  $  0.10
    Distributions                                                -       6.8
    Distributions per share                                $     -   $  0.26
    Total assets                                             253.2     150.1
    Credit facility outstanding                              109.2      49.8
    Net earnings (loss)                                       (7.2)     (2.2)
    Net earnings (loss) per share - diluted                $ (0.18)  $ (0.09)

    The following table provides a quantitative reconciliation of net earnings
to EBITDA.

                                                             Three     Three
                                                            months    months
                                                             ended     ended
                                                           June 30,  June 30,
    $million                                                  2007      2006

    Net earnings (loss)                                    $  (7.2)  $  (2.2)
    Add (deduct) the following:
    Amortization                                               5.5       4.4
    Gain on sale of property, equipment and investments       (2.0)        -
    Interest                                                   1.4       0.1
    Income taxes                                              (6.8)      0.2
                                                          -------------------
    EBITDA                                                 $  (9.1)  $   2.5
                                                          -------------------
                                                          -------------------
    EBITDA/Share                                           $ (0.22)  $  0.10
                                                          -------------------
                                                          -------------------

    The Corporation has provided for $11.25 million with respect to the
amounts owing from TSU, including $5 million in relation to revenue that is
not recognized in these financial statements due to uncertainty of collection.
See "Commitments and contingencies".

    Operating Results for the three and six months ended June 30, 2007 and
    2006

    Selected Information
    --------------------

    Revenue

                                         Three     Three       Six       Six
                                        months    months    months    months
                                         ended     ended     ended     ended
                                       June 30,  June 30,  June 30,  June 30,
    $million                              2007      2006      2007      2006

    Revenue
    Oilfield Services
      Canada                           $   8.3   $  14.5   $  40.8   $  49.3
      International                        9.3       5.3      21.5       9.1
                                      ---------------------------------------

    Total revenue                      $  17.6   $  19.8   $  62.3   $  58.4
                                      ---------------------------------------
                                      ---------------------------------------
    

    In Canada, natural gas prices and, to a lesser extent, oil prices are the
primary drivers of the Corporation's activity levels, as the netbacks received
by its customers determine oilfield activity on their part. Reductions in
prices, particularly for natural gas, coupled with a strengthening Canadian
dollar, resulted in a significant decline in industry activity in the Western
Canadian Sedimentary Basin during the latter half of 2006 and the first six
months of 2007. The AECO natural gas spot price and West Texas Intermediate
("WTI") oil spot price as at June 30, 2007 were CDN $5.80 per gigajoule and
US $71.09 per barrel respectively. AECO averaged approximately CDN $7.10 per
gigajoule for the three months ended June 30, 2007 compared to CDN $6.01 per
gigajoule for 2006. WTI averaged US $64.73 for the three months ended June 30,
2007 compared to US $70.56 per barrel for 2006.
    The Corporation strives to increase its revenue and revenue per well
through application of the "bundling concept". Management believes this
service offering increases utilization of equipment, provides additional
revenue per job site, and allows the Corporation to combine multiple product
lines to the same customer. Management also believes it has also allowed the
Corporation to cross-sell services that were previously provided by other
suppliers or competitors.
    As an extension to the above concept, the Corporation strives to increase
its revenue per well by providing customers with Integrated Project Management
("IPM") of equipment, personnel, management expertise and coordination of
third party services. Management believes that IPM provides the customer with
several advantages compared to regular well operators. These advantages are as
follows:

    
    -   A single point of contact for the customer, making coordination and
        monitoring of operations on a well site easier;
    -   Providing one service company responsible for all aspects of the
        operation, avoiding any confusion on responsibility and downtime
        costs;
    -   Cost and operational efficiencies as there is no duplication of
        supervisors and manpower with one service company; and
    -   Coordination of all services, including those required to be provided
        by third parties, to provide a full suite of services by one service
        provider.
    

    Domestic revenues decreased by $6.2 million or 43% to $8.3 million for
the three months ended June 30, 2007, compared to domestic revenues of
$14.5 million for the three months ended June 30, 2006. Weather and commodity
price expectations dampened demand for the Corporation's services. In
particular, activity in Canada was negatively impacted by ongoing concerns
over natural gas commodity prices. Natural gas inventory levels in North
America continue to be at very high levels and have weakened the expectations
for future natural gas prices. This development, in conjunction with a
strengthened Canadian dollar, have caused production companies to review the
economic viability of shallow natural gas and coal bed methane exploration and
development programs. This affected utilization rates on the Corporation's
equipment service lines exposed to this area of the market (see "Oilfield
services expense").
    International revenue increased by approximately 75% to $9.3 million for
the three months ended June 30, 2007, as compared to $5.3 million for the
three months ended June 30, 2006. The increase in international revenue was
primarily attributable to the Corporation's ability to secure international
contracts in Asia and the Middle East. Due to weakness in Canadian activity
levels, the Corporation has increased efforts to profitably deploy additional
equipment outside Canada.

    
    Oilfield services expense

                                         Three     Three       Six       Six
                                        months    months    months    months
                                         ended     ended     ended     ended
                                       June 30,  June 30,  June 30,  June 30,
    $million                              2007      2006      2007      2006

    Equipment utilization                 24.3%     39.2%     49.5%     70.3%
                                      ---------------------------------------
                                      ---------------------------------------

    Oilfield services expense          $  17.5   $  12.8   $  45.1   $  34.0
                                      ---------------------------------------
                                      ---------------------------------------

    Oilfield services operating
     margin                            $   0.1   $   7.0   $  17.2   $  24.4
                                      ---------------------------------------
                                      ---------------------------------------

    Oilfield services operating
     margin %                              0.1%     35.3%     27.6%     41.7%
                                      ---------------------------------------
                                      ---------------------------------------
    

    Oilfield services expense includes both fixed and variable costs that in
total do not increase or decrease by the same proportion as changes in revenue
and activity levels. Oilfield services operating margin is a Non-GAAP term and
is determined by deducting oilfield services expense from revenue. Oilfield
services operating margin percentages are calculated by dividing oilfield
services operating margins by revenue. The Corporation's oilfield services
operating margin percentage for the three months ended June 30, 2007 compared
to 2006 decreased from 35.3% to 0.1%.
    The increase in oilfield service expenses was largely attributed to the
additional cost requirements as the Corporation retooled equipment and
personnel for its international operations. Additional costs were required as
the Corporation continued to build an infrastructure needed for future growth
opportunities within the international market as well as relocate equipment to
new areas. The Corporation experienced lower utilizations due to weather
issues and economic factors discussed above. Repairs on oilfield equipment
have also increased as the company expands its international operations and
incurs additional costs associated with maintaining equipment.
    Equipment utilization is determined by dividing the number of days a rig
operates by the number of days in the relevant period. Utilization is affected
by competition, economic conditions and the inability at certain times of the
year to physically access locations due to climate, the availability of labour
and by repair and maintenance activities. Utilization decreased in 2007 from
the same periods in 2006 due to reduced industry activity.

    
    General and administration

                                         Three     Three       Six       Six
                                        months    months    months    months
                                         ended     ended     ended     ended
                                       June 30,  June 30,  June 30,  June 30,
    $million                              2007      2006      2007      2006

    General and administration         $   9.0   $   4.5   $  13.6   $   8.3
                                      ---------------------------------------
                                      ---------------------------------------
    

    General and administration costs increased by $4.5 million to
$9.0 million for the three months ended June 30, 2007 compared to $4.5 million
for the three months ended June 30, 2006. For the six months ended June 30,
2007, general and administration costs increased to $13.6 million from
$8.3 million for the same period in 2006. The 2007 increase was largely due to
an increase in the provision for bad debts of $4.6 million for the three
months ended June 30, 2007 and $5.7 million for the six months then ended due
to receivables that are, in part, the subject of litigation (see "Commitments
and contingencies"). The Corporation also experienced additional personnel
costs as it expanded its international operations.
    As a percentage of revenues, excluding the provision for bad debts, these
expenses increased in 2007 to 25.0% of revenue for the three month period
ended June 30, 2007 as compared to 22.7% of revenue for the three months ended
June 30, 2006. General and administration costs for the six months ended
June 30, 2007 and 2006, as a percentage of revenue excluding the provision for
bad debts, were 12.7% and 14.2% respectively.

    
    Amortization

                                         Three     Three       Six       Six
                                        months    months    months    months
                                         ended     ended     ended     ended
                                       June 30,  June 30,  June 30,  June 30,
    $million                              2007      2006      2007      2006

    Amortization                       $   5.5   $   4.4   $  10.5   $   8.4
                                      ---------------------------------------
                                      ---------------------------------------
    

    Amortization for the three months ended June 30, 2007 was $5.5 million
compared to $4.4 million for the same period in 2006. For the six months ended
June 30, 2007 amortization was $10.5 million, compared to $8.4 million for the
same period in 2006. The increase is due to the growth of the Corporation's
equipment fleet since 2006 offset by the change in estimated useful lives
effective July 1, 2006.

    
    Foreign exchange (gain) loss

                                         Three     Three       Six       Six
                                        months    months    months    months
                                         ended     ended     ended     ended
                                       June 30,  June 30,  June 30,  June 30,
    $million                              2007      2006      2007      2006

    Foreign exchange (gain) loss       $   0.2   $     -   $   0.7   $  (0.4)
                                      ---------------------------------------
                                      ---------------------------------------

    The Corporation has exposure to US$ revenues and expenses, primarily
through its international operations, and to the Dirham used locally in Dubai
(which is tied to the US$).

    Interest expense

                                         Three     Three       Six       Six
                                        months    months    months    months
                                         ended     ended     ended     ended
                                       June 30,  June 30,  June 30,  June 30,
    $million                              2007      2006      2007      2006

    Interest expense                   $   1.4   $   0.1   $   2.4   $   0.6
                                      ---------------------------------------
                                      ---------------------------------------

    Interest expense for the three and six months ended June 30, 2007 was in
respect of the Corporation's credit facility. The Corporation currently pays
interest on its credit facility at prime plus 1% compared to prime plus 0.75%
in the same period in 2006 (see "Liquidity and Capital Resources").

    Income taxes (recovery)

                                         Three     Three       Six       Six
                                        months    months    months    months
                                         ended     ended     ended     ended
                                       June 30,  June 30,  June 30,  June 30,
    $million                              2007      2006      2007      2006

    Income taxes (recovery)            $  (6.8)  $   0.2   $  (6.6)  $   0.5
                                      ---------------------------------------
                                      ---------------------------------------
    

    The income tax expenses for 2006 and 2007 include taxes incurred in
foreign jurisdictions. The Corporation uses the liability method of tax
allocation in accounting for income taxes. Under this method, future tax
assets and liabilities are determined for the income tax consequences
attributable to differences between amounts recorded in the financial
statements and their respective tax bases, using substantially enacted tax
rates. The effect of any change in income tax rates on future tax assets and
liabilities is recognized in earnings in the period that the change occurs.
Effective with the reorganization from a Trust, the Corporation recognized in
earnings and recorded a tax asset of $7.0 million pertaining to the difference
in tax bases for property, plant and equipment and financing costs.

    
    Trading Summary

    The average monthly trading price and volume for the Trust Units during
the six months ended June 30, 2007 were as follows:

           Month          Average $/Unit       Average Daily Units
                                                      Traded

    2007   January              5.60                  20,753
           February             4.20                 105,910
           March                2.91                  67,950
           April                2.74                  74,020
           May                  2.48                 107,773
           June                 2.28                  45,238
    

    Liquidity and Capital Resources

    On February 26, 2007, the Corporation announced that its Board of
Directors had formed a special committee, comprised solely of independent
directors (the "Special Committee"), to consider the benefits of a
reorganization of the Trust. It was expected that the proposed reorganization
would include a conversion to a corporation; a restructuring of long-term
debt; and an issuance of equity from treasury. In February 2007 the Trust also
suspended distributions to unitholders.
    These actions were primarily due to the need to preserve capital for
operations and growth due to the change in the ability to access new equity
from the capital markets. This situation primarily resulted from the proposed
change in Canadian taxation policy for income trusts and the consequent
inability to fund the capital expenditure program in whole, or in part, with
equity.
    At the Annual and Special Meeting of Securityholders of the Trust held on
June 28, 2007 unitholders, optionholders and holders of Exchangeable Shares
approved the conversion of the Trust into a Corporation under a Plan of
Arrangement. The Plan of Arrangement was subsequently approved by the Court of
Queen's Bench of Alberta on June 29, 2007. Under the Plan of Arrangement, each
outstanding Trust Unit or Exchangeable Share of the Trust was exchanged for
one common share of the Corporation. Additionally, all outstanding options to
acquire units in the Trust, whether vested or not, were exchanged for options
of the Corporation under substantially the same terms and conditions,
including, without limitation, the same "in the money" amount, if any.

    Credit facility

    The Corporation has secured a commitment for a new credit facility (see
below). The Corporation's present credit facility is with a syndicate of
commercial lenders. This credit facility is composed of a $20-million
operating line and a $100-million equipment based revolving loan. Amounts
drawn bear interest at prime plus 0.5% to prime plus 1% depending on the level
to which the facility is drawn. At June 30, 2007 and at the date of this
Management Discussion and Analysis the rate in effect was prime plus 1%. The
operating line may be drawn to a maximum of the lesser of $20 million and 75%
of Canadian accounts receivable aged less than 90 days. The equipment loan may
be drawn to a maximum of the lesser of $100 million and 75% of the appraised
orderly liquidation value of eligible equipment. The obligations under the
credit facility are secured by debentures under which the Corporation and its
Canadian subsidiaries grant security over all of their respective assets.
    At June 30, 2007, a total of $109.2 million of the facility had been
drawn (December 31, 2006 - $118.6 million).
    The credit facility has a one year revolving term, which may be extended
for an additional 364 days at the discretion of the lenders on application by
the Trust. On April 18, 2007 the Trust requested such an extension. On
June 28, 2007 an extension was granted to July 30, 2007 and on July 30, 2007 a
further extension was granted to August 31, 2007. If the revolving period is
not extended then the outstanding principal will become repayable in scheduled
repayments as follows: to June 30, 2008 - $23.2 million; to June 30, 2009 -
$39.7 million; to June 30, 2010 - $39.7 million; and to June 30, 2011 -
$6.6 million.
    At June 30, 2007, the Corporation had a consolidated leverage ratio
(generally defined in its credit facility agreement as total debt divided by
the 12-month trailing adjusted earnings before interest, depreciation,
amortization and taxes) of approximately 5.13 to 1.0. On March 9, 2007 the
Trust and its lenders executed an amendment agreement effective December 31,
2006, that amended the maximum permitted consolidated leverage ratio at
December 31, 2006 and March 31, 2007 to 3.6 to 1.0 and for each quarter ended
thereafter to 2.75 to 1.00. On April 30, 2007, the Trust executed with its
lenders an agreement to waive the requirement that the proceeds of sale of the
Sense/EDM shares be applied to amounts owing under its credit facility. This
agreement also eliminated the requirement that amounts received from the
issuance of equity and applied to reduce amounts owing under the credit
facility would permanently reduce the amounts available to be drawn under the
credit facility by an equivalent amount. In conjunction with their consent to
the Plan of Arrangement, on June 28, 2007 the lenders agreed to waive
compliance with financial covenants of the credit facility for the fiscal
quarter ending June 30, 2007.
    In early July 2007, the Corporation secured a commitment on a fully
underwritten basis for up to $155-million of financing from a Canadian
affiliate of GE Energy Financial Services. The financing is comprised of up to
an $80-million senior secured revolving credit facility and up to
US$75-million of senior second lien loans.
    This financing, that is progressing through final due diligence, will be
used to refinance the Corporation's credit facility, in which the GE Energy
Financial Services affiliate served as agent, and to fund working capital and
future opportunities. The GE Energy Financial Services affiliate will also
provide $20-million in bridge financing until the new financing is completed,
which is now anticipated to be after August 31, 2007.
    The proposed senior secured revolving credit facility is for an initial
term of 364 days and amounts available to be drawn are based upon a borrowing
base calculation that includes eligible accounts receivable and equipment. The
revolving facility would initially bear interest at prime plus 0.8%. The
senior second lien notes have a term of 5.5 years, are repayable upon
maturity, callable, and are estimated to bear interest at a rate of LIBOR plus
8%. The revolving credit facility and senior second lien loans are secured in
a manner customary for such debt.

    Cash Provided by Operating Activities

    For the three months ended June 30, 2007, cash used in operating
activities was $10.2 million before reflecting working capital adjustments.
After consideration of working capital adjustments, cash used in operating
activities was $10.6 million. For the three months ended June 30, 2006, cash
provided by operating activities was $16.4 million. Cash provided by (used in)
operating activities for the six months ended June 30, 2007 and 2006 were
$(1.2) million and $22.4 million respectively. The 2007 reductions in cash
from operations are primarily due to reduced industry activity in Canada that
has in turn reduced demand for the Corporation's services.

    Investing Activities

    For the three months ended June 30, 2007, expenditures to acquire rigs,
equipment and other operational assets were $2.3 million compared to
$25.2 million for the same period in 2006 (both amounts after the change in
accounts payable related to constructing rigs and equipment). For the six
month period ended June 30, 2007 the Corporation expended $21.9 million
compared to $46.9 million in the same period ended June 30, 2006. The majority
of the Corporation's capital spending in 2007 was related to the completion of
rigs under construction at December 31, 2006, including those utilizing the
new RAPAD drilling rig design. The Corporation also disposed of three surplus
rigs in 2007 for proceeds of $1.8 million, and an additional $5.0 million in
proceeds was received from the sale of shares in Sense/EDM AS ("Sense/EDM").

    Financing Activities

    For the three months and six months ended June 30, 2007, the Corporation
repaid its credit facility by $6.7 million and $9.4 million respectively.
    On March 28, 2007 the Trust issued 5,225,442 Trust Units and 1,306,361
Trust Unit purchase warrants (that expire September 2008) pursuant to a
private placement for aggregate consideration of $13.6 million. On that date,
the Corporation also issued 2,500,000 Trust Units in exchange for 2,500,000
Exchangeable Shares.
    On April 13, 2007, through a public offering the Trust issued 10,921,746
Trust Units for aggregate consideration of $28.4 million. Concurrent with this
transaction the Corporation issued 1,000,000 Trust Units in exchange for
1,000,000 Exchangeable Shares.
    No distributions were declared during the three months ended June 30,
2007. Distributions declared for the six months ended June 30, 2007 were
$2.1 million.

    Commitments and contingencies

    Rigs under construction

    In July 2005, the Trust entered into a contract with Sense/EDM, a
Norwegian rig manufacturer, to purchase sixteen rigs with an option to cancel
the order for all but five of the rigs, subject to certain conditions. During
2006, the Trust determined that it only wished to take delivery of and
complete ten of the contracted-for rigs for an estimated cost of approximately
$65.0 million, with deliveries forecast to take place in 2006 and 2007. As a
result, the Trust cancelled the order for the remaining six rigs.
    In 2006, the Trust took delivery of and completed four rigs for a total
cost of $29.2 million and had two rigs under construction. In accordance with
performance provisions in the contract and in light of the late deliveries and
other performance issues of Sense/EDM, the Trust commenced negotiations to
suspend the order for the final four rigs.
    On March 6, 2007, Sense/EDM asserted that the Corporation was still
required to take delivery of the final four rigs and that they are owed
approximately $20 million, including interest, for costs pertaining to the
acquisition and completion of these rigs and for the rigs delivered to date or
under construction.
    At December 31, 2006, the Trust had recorded net amounts payable to
Sense/EDM of approximately $8.0 million that the Trust believed represented
the maximum amount it was exposed for under this contract. During the quarter
ended March 31, 2007, the Trust paid $3.0 million to Sense/EDM and negotiated
the sale of its investment in Sense/EDM for a further 26.5 million Norwegian
Kroner or approximately $5.0 million. This sale closed on April 3, 2007 with
the proceeds being forwarded to Sense/EDM by the purchaser and applied on
account to amounts ultimately determined as being owed, pending resolution of
the dispute.
    An agreement to settle the dispute was reached in May, 2007, subject to
finalization of a new rig purchase agreement that has yet to occur. It was
agreed that the rigs that the Trust had previously taken delivery of have been
paid for in full and that the purchase price for four additional rigs,
including the two noted above as presently targeted for completion in 2007,
will be re-negotiated with a fixed price and specified payment dates based
upon construction progress. All other alleged commitments for additional rigs
were terminated in exchange for a cancellation fee paid for one rig on which
Sense/EDM had commenced construction. Finalization of the settlement on the
terms agreed to will result in the future acquisition of four rigs and a
future obligation for the Corporation of approximately $18-20 million.

    Accounts receivable

    On May 7, 2007 High Arctic Energy Services Limited Partnership (a
subsidiary of the Corporation) filed a claim against Transeuro Energy Corp.
("Transeuro") for approximately $14.6 million plus interest and costs. The
claim demands payment for services rendered by High Arctic Energy Services
Limited Partnership to Transeuro in late 2006 and early 2007 in accordance
with the contract entered into by the parties to provide drilling services at
the Beaver River, British Columbia location of Transeuro. The claim was
brought as Transeuro has refused repeated requests for payment of amounts due
to High Arctic Energy Services Limited Partnership.
    Subsequent to the filing of its claim, the Corporation received a copy of
a claim filed by Transeuro in the Supreme Court of British Columbia against a
Dubai subsidiary of the Trust, High Arctic Energy Services LLC ("High Arctic
Dubai"), asserting certain entities owned by the Trust are in breach of
various obligations. Among other things, the claim asserts that High Arctic
Dubai has overcharged for the Beaver River services. There are further claims
related to actions taken by High Arctic Dubai in Dubai in response to the
failure of Transeuro to pay amounts owing for services rendered in Dubai,
Armenia, Papua New Guinea and the Ukraine. The Corporation views the
assertions against High Arctic Dubai with respect to the Canadian and Dubai
activities as discrete issues and without merit.
    No timetable has been set for the hearing of the claim by High Arctic
Energy Services Limited Partnership or the claim by Transeuro.
    The Corporation has not agreed to Transeuro's assertions and believes the
Corporation's litigation position is strong. The Corporation has demanded
payment of approximately $30 million from Transeuro. Approximately one-half of
this amount relates to international contracts and one-half to the Canadian
Beaver River contract. The Corporation is pursuing collection of the entire
amount owing plus any related costs and damages.
    Nevertheless, due to a lack of certainty regarding collectability, risks
inherent in the litigation process, and disputes regarding cancellation fees,
invoices and contract terms the Corporation has provided for $11.25 million in
relation to the Transeuro amounts. The $11.25 million consists of $5.0 million
in relation to revenue that is not recognized in these financial statements
due to uncertainty of collection and an allowance for bad debt expense of
$6.25 million relating to the uncertainty over collection of the remaining
receivable. These financial statements reflect a net receivable of
$18.75 million which is less than the amount that the Corporation's management
expects to ultimately collect.

    Income taxes

    The Corporation has been informed by a customer in Turkmenistan that
there is a possible exposure to the Corporation of US$1.9 million for taxes in
that jurisdiction. Management believes that it has calculated and remitted all
taxes properly due in Turkmenistan and the remaining tax exposure is without
merit. Therefore, no amount has been accrued in these financial statements for
this potential exposure.

    Contractual obligations

    In addition to the commitments and contingencies noted above, in the
normal course of business, the Corporation incurs contractual obligations,
primarily related to operating leases. The Corporation's total contractual
obligations for leases as at June 30, 2007 are $1.1 million to June 30, 2008,
$1.0 million to June 30, 2009, and $0.3 million to March 31, 2010.
    The following tables set forth the Corporation's contractual obligations,
in each case for the years ended June 30, as at June 30, 2007:

    
                                               June 30, 2007
                             -----------------------------------------------
                                                                      Post-
    $million                  Total    2008    2009    2010    2011    2011
                             ------- ------- ------- ------- ------- -------
    Long-term debt
     obligations (1)         $ 109.2 $  23.2 $  39.7 $  39.7 $   6.6 $     -
    Operating lease and
     equipment purchase
     obligations (2)            20.4    16.1     4.0     0.3       -       -
                             ------- ------- ------- ------- ------- -------
    Total obligations        $ 129.6 $  39.3 $  43.7 $  40.0 $   6.6 $     -
                             ------- ------- ------- ------- ------- -------
                             ------- ------- ------- ------- ------- -------

    (1) There is no present requirement to repay principal on the
        Corporation's credit facility. The amounts noted assume the credit
        facility is not renewed by lenders in 2007. The Corporation is
        presently examining the restructuring of its debt obligations (refer
        to note 14 of the unaudited consolidated financial statements for the
        six months ended June 30, 2007).
    (2) The table represents management's best estimate of costs required to
        honour the equipment purchase obligation (refer to note 9 of the
        unaudited consolidated financial statements for the six months ended
        June 30, 2007).


    Quarterly Financial Review

    Selected Quarterly Consolidated Financial Information
     (Three months ended)
    $million except per unit amounts

                                                             Decem-   Septem-
                                       June 30, March 31,   ber 31,   ber 30,
                                          2007      2007      2006      2006
                                       -------- --------- --------- ---------

    Revenue                            $  17.6   $  44.7   $  37.6   $  27.8
    EBITDA                                (9.1)     12.0       8.9       9.5
    Net earnings (loss)                   (7.2)      6.8       4.2       5.9
    Net earnings (loss) per unit -
     basic and diluted                 $ (0.18)  $  0.26   $  0.17   $  0.23

                                                             Decem-   Septem-
                                       June 30, March 31,   ber 31,   ber 30,
                                          2006      2006      2005      2005
                                       -------- --------- --------- ---------

    Revenue                            $  19.8   $  38.6   $  32.0   $  25.2
    EBITDA                                 2.5      14.0      10.0       8.4
    Net earnings (loss)                   (2.2)      9.2       3.5      (5.1)
    Net earnings (loss) per unit -
     basic and diluted                 $ (0.09)  $  0.36   $ (0.19)  $ (0.21)

    Risk Management and Uncertainties

    The continued success of the Corporation is dependent to a great extent on
the continued health of the oil and natural gas industry in Canada and
internationally. As a member of this industry, the Corporation is exposed to
various risks, including:

    -   volatilities in global supply and demand and market prices for oil
        and natural gas and the effect of these volatilities on the demand
        for oilfield services generally;
    -   uncertainties in weather and temperature affecting the duration of
        the service periods and the activities that can be completed;
    -   changes in legislation and the regulatory environment, including
        uncertainties with respect to implementing the Kyoto Protocol;
    -   alternatives to and changing demands for petroleum products;
    -   the world-wide demand for oilfield services in connection with the
        underbalanced drilling, workover and completion of oil and gas wells;
    -   general economic conditions in Canada, the United States, Southeast
        Asia and the Middle East, including variations in exchange rates and
        interest rates;
    -   liabilities and risks, including environmental liabilities and risks,
        global political stability and other risks, inherent in oil and gas
        operations;
    -   credit risks associated with customers in the oil and gas industry,
        including the inability of a significant customer of the Corporation
        to pay for goods and services that have been provided;
    -   risks inherent in foreign operations, including political and
        economic risk; and
    -   regional and international competition.

    These factors may impact upon the Corporation's customer base which, in
turn, would impact the Corporation's business prospects.

    The Corporation is also subject to specific risks, such as:

    -   liquidity risks, which may be exacerbated if the Corporation is
        unable to renegotiate its debt obligations and complete new equity
        financings on terms acceptable to the Corporation or at all;
    -   income tax matters, restrictions on non-resident ownership and the
        unanticipated tax and other expenses and liabilities of the
        Corporation;
    -   operational risks involved in drilling and the ability to obtain
        satisfactory insurance;
    -   continuing success in developing and integrating technological
        advances and the ability to match advances of competitors;
    -   the cancellation of industry-standard type contract arrangements used
        by the Corporation including written contacts, that are cancellable
        by customers at any time, and verbal agreements;
    -   sourcing, pricing and availability of raw materials, component parts,
        equipment, suppliers, facilities, and skilled personnel;
    -   the Corporation's inability to successfully address potential
        material weaknesses in internal controls or other control
        deficiencies that would affect its ability to report its financial
        results on a timely and accurate basis and to comply with disclosure
        and other requirements.
    

    Lastly, the Corporation has specific risks that result from its unique
situation. Certain officers and directors are also officers and directors of
other oil and gas or oil and gas service companies and conflicts of interest
may exist. The CEO directly or indirectly has the ability to control the votes
to approximately 41% of the issued and outstanding shares and, as such, is in
a position to significantly influence the outcome of actions requiring
shareholder approval.
    The Corporation seeks to mitigate these risks through such means as
employing highly qualified professional staff; adhering to best practices for
corporate governance and disclosure; employing proactive environmental and
safety programs with a significant emphasis on continued training; a strong
independent Board of Directors; and operating in several markets.
    These risks are outlined in greater detail in the Trust's Annual
Information Form and the Trust's Information Circular dated May 29, 2007 for
the year ended December 31, 2006.

    Critical Accounting Estimates

    The Corporation's significant accounting policies are described in Note 2
to the annual consolidated financial statements of the Trust dated
December 31, 2006. The preparation of consolidated financial statements
requires that certain estimates and judgments be made in regard to the
reported amounts of revenue and expense as well as the carrying value of
assets and liabilities. These estimates are based upon historical experience
and the judgment of management.
    The principal critical accounting estimate in respect of the Corporation
relates to amortization of property and equipment, including asset and
impairment write downs, if any. All amortization is carried out on the basis
of the estimated useful lives of the related assets. Equipment under
construction is not amortized until put into use. Included in property and
equipment is equipment acquired under capital leases. All equipment is
amortized based on the declining balance method with rates ranging from 10% to
30%.
    Assessing the reasonableness of the estimated useful lives of properties
requires judgment and is based on currently available information, including
periodic amortization studies conducted by the Corporation. Additionally, the
Corporation canvasses its competitors to ensure it utilizes methodologies and
rates consistent with the remainder of the sector in which the Corporation
operates. Changes in circumstances, such as technological advances, changes to
the Corporation's business strategy, changes in the Corporation's capital
strategy, or changes in regulations may result in the actual useful lives
differing from the Corporation's estimates.
    A change in the remaining useful life of a group of assets, or their
expected residual value, will affect the amortization rate used to amortize
the group of assets, and thus affect amortization expense as reported in the
Corporation's results of operations. These changes are reported prospectively
when they occur.
    Another important estimate made by the Corporation, in particular due to
its international exposure, is the allowance for collection of doubtful
accounts. In addition to its day-to-day monitoring of its accounts receivable
position, the Corporation has instituted detailed credit reviews prior to
commencement of contractual arrangements and the use of export insurance
provided by Export Development Canada where practical.
    Lastly, the Corporation operates in Canada and several international
jurisdictions with varying taxation policies and procedures for determining
taxable income, if any. In particular, the Corporation must estimate its
earnings and capital expenditures in Canada in order to assess whether it will
be liable for income tax.

    Related Party Transactions

    In the normal course of business, the Corporation has entered into
transactions with certain companies controlled by the CEO. During the three
months ended June 30, 2007 the Corporation paid premises rent, equipment and
vehicle leases payments of $0.3 million to these entities as compared to
$0.2 million for the same period in 2006. The Corporation had amounts payable
in connection with the above transactions of $0.7 million for June 30, 2007
compared to nil as at June 30, 2006. These transactions are evaluated annually
by management and are considered to approximate fair market value. Amounts due
to or from the related parties are non-interest bearing, unsecured and
repayable on demand except for the following. In May 2007, a company
controlled by the CEO advanced $2.0 million to the Corporation to enable the
acquisition of rental equipment that was put into service the following month
by the Corporation. The parties have negotiated that the amount is unsecured,
bears interest at 12% and is repayable on demand.

    Financial Instruments

    The Corporation has not entered into any hedge transactions and does not
have any derivative type instruments outstanding.
    On January 1, 2007, the Trust adopted the new CICA Handbook sections 3955
- Financial Instruments - Recognition and Measurement, 1530 - Comprehensive
Income, and 3865 - Hedges. The financial instruments standard establishes the
recognition and measurement criteria of financial assets, financial
liabilities and derivatives. All financial instruments are required to be
measured at fair value on initial recognition of the instrument, except for
certain related party transactions. Measurement in subsequent periods depends
on whether the financial instrument has been classified as held-for-trading,
available-for-sale, held-to-maturity, loans and receivables, or other
financial liabilities as defined by the standard.
    Financial assets and financial liabilities held-for-trading are measured
at fair value with changes in those fair values recognized in net earnings.
Financial assets available-for-sale are measured at fair value, with changes
in those fair values recognized in other comprehensive income. Financial
assets held-to-maturity, loans and receivables and other financial liabilities
are measured at amortized cost using the effective interest method of
amortization. The methods used by the Corporation in determining the fair
value of financial instruments are unchanged as a result of implementing the
new standard.
    The Corporation has no financial instruments or activities that give rise
to other comprehensive income. The Corporation's cash and cash equivalents are
designated as held-for-trading and are measured at carrying value, which
approximates fair value due to the short-term nature of these instruments.
Accounts receivable are designated as loans and receivables. Accounts payable
and accrued liabilities, distribution payable, due to related parties and the
credit facility are designated as other liabilities.

    Off-Balance Sheet Arrangements/Variable Interest Entities

    The Corporation has no off-balance sheet arrangements or variable
interest entities.

    Change in Accounting Policy

    Except for the adoption of new standards described above, the Corporation
has not changed any accounting policies since December 31, 2006.

    Internal Control over Financial Reporting

    There were no changes in the Corporation's internal controls over
financial reporting that occurred during the three and six months ended
June 30, 2007. A full disclosure of internal controls over financial reporting
and related deficiencies is included in the Trust's MD&A for the year ended
December 31, 2006.

    Outlook

    For the Corporation to be successful in addressing the risks and
opportunities outlined below, it will be critical to renegotiate its credit
facility in a timely manner (see "Credit facility") and complete new equity
financings, on terms acceptable to the Corporation, within the next six to
nine months.
    To a substantial degree, the success of the Corporation's domestic
business depends on the level of spending by exploration and production
companies for exploration, development and production activities. The oil and
gas industry, and in particular the Canadian industry, has been subject to
volatility in recent years due to significant changes in the demand for,
supply of, and pricing of natural gas and oil. Relative to recent years,
higher oil prices are expected to continue in 2007 and management expects
activity on oil production and completion services to be steady.
    Commencing in 2006 and continuing into 2007, industry activity in Canada
was negatively impacted by ongoing concerns over natural gas commodity prices,
in particular as it pertains to shallow gas and coal bed methane exploration
and development. Natural gas inventory levels in North America continue at
high levels resulting in weakened near term natural gas prices. The relatively
recent strength of the Canadian dollar relative to the US dollar has also
negatively impacted producers, as oil and gas are commodities that are
transacted in US dollars. These developments have caused exploration and
production companies to review the economic viability of natural gas and coal
bed methane exploration and development programs. This has reduced drilling
activities in these areas since the third quarter of 2006 and is expected to
continue throughout 2007. Activity levels in this market have a direct impact
on earnings of the Corporation based upon the nature of the equipment and
services that it provides. As noted above, in the first quarter of 2007 the
Corporation also completed activities under a major IPM contract that will
result in reduced revenues from this source in 2007 relative to those earned
from the contract in 2006.
    The Corporation currently expects to focus its 2007 growth efforts
primarily on international opportunities. International industry activity
levels are expected to remain steady in 2007. The demand for oil and natural
gas remains high and the maturing of many reserve basins in the Middle East is
expected to result in further reserve optimization activities. Management
believes that this circumstance fits well with the Corporation's product
service lines. An increase in new drilling activity is also expected, with
substantial funds expected to be spent by exploration and production companies
over the next five years. This will include development of new regions in
Australia, Papua New Guinea, Southeast Asia, Africa, and former Soviet
Republics, as well as expansion of existing areas and new areas in the Middle
East.
    The Corporation has taken proactive steps to address the declining
utilization of equipment being experienced by it and the oilfield service
industry in Canada. Since September 2006, the Corporation has announced new
contracts for work with major exploration and production companies in Papua
New Guinea, Kuwait and Oman and is presently active in these areas.
Additionally, the Corporation's RAPAD rig that was contracted for work in
Thailand in early 2007 completed its contract there and has moved to work for
the same Canadian-based customer in India. Lastly, the Corporation has
recently contracted a second RAPAD rig to work for Canadian-based customers
for a minimum of six months in Tunisia.

    Additional Information

    Additional information on the Corporation, including the Annual
Information Form of the Trust for the year ended December 31, 2006 and the
Trust's Information Circular dated May 29, 2007, can be found on SEDAR at
www.sedar.com.


    
    High Arctic Energy Services Inc.
    (formerly High Arctic Energy Services Trust)
    Consolidated Balance Sheets
    As at June 30, 2007 and December 31, 2006
    ($ Million Unaudited)
    -------------------------------------------------------------------------
                                                        June 30, December 31,
                                                           2007         2006
                                                              $            $
    Assets
    Current assets
    Cash and cash equivalents                               4.1          3.1
    Accounts receivable (note 9)                           40.8         38.4
    Work-in-progress                                        0.8            -
    Inventory                                               1.6          2.3
    Prepaid expenses                                        2.5          0.8
                                                       ----------------------

                                                           49.8         44.6

    Investment (note 2)                                       -          3.0

    Property and equipment (note 3)                       158.1        123.9

    Rigs and equipment under construction (note 4)         38.3         61.9
    Future taxes (note 12)                                  7.0            -
                                                       ----------------------

                                                          253.2        233.4
                                                       ----------------------
                                                       ----------------------

    Liabilities
    Current liabilities
    Current portion of credit facility (note 5)            23.2         10.9
    Accounts payable and accrued liabilities               29.1         35.1
    Distributions payable                                     -          3.3
    Due to related parties (note 8)                         2.7          0.4
                                                       ----------------------

                                                           55.0         49.7

    Credit Facility (note 5)                               86.0        107.7
                                                       ----------------------

                                                          141.0        157.4


    Shareholders' equity
    Share capital (note 6)                                126.4         89.2
    Contributed surplus (note 7)                            1.4          0.7
    Warrants (note 6)                                       0.8            -
    Retained earnings (deficit)                           (16.4)       (13.9)
                                                       ----------------------

                                                          112.2         76.0
                                                       ----------------------

                                                          253.2        233.4
                                                       ----------------------
                                                       ----------------------
    Basis of presentation (note 1)
    Commitments and contingencies (note 9)

    See accompanying notes


    Approved on behalf of the Corporation by:

    (signed) "Jed Wood"  Director     (signed) "Christopher Warren"  Director
    -------------------               -----------------------------


    High Arctic Energy Services Inc.
    (formerly High Arctic Energy Services Trust)
    Consolidated Statements of Net Earnings (Loss), Comprehensive Income
    (Loss) and Retained Earnings (Deficit)
    ($ Million except per unit amounts - Unaudited)
    -------------------------------------------------------------------------

                                      ------------------- -------------------
                                      Three months ended    Six months ended
                                       June 30,  June 30,  June 30,  June 30,
                                          2007      2006      2007      2006
                                             $         $         $         $

    Revenue                               17.6      19.8      62.3      58.4
                                      ------------------- -------------------

    Expenses
    Oilfield services                     17.5      12.8      45.1      34.0
    General and administration             9.0       4.5      13.6       8.3
    Amortization                           5.5       4.4      10.5       8.4
    Foreign exchange (gain) loss           0.2         -       0.7      (0.4)
                                      ------------------- -------------------
                                          32.2      21.7      69.9      50.3
                                      ------------------- -------------------

    Operating earnings (loss)            (14.6)     (1.9)     (7.6)      8.1

    Interest (note 4)                      1.4       0.1       2.4       0.6
    Gain on sale of property,
     equipment and investments            (2.0)        -      (3.0)        -
                                      ------------------- -------------------

    Net earnings (loss) before
     income taxes                        (14.0)     (2.0)     (7.0)      7.5

    Income taxes (recovery) (note 12)     (6.8)      0.2      (6.6)      0.5
                                      ------------------- -------------------

    Net earnings (loss) and
     comprehensive income (loss)          (7.2)     (2.2)     (0.4)      7.0

    Retained earnings (deficit) -
     beginning of period                  (9.2)     (2.4)    (13.9)     (6.0)

    Distributions as a Trust                 -      (6.9)     (2.1)    (12.5)
                                      ---------------------------------------

    Retained earnings (deficit)-
     end of period                       (16.4)    (11.5)    (16.4)    (11.5)
                                      ---------------------------------------
                                      ---------------------------------------

    Earnings (loss) per share -
     basic and diluted                 $ (0.18)  $ (0.09)  $ (0.01)  $  0.27
                                      ---------------------------------------
                                      ---------------------------------------


    Basis of presentation (note 1)
    See accompanying notes



    High Arctic Energy Services Inc.
    (formerly High Arctic Energy Services Trust)
    Consolidated Statements of Cash Flows
    ($ Million - Unaudited)
    -------------------------------------------------------------------------

                                      ------------------- -------------------
                                      Three months ended    Six months ended
                                       June 30,  June 30,  June 30,  June 30,
                                          2007      2006      2007      2006
                                             $         $         $         $

    Cash provided by (used in):

    Operating activities
    Net earnings (loss) and
     comprehensive income (loss)          (7.2)     (2.2)     (0.4)      7.0
    Add non-cash items:
      Amortization                         5.5       4.4      10.5       8.4
      Share-based compensation             0.5         -       0.7       0.1
      Future taxes (recovery)             (7.0)        -      (7.0)        -
      Gain on sale of property and
       equipment and investments          (2.0)        -      (3.0)        -
                                      ---------------------------------------
                                      ---------------------------------------

                                         (10.2)      2.2       0.8      15.5
    Change in non-cash working
     capital balances                     (0.4)     14.2      (2.0)      6.9
                                      ---------------------------------------
                                      ---------------------------------------

                                         (10.6)     16.4      (1.2)     22.4
                                      ---------------------------------------
                                      ---------------------------------------

    Investing activities
    Property and equipment and rigs
     and equipment under construction     (2.3)    (25.2)    (21.9)    (46.9)
    Proceeds on sale of property and
     equipment and investments             5.0         -       6.8         -
    Change in non-cash working
     capital balances                     (4.0)      4.5      (8.2)      0.8
                                      ---------------------------------------
                                      ---------------------------------------

                                          (1.3)    (20.7)    (23.3)    (46.1)
                                      ---------------------------------------
                                      ---------------------------------------

    Financing activities
    Advances from (to) related parties    (2.2)     (0.4)      2.3         -
    Change in long-term portion of
     credit facility                      (8.8)        -     (21.7)        -
    Issuance of shares, net of costs      25.4         -      38.0         -
    Distributions as a Trust                 -      (6.9)     (2.1)    (12.5)
    Change in non-cash working capital
     balances                             (4.0)      0.1      (3.3)      0.1
    Change in current portion of
     credit facility                       2.1      11.7      12.3      35.9
                                      ---------------------------------------
                                      ---------------------------------------

                                          12.5       4.5      25.5      23.5
                                      ---------------------------------------
                                      ---------------------------------------

    Net increase (decrease) in cash
     and cash equivalents                  0.6       0.2       1.0      (0.2)

    Cash and cash equivalents -
     beginning of period                   3.5       0.8       3.1       1.2
                                      ---------------------------------------
                                      ---------------------------------------

    Cash and cash equivalents -
     end of period                         4.1       1.0       4.1       1.0
                                      ---------------------------------------
                                      ---------------------------------------

    Supplemental information
    Cash paid for:
    Interest                               1.8       0.6       3.9       1.1
    Income taxes                           0.1       0.2       0.3       0.5



    Basis of presentation (note 1)
    See accompanying notes



    High Arctic Energy Services Inc.
    (formerly High Arctic Energy Services Trust)
    Notes to Consolidated Financial Statements
    June 30, 2007
    (tabular amounts in millions of dollars, except per unit amounts -
    Unaudited)


    1   Basis of presentation

        High Arctic Energy Services Inc. (the "Corporation") is incorporated
        under the laws of Alberta, Canada and commenced operations on
        June 29, 2007 as a consequence of reorganization through a Plan of
        Arrangement approved by the securityholders of the Trust. The
        reorganization resulted in the Corporation acquiring the business of
        the Trust through the exchange of each outstanding Trust Unit or
        Exchangeable Share of the Trust on a one-for-one basis, after
        accounting for the conversion factor applicable to certain
        Exchangeable Shares, for common shares of the Corporation (see
        note 6). For accounting purposes, the Corporation is considered a
        continuation of the Trust.

        The Corporation's principal focus is to engage in the global oilfield
        services business by providing specialized drilling and production
        services, equipment, design and development and technical support and
        training to the Canadian and international oil and gas industry. The
        Corporation's Canadian operations are considered to have some
        seasonality with peak levels in the first and fourth quarters.

        These unaudited consolidated interim financial statements are stated
        in Canadian dollars and have been prepared by management in
        accordance with Canadian Generally Accepted Accounting Principles
        ("GAAP") on a going concern basis. They follow the same accounting
        policies as the audited consolidated financial statements of the
        Trust for the year ended December 31, 2006, except as discussed
        below, and should be read in conjunction with these statements. The
        consolidated earnings and cash flows for the periods prior to June
        29, 2007 are those of the Trust. The going concern basis presumes the
        realization of assets and discharge of liabilities in the normal
        course of business for the foreseeable future. The Corporation has
        breached a significant banking covenant at June 30, 2007 (see note 5)
        by not generating sufficient cash flows from operations. The
        Corporation's ability to continue as a going concern is dependent
        upon achieving profitable operations and upon obtaining additional
        financing. While the Corporation is focusing its best efforts on
        these matters, the outcome cannot be predicted at this time. These
        financial statements do not include any adjustments to the amounts
        and classification of assets and liabilities that might be necessary
        should the Corporation be unable to continue in business and
        therefore be unable to realize its assets and discharge its
        liabilities in the normal course of business. Such adjustments could
        be material.

        On January 1, 2007, the Trust adopted the new CICA Handbook sections
        3855 - Financial Instruments - Recognition and Measurement, 1530 -
        Comprehensive Income, and 3865 - Hedges. The financial instruments
        standard establishes the recognition and measurement criteria of
        financial assets, financial liabilities and derivatives. All
        financial instruments are required to be measured at fair value on
        initial recognition of the instrument, except for certain related
        party transactions. Measurement in subsequent periods depends on
        whether the financial instrument has been classified as held-for-
        trading, available-for-sale, held-to-maturity, loans and receivables,
        or other financial liabilities as defined by the standard.
        Financial assets and financial liabilities held-for-trading are
        measured at fair value with changes in those fair values recognized
        in net earnings. Financial assets available-for-sale are measured at
        fair value, with changes in those fair values recognized in other
        comprehensive income. Financial assets held-to-maturity, loans and
        receivables and other financial liabilities are measured at amortized
        cost using the effective interest method of amortization. The methods
        used by the Corporation in determining the fair value of financial
        instruments are unchanged as a result of implementing the new
        standard.

        The Corporation has no financial instruments or activities that give
        rise to other comprehensive income. The Corporation's cash and cash
        equivalents are designated as held-for-trading and are measured at
        carrying value, which approximates fair values due to the short-term
        nature of these instruments. Accounts receivable are designated as
        loans and receivables and are measured at cost, which approximates
        fair value due to the short-term nature of these items. Accounts
        payable and accrued liabilities, distribution payable, due to related
        parties and credit facility are designated as other liabilities
        having a similar short-term nature and are measured at cost.

        The Corporation follows a policy of deferring start-up costs for new
        contracts as work-in-progress and amortizing these costs upon
        commencement of contract revenues. These costs are amortized over the
        lesser of the number of contract months or one year. Amounts deferred
        in periods prior to the three months ended June 2007 were considered
        immaterial for reporting purposes.

    2   Investment

                                                        June 30, December 31,
                                                           2007         2006
                                                              $            $
                                                       ----------------------
        Investment - at cost                                  -          3.0
                                                       ----------------------
                                                       ----------------------

        In October 2005, the Trust exercised its option to acquire 10 per
        cent of the outstanding shares of Sense EDM AS ("Sense/EDM") for
        total cash consideration of 16.5 Kroner, or approximately
        $3.0 million Canadian. On April 3, 2007, the Trust sold its
        investment in Sense/EDM for proceeds of 26.5 million Norwegian Kroner
        or approximately $5.0 million. The proceeds of the sale were
        forwarded to Sense/EDM by the purchaser and applied against amounts
        asserted by Sense/EDM to be owed to them by the Trust, pending
        resolution of a dispute (see note 9).

    3   Property and equipment

                                                       June 30, 2007
                                             --------------------------------
                                                     Accumulated
                                               Cost amortization         Net
                                                  $            $           $

        Automotive                              1.0          0.7         0.3
        Computer hardware                       0.7          0.3         0.4
        Computer software                       0.6          0.3         0.3
        Equipment - field                      36.3          9.5        26.8
        Equipment - drilling rigs              45.7          4.2        41.5
        Equipment - hydraulic workover rigs    60.1         12.0        48.1
        Equipment - snubbing, air drilling
         and nitrogen                          58.6         22.0        36.6
        Equipment - office                      0.5          0.2         0.3
        Leasehold improvements                  4.7          0.9         3.8
                                             --------------------------------
                                             --------------------------------

                                              208.2         50.1       158.1
                                             --------------------------------
                                             --------------------------------

                                                    December 31, 2006
                                             --------------------------------
                                                     Accumulated
                                               Cost amortization         Net
                                                  $            $           $

        Automotive                              0.7          0.6         0.1
        Computer hardware                       0.7          0.2         0.5
        Computer software                       0.4          0.3         0.1
        Equipment - field                      29.6          7.0        22.6
        Equipment - drilling rigs              16.2          0.6        15.6
        Equipment - hydraulic workover rigs    60.7         11.5        49.2
        Equipment - snubbing, air drilling
         and nitrogen                          52.1         19.4        32.7
        Equipment - office                      0.5          0.1         0.4
        Leasehold improvements                  3.2          0.5         2.7
                                             --------------------------------
                                             --------------------------------

                                              164.1         40.2       123.9
                                             --------------------------------
                                             --------------------------------

    4   Rigs and equipment under construction
                                                       6 Months
                                                          Ended   Year ended
                                                        June 30, December 31,
                                                           2007         2006
                                                              $            $

        Equipment - hydraulic workover and drilling rigs
        Opening balance                                    23.9         16.5
        Construction costs and capitalized interest
         added in the period                               18.6         44.0
        Units completed and transferred to property
         and equipment                                    (19.9)       (36.6)
                                                      -----------------------
                                                      -----------------------

                                                           22.6         23.9
                                                      -----------------------
                                                      -----------------------

        Equipment - snubbing, air drilling and
         nitrogen
        Opening balance                                    38.0         10.6
        Construction costs and capitalized interest
         added in the period                                1.0         40.0
        Units completed and transferred to property
         and equipment                                    (23.3)       (12.6)
                                                      -----------------------
                                                      -----------------------

                                                           15.7         38.0
                                                      -----------------------
                                                      -----------------------

                                                           38.3         61.9
                                                      -----------------------
                                                      -----------------------

        The Corporation capitalizes interest on the equipment loan relating
        to rigs and equipment under construction. During the three and six
        months ended June 30, 2007 a total of $0.5 million and $1.5 million
        was capitalized to rigs and equipment under construction respectively
        (2006 - $0.5 million and $0.5 million respectively).

    5    Credit facility

        The Corporation has secured a commitment for a new credit facility
        (see note 14). The Corporation's present credit facility is with a
        syndicate of commercial lenders. This credit facility is composed of
        a $20-million operating line and a $100-million equipment based
        revolving loan. Amounts drawn bear interest at prime plus 0.5% to
        prime plus 1% depending on the level to which the facility is drawn.
        At June 30, 2007 and at the date of these financial statements the
        rate in effect was prime plus 1%. The operating line may be drawn to
        a maximum of the lesser of $20 million and 75% of Canadian accounts
        receivable aged less than 90 days. The equipment loan may be drawn to
        a maximum of the lesser of $100 million and 75% of the appraised
        orderly liquidation value of eligible equipment. The obligations
        under the credit facility are secured by debentures under which the
        Corporation and its Canadian subsidiaries grant security over all of
        their respective assets.

        At June 30, 2007, a total of $109.2 million of the facility had been
        drawn (December 31, 2006 - $118.6 million).

        The credit facility has a one year revolving term, which may be
        extended for an additional 364 days at the discretion of the lenders
        on application by the Trust. On April 18, 2007 the Trust requested
        such an extension. On June 28, 2007 an extension was granted to July
        30, 2007 and on July 30, 2007 a further extension was granted to
        August 31, 2007. If the revolving period is not extended then the
        outstanding principal will become repayable in scheduled repayments
        as follows: to June 30, 2008 - $23.2 million; to June 30, 2009 -
        $39.7 million; to June 30, 2010 - $39.7 million; and to June 30, 2011
        - $6.6 million.

        At June 30, 2007, the Corporation had a consolidated leverage ratio
        (generally defined in its credit facility agreement as total debt
        divided by the 12-month trailing adjusted earnings before interest,
        depreciation, amortization and taxes) of approximately 5.13 to 1.0.
        On March 9, 2007 the Trust and its lenders executed an amendment
        agreement effective December 31, 2006, that amended the maximum
        permitted consolidated leverage ratio at December 31, 2006 and March
        31, 2007 to 3.6 to 1.0 and for each quarter ended thereafter to 2.75
        to 1.00. On April 30, 2007, the Trust executed with its lenders an
        agreement to waive the requirement that the proceeds of sale of the
        Sense/EDM shares be applied to amounts owing under its credit
        facility. This agreement also eliminated the requirement that amounts
        received from the issuance of equity and applied to reduce amounts
        owing under the credit facility would permanently reduce the amounts
        available to be drawn under the credit facility by an equivalent
        amount. In conjunction with their consent to the Plan of Arrangement,
        on June 28, 2007 the lenders agreed to waive compliance with
        financial covenants of the credit facility for the fiscal quarter
        ending June 30, 2007.

    6   Share capital

        Authorized

        An unlimited number of common shares and an unlimited number of
        preferred shares may be issued.

        Issued

                                               June 30,          December 31,
                                                  2007                  2006
                               ------------------------ ---------------------
                                     Shares     Amount     Shares     Amount
                                                     $                     $
    Trust Units Converted to
     Common Shares
    Opening balance               9,936,405       36.8  9,769,706       35.2
    Issuance on private placement 5,225,442       13.6          -          -
    Value attributed to warrants
     on private placement                 -       (0.8)         -          -
    Issuance on prospectus
     offering                    10,921,746       28.4          -          -
    Issued on exchange of
     Series A Exchangeable
     Shares                       3,500,000          -          -          -
    Units issued for DRIP plan
     and options                          -          -    164,699        1.6
    Unit issuance and
     reorganization costs                 -       (4.0)         -          -
    Options exercised                     -          -      2,000          -
                               ----------------------------------------------
                               ----------------------------------------------

    Common Shares (2006 - Trust
     Units) Issued               29,583,593       74.0  9,936,405       36.8
                               ----------------------------------------------

    Exchangeable Shares Converted
     to Common Shares
    Opening balance              16,190,808       52.4 15,745,453       52.4
    Exchanged - Series A
     Exchangeable Shares         (3,500,000)         -          -          -
    Change in conversion ratio -
     Series B Exchangeable Shares   167,924          -    445,355          -
                               ----------------------------------------------
                               ----------------------------------------------

    Common Shares (2006 -
     Exchangeable Shares)
     Issued                      12,858,732       52.4 16,190,808       52.4
                               ----------------------------------------------

    Common shares outstanding
     after Plan of Arrangement   42,442,325      126.4 26,127,213       89.2
                               ----------------------------------------------
                               ----------------------------------------------


        Issuance of Trust Units

        On March 28, 2007 the Trust issued 5,225,442 Trust Units and
        1,306,361 Trust Unit purchase warrants (expiring September 2008) for
        aggregate consideration of $13.6 million. On that date, the Trust
        also issued 2,500,000 Trust Units in exchange for 2,500,000
        Exchangeable Shares. The Trust valued the warrants using the
        following assumptions in the Black-Scholes model: average risk-free
        interest rate of 4.2%; average expected life of 1.5 years; expected
        volatility of 40% and a weighted average estimate of distribution
        yield of nil.

        On April 13, 2007 the Trust completed a prospectus offering of
        10,921,746 Trust Units for aggregate consideration of $28.4 million.
        Concurrent with the transaction the Trust issued 1,000,000 Trust
        Units in exchange for 1,000,000 Exchangeable Shares.

        Plan of Arrangement

        At the Annual and Special Meeting of Securityholders of the Trust
        held on June 28, 2007 unitholders, optionholders and holders of
        Exchangeable Shares approved the conversion of the Trust's business
        into a corporate structure under a Plan of Arrangement. The Plan of
        Arrangement was subsequently approved by the Alberta Court of Queen's
        Bench on June 29, 2007. Under the Plan of Arrangement, each
        outstanding Trust Unit or Exchangeable Share was exchanged, after
        accounting for the conversion factor applicable to certain
        exchangeable Shares, for one common share of the Corporation.
        Additionally, all outstanding options to acquire Trust Units, whether
        vested or not, were exchanged for options of the Corporation under
        substantially the same terms and conditions, including, without
        limitation, the same "in the money" amount, if any.

        Per share amounts

        The weighted average number of common shares outstanding for the
        three and six months ended June 30, 2007 were 41,002,095 and
        33,733,146 basic and fully diluted shares respectively (three and six
        months ended June 30, 2006 - 25,660,553 and 25,601,821 basic and
        fully diluted shares respectively).

    7   Share-based compensation plans

        The Corporation has a Share Option Plan that provides incentive for
        directors, management and key employees that provides options to
        purchase shares. A total of approximately 4,244,233 (being 10% of all
        outstanding shares) are available for grants under the plan.

        At June 30, 2007, a total of 3,397,750 shares are exercisable up to
        2012, at amounts that range from $2.20 to $13.84 per share. These
        options were all issued since July 21, 2005, have a term of 5 years
        and allow the holder to exercise their options over a three-year
        vesting period with 40% exercisable on the first anniversary date,
        30% on the second anniversary date and 30% on the third anniversary
        date. The exercisable options have an average remaining contractual
        life of 4.33 years and 689,000 options may be exercised in 2007.

                                    Number of Shares  Average Amount $/share

        Total December 31, 2006            1,619,000                   12.62

        Granted                            2,163,900                    2.95
        Exercised                                  -                       -
        Forfeited                           (385,150)                   8.69

        Total June 30, 2007                3,397,750                    5.49

        The Corporation recognized share-based compensation expense and
        contributed surplus of $0.7 million for the six months ended June 30,
        2007 (2006 - $0.1 million) using the following assumptions in the
        Black-Scholes model: average risk-free interest rate of 4.2%; average
        expected life of 5 years; expected volatility of 40% and a weighted
        average estimate of distribution yield of nil (2006 - 8.65%).

    8   Related party transactions

        In the normal course of business, during the three and six months
        ended June 30, 2007 the Corporation paid premises rent of
        $0.3 million and $0.6 million ($0.2 million and $0.4 million during
        the three and six months ended June 30, 2006) and equipment and
        vehicle leases payments of $0.3 million and $0.6 million
        ($0.2 million and $0.4 million during the three and six months ended
        June 30, 2006), to companies controlled by the CEO. At June 30, 2007
        the Corporation had amounts payable in connection with the
        transactions of $0.7 million (June 30, 2006 - Nil).

        These transactions are measured at exchange values based on rates
        charged to arms length customers which, in the opinion of management,
        approximate fair value.

        Amounts due to or from the related parties are non-interest bearing,
        unsecured and repayable on demand except for the following. In May
        2007, a company controlled by the CEO advanced $2.0 million to the
        Corporation to enable the acquisition of rental equipment that was
        put into service the following month by the Corporation. The parties
        have negotiated that the amount is unsecured, bears interest at 12%
        and is repayable on demand.

    9   Commitments and contingencies

        Rigs under construction

        In July 2005, the Trust entered into a contract with Sense/EDM AS
        ("Sense/EDM"), a Norwegian rig manufacturer, to purchase sixteen rigs
        with an option to cancel the order for all but five of the rigs,
        subject to certain conditions. During 2006, the Trust determined that
        it only wished to take delivery of and complete ten of the
        contracted-for rigs for an estimated cost of approximately
        $65.0 million, with deliveries forecast to take place in 2006 and
        2007. As a result, the Trust cancelled the order for the remaining
        six rigs.

        In 2006, the Trust took delivery of and completed four rigs for a
        total cost of $29.2 million and had two rigs under construction. In
        accordance with performance provisions in the contract and in light
        of the late deliveries and other performance issues of Sense/EDM, the
        Trust commenced negotiations to suspend the order for the final four
        rigs.

        On March 6, 2007, Sense/EDM asserted that the Corporation was still
        required to take delivery of the final four rigs and that they are
        owed approximately $20 million, including interest, for costs
        pertaining to the acquisition and completion of these rigs and for
        the rigs delivered to date or under construction.

        At December 31, 2006, the Trust had recorded net amounts payable to
        Sense/EDM of approximately $8.0 million that the Trust believed
        represented the maximum amount it was exposed for under this
        contract. During the quarter ended March 31, 2007, the Trust paid
        $3.0 million to Sense/EDM and negotiated the sale of its investment
        in Sense/EDM for a further 26.5 million Norwegian Kroner or
        approximately $5.0 million. This sale closed on April 3, 2007 with
        the proceeds being forwarded to Sense/EDM by the purchaser and
        applied on account to amounts ultimately determined as being owed,
        pending resolution of the dispute.

        An agreement to settle the dispute was reached in May, 2007, subject
        to finalization of a new rig purchase agreement that has yet to
        occur. It was agreed that the rigs that the Trust had previously
        taken delivery of have been paid for in full and that the purchase
        price for four additional rigs, including the two noted above as
        presently targeted for completion in 2007, will be re-negotiated with
        a fixed price and specified payment dates based upon construction
        progress. All other alleged commitments for additional rigs will be
        terminated in exchange for a cancellation fee paid for one rig on
        which Sense/EDM had commenced construction. Finalization of the
        settlement on the terms agreed to will result in the future
        acquisition of four rigs and a future obligation for the Corporation
        of approximately $18-20 million.

        Accounts receivable

        On May 7, 2007 High Arctic Energy Services Limited Partnership (a
        subsidiary of the Corporation) filed a claim against Transeuro Energy
        Corp. ("Transeuro") for approximately $14.6 million plus interest and
        costs. The claim demands payment for services rendered by High Arctic
        Energy Services Limited Partnership to Transeuro in late 2006 and
        early 2007 in accordance with the contract entered into by the
        parties to provide drilling services at the Beaver River, British
        Columbia location of Transeuro. The claim was brought as Transeuro
        has refused repeated requests for payment of amounts due to High
        Arctic Energy Services Limited Partnership.

        Subsequent to the filing of its claim, the Corporation received a
        copy of a claim filed by Transeuro in the Supreme Court of British
        Columbia against a Dubai subsidiary of the Trust, High Arctic Energy
        Services LLC ("High Arctic Dubai"), asserting certain entities owned
        by the Trust are in breach of various obligations. Among other
        things, the claim asserts that High Arctic Dubai has overcharged for
        the Beaver River services. There are further claims related to
        actions taken by High Arctic Dubai in Dubai in response to the
        failure of Transeuro to pay amounts owing for services rendered in
        Dubai, Armenia, Papua New Guinea and the Ukraine. The Corporation
        views the assertions against High Arctic Dubai with respect to the
        Canadian and Dubai activities as discrete issues and without merit.

        No timetable has been set for the hearing of the claim by High Arctic
        Energy Services Limited Partnership. or the claim by Transeuro.

        The Corporation has not agreed to Transeuro's assertions and believes
        the Corporation's litigation position is strong. The Corporation has
        demanded payment of approximately $30 million from Transeuro.
        Approximately one-half of this amount relates to international
        contracts and one-half to the Canadian Beaver River contract. The
        Corporation is pursuing collection of the entire amount owing plus
        any related costs and damages.

        Nevertheless, due to a lack of certainty regarding collectability,
        risks inherent in the litigation process, and disputes regarding
        cancellation fees, invoices and contract terms the Corporation has
        provided for $11.25 million in relation to the Transeuro amounts. The
        $11.25 million consists of $5.0 million in relation to revenue that
        is not recognized in these financial statements due to uncertainty of
        collection and an allowance for bad debt expense of $6.25 million
        relating to the uncertainty over collection of the remaining
        receivable. These financial statements reflect a net receivable of
        $18.75 million which is less than the amount that the Corporation's
        management expects to ultimately collect.

        Income taxes

        The Corporation has been informed by a customer in Turkmenistan that
        there is a possible exposure to the Corporation of US $1.9 million
        for taxes in that jurisdiction. Management believes that it has
        calculated and remitted all taxes properly due in Turkmenistan and
        the asserted tax exposure is without merit. Therefore, no amount has
        been accrued in these financial statements for this potential
        exposure.

        Lease obligations

        The Corporation has entered into long-term premises leases with a
        related party, described in note 8, that expire in 2009. The leases
        contain an option to renew for a further five years. Future minimum
        lease payments as at June 30, 2007 are:

        To June 30, 2008                 1.1
        To June 30, 2009                 1.0
        To June 30, 2010                 0.3
                                      -------
                                      -------
                                         2.4
                                      -------
                                      -------
    10  Credit risk

        During the three and three and six months ended June 30, 2007, 72%
        and 56% of the Corporations sales (34% and 38% during the three and
        six months ended June 30, 2006) were to two customers. At June 30,
        2007, 84% of the Trust's accounts receivables (2006 - 84%) were from
        these customers.

    11  Segmented information

        The Corporation operates one business of providing oilfield services
        to customers. This business has the following geographic
        characteristics:

                                      Three months ended    Six months ended
                                       June 30,  June 30,  June 30,  June 30,
                                          2007      2006      2007      2006
                                             $         $         $         $

        Revenue
        Canada                             8.3      14.5      40.8      49.3
        International
          Papua New Guinea                 3.2         -       6.0         -
          United Arab Emirates             1.1       1.9       4.5       3.3
          Saudi Arabia                     2.0       0.7       4.5       1.0
          Thailand                         1.4         -       3.8         -
          Oman                             0.5         -       1.2         -
          India                            0.4         -       0.4         -
          Turkmenistan                       -       2.4         -       4.3
          Other                            0.7       0.3       1.1       0.5
                                     ----------------------------------------
        Total International                9.3       5.3      21.5       9.1
                                     ----------------------------------------
                                          17.6      19.8      62.3      58.4
                                     ----------------------------------------
                                     ----------------------------------------



                                                        June 30, December 31,
                                                           2007         2006
                                                              $            $
        Property and equipment and rigs and equipment
         under construction
        Canada                                            160.3        153.0
        United Arab Emirates                               36.1         32.8
                                                       ----------------------

                                                          196.4        185.8
                                                       ----------------------
                                                       ----------------------

    12  Income taxes

        The Corporation uses the liability method of tax allocation in
        accounting for income taxes. Under this method, future tax assets and
        liabilities are determined for the income tax consequences
        attributable to differences between amounts recorded in the financial
        statements and their respective tax bases, using substantially
        enacted tax rates. The effect of any change in income tax rates on
        future tax assets and liabilities is recognized in earnings in the
        period that the change occurs. Effective with the reorganization from
        a Trust, the Corporation recognized in earnings and recorded a tax
        asset of $7.0 million pertaining to the difference in tax bases for
        property, plant and equipment and financing costs.

    13  Supplementary information

        The net change in the following non-cash working capital items
        increases (decreases) cash flows as follows:

                                      Three months ended    Six months ended
                                       June 30,  June 30,  June 30,  June 30,
                                          2007      2006      2007      2006
                                             $         $         $         $

        Operations
        Accounts receivable                4.2      11.4      (3.2)      5.3
        Inventory and prepaid expenses    (1.4)     (1.3)     (1.0)     (1.3)
        Accounts payable and accrued
         liabilities                      (3.2)      4.1       2.2       2.9
                                     ----------------------------------------

                                          (0.4)     14.2      (2.0)      6.9
                                     ----------------------------------------
                                     ----------------------------------------

        Investing
        Accounts payable and accrued
         liabilities                      (4.0)      4.5      (8.2)      0.8
                                     ----------------------------------------
                                     ----------------------------------------


        Financing
        Distributions payable             (4.0)      0.1      (3.3)      0.1
                                     ----------------------------------------
                                     ----------------------------------------

    14  Subsequent events

        In early July 2007, the Corporation secured a commitment on a fully
        underwritten basis for up to $155-million of financing from a
        Canadian affiliate of GE Energy Financial Services. The financing is
        comprised of up to an $80-million senior secured revolving credit
        facility and up to US$75-million of senior second lien loans.

        This financing, that is progressing through final due diligence, will
        be used to refinance the Corporation's credit facility, in which the
        GE Energy Financial Services affiliate served as agent, and to fund
        working capital and future opportunities. The GE Energy Financial
        Services affiliate will also provide $20-million in bridge financing
        until the new financing is completed, which is now anticipated to be
        after August 31, 2007.

        The senior secured revolving credit facility is for an initial term
        of 364 days and amounts available to be drawn are based upon a
        borrowing base calculation that includes eligible accounts receivable
        and equipment. The revolving facility would initially bear interest
        at prime plus 0.8%. The senior second lien notes have a term of
        5.5 years, are repayable upon maturity, callable, and are estimated
        to bear interest at a rate of LIBOR plus 8%. The revolving credit
        facility and senior second lien loans are secured in a manner
        customary for such debt.
    

    %SEDAR: 00025582E




For further information:

For further information: Jed Wood, President and Chief Executive
Officer, High Arctic Energy Services Inc., Tel: (403) 340-9825,
jed.wood@haes.ca

Organization Profile

High Arctic Energy Services Inc.

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