Pure Energy Services Ltd. Announces Results for the Second Quarter Ended June 30, 2009

CALGARY, ALBERTA--(Marketwire - Aug. 12, 2009) - Pure Energy Services Ltd. PSV /T/ Selected Consolidated Financial Information ---------------------------------------------------------------------------- Three months ended Six months ended ($ thousands, except per share June 30, June 30, amounts)(unaudited) 2009 2008 2009 2008 ---------------------------------------------------------------------------- Revenue $ 18,859 $32,087 $ 64,510 $ 78,782 Gross margin $ (1,045) $ 3,809 $ 8,006 $ 16,415 Gross margin % (6%) 12% 12% 21% General and administrative expenses $ 4,513 $ 4,847 $ 8,917 $ 10,144 EBITDA (1) $ (5,837) $(1,020) $ (821) $ 6,276 EBITDAS (1) $ (5,756) $ (838) $ (649) $ 7,138 Net loss $ (19,654) $(3,748) $(19,695) $ (1,690) Loss per share: Basic $ (1.18) $ (0.24) $ (1.21) $ (0.11) Diluted $ (1.18) $ (0.24) $ (1.21) $ (0.11) Funds flow from operations (2) $ (6,255) $(1,821) $ (2,417) $ 4,778 ---------------------------------------------------------------------------- June 30, December 31, 2009 2008 --------------------------- Total assets $ 231,068 $ 227,810 Total long-term debt $ 76,065 $ 65,314 ---------------------------------------------------------------------------- (1) EBITDA and EBITDAS do not have standardized meanings prescribed by Canadian generally accepted accounting principles ("GAAP"). Management believes that, in addition to net income, EBITDA and EBITDAS are useful supplemental measures. EBITDA and EBITDAS are provided as measures of operating performance without reference to financing decisions, amortization or income tax impacts, which are not controlled at the operating management level. EBITDAS also excludes stock-based compensation expense as it is also not controlled at the operating management level. Investors should be cautioned that EBITDA and EBITDAS should not be construed as alternatives to net income determined in accordance with GAAP as an indicator of the Corporation's performance. The Corporation's method of calculating EBITDA and EBITDAS may differ from that of other corporations and accordingly may not be comparable to measures used by other corporations. The Corporation calculates EBITDA and EBITDAS as follows: Three months ended Six months ended June 30, June 30, ($ thousands) 2009 2008 2009 2008 ---------------------------------------------------------------------------- Net loss before income tax $ (26,872) $ (5,318) $(26,410) $ (2,471) Add: Depreciation expense 3,739 3,696 7,804 7,402 Impairment of property and equipment 16,925 - 16,925 - Interest expense 371 602 860 1,345 ---------------------------------------------------------------------------- EBITDA $ (5,837) $ (1,020) $ (821) $ 6,276 Add: Stock based compensation expense 81 182 172 862 ---------------------------------------------------------------------------- EBITDAS $ (5,756) $ (838) $ (649) $ 7,138 ---------------------------------------------------------------------------- (2) Funds flow from operations is defined as cash from operating activities before changes in non-cash working capital, as presented on the Corporation's statement of cash flows. Funds flow from operations is a measure that provides investors with additional information regarding the Corporation's liquidity and its ability to generate funds to finance its operations. Funds from operations does not have a standardized meaning prescribed by GAAP and may not be comparable to similar measures provided by other corporations. /T/ Second Quarter Highlights In the midst of a challenging operating environment, Pure continued to remain focused on strengthening its business operations through the expansion of its Canadian wireline and production testing operations with its June 22, 2009 merger with CanSub. The merger of Pure and CanSub creates one of the largest providers of wireline and production testing services in the WCSB. After closing of the merger, and following the disposition of redundant equipment, Pure now operates a total fleet of 89 wireline units, 116 production testing units and 10 swabbing units in its Canadian and US completions services segments. Combined, Pure and CanSub are a stronger company which will provide a number of benefits, including: - Increased customer base; - Increased exposure to unconventional oil and gas plays such as the Horn River and Montney gas plays in north eastern British Columbia, and the Bakken oil play in Saskatchewan and North Dakota; - The increased fleet size and diversity of equipment which will allow the Corporation to reallocate equipment to support the growth of new markets in the US, such as the Marcellus shale gas play, as well as to better support the Corporation's existing operations; - Improved cost efficiencies through consolidation of the existing operating and support infrastructures as well as cost benefits resulting from economies of scale; and - Further diversification of customers, geographic coverage and services. Integration efforts have begun and management is excited about the positive response seen from both the CanSub and Pure employees and from the Corporation's customers. This positive news event during the quarter was a welcome break in the otherwise frustrating and challenging environment that the industry is currently experiencing. Low natural gas prices have negatively impacted industry activity, which has resulted in lower activity and pricing for both the Corporation's US and Canadian operations. Activity in Pure's Canadian operations was further negatively impacted by the seasonal activity declines associated with spring breakup. As a result of the lower activity and pricing declines for the Corporation's services, revenue during the quarter declined to $18.9 million from $32.1 million in the second quarter of 2008. While revenue declined in all three of the Corporation's operating segments, the US continued to provide the largest contribution to the Corporation's results with US revenue accounting for 69% of Pure's consolidated revenue. This result demonstrates the strength in Pure's diversified business operations. The lower revenue and activity was not sufficient to offset fixed operating costs and the costs associated with seasonal repair and maintenance activities resulting in a negative consolidated gross margin of $1.0 million versus a positive consolidated gross margin of $3.8 million in the second quarter of 2008. Consistent with the decline in gross margin, consolidated EBITDA decreased $4.8 million to a loss of $5.8 million versus the $1.0 million loss incurred in the second quarter of 2008. Partially offsetting the impact of the lower gross margin on EBITDA was a $0.3 million decline in general and administrative expenses due to cost saving initiatives implemented by the Corporation. As previously announced, on August 6, 2009, Pure agreed to sell its well fracturing business. As a result of this sale the Corporation recognized a $16.9 million, $11.8 million net of tax, asset impairment in the second quarter due to the proceeds from the sale being less than the carrying value of the assets as at June 30, 2009. The effect of this asset impairment combined with the lower operating results resulted in a net loss for the quarter of $19.7 million, or $1.18 per share, versus the $3.7 million loss, or $0.24 per share, generated in the second quarter of 2008. Excluding the impact of the asset impairment, the net loss for the quarter was $7.9 million or $0.47 per share. The lower activity experienced in the second quarter combined with below normal activity in the first quarter of 2009 has resulted in consolidated revenue of $64.5 million year to date versus $78.8 million generated in the first six months of 2008. While activity has been stronger in the Corporation's US operations, it has not been sufficient to offset the significant decline in Canadian activity experienced in the first six months of 2009 compared to 2008. Similar to the discussion above for the second quarter results, the lower activity and revenue rates experienced year to date have resulted in a $8.4 million decline in gross margin to $8.0 million year to date compared to $16.4 million in the first six months of 2008. This decline in gross margin was also reflected in the lower EBITDA of a loss of $0.8 million versus a positive EBITDA of $6.3 million in the comparative period in 2008. A $1.2 million reduction in general and administrative expenses year to date has helped to mitigate the impact of lower operating results on EBITDA. The significant impact of the second quarter asset impairment has resulted in a year to date net loss of $19.7 million, or $1.21 per share, versus the $1.7 million net loss, or $0.11 per share, incurred in the first six months of 2008. Excluding the impact of the asset impairment and associated income taxes, the net loss year to date is $7.9 million or $0.49 per share. Activity has increased in both the Corporation's US and Canadian operations subsequent to quarter end. Management believes that these improved activity levels combined with cost reduction initiatives implemented to date will allow the Corporation's operating margins to improve in the third quarter. This anticipated improvement in operating results combined with the proceeds from the sale of the Corporation's well fracturing assets provides the Corporation with the strength to manage through the weakness currently being experienced in the industry. CanSub Merger On June 22, 2009, Pure closed its previously announced merger with CanSub after CanSub shareholders voted 99.99% in favour of the merger. The merger was completed by way of a plan of arrangement under the Business Corporations Act (Alberta) whereby CanSub shareholders received 0.3017 of a Pure common share for each CanSub Class A common share. A total of 7,835,216 shares were issued to the previous CanSub shareholders. Following completion of the merger, the previous shareholders of Pure own approximately 67% of Pure's outstanding common shares, and the previous shareholders of CanSub own approximately 33% of Pure's outstanding common shares. As a result of the merger with CanSub and following the disposition of redundant equipment, Pure now operates a total fleet of 89 wireline units, 116 production testing units and 10 swabbing units in its Canadian and US completions services segments. Combined, Pure and CanSub are a stronger company which will provide a number of benefits including: - Increased customer base; - Increased exposure to unconventional oil and gas plays such as the Horn River and Montney gas plays in north eastern British Columbia, and the Bakken oil play in Saskatchewan and North Dakota; - The increased fleet size and diversity of equipment which will allow the Corporation to reallocate equipment to support the growth of new markets in the US, such as the Marcellus shale gas play in Pennsylvania, as well as to better support the Corporation's existing operations; - Improved cost efficiencies through consolidation of the existing operating and support infrastructures as well as cost benefits resulting from economies of scale; and - Further diversification of customers, geographic coverage and services. Management is excited about the opportunities the combined entity has to improve the financial and operating performance for the Corporation in the future. Subsequent Event On August 6, 2009 the Corporation entered into a definitive agreement to sell the Corporation's well fracturing assets for total proceeds of $42.8 million before post closing adjustments and the purchase of associated inventory. The Corporation will receive $39.8 million of the proceeds on closing, August 14, 2009, with the remaining $3.0 million, before post closing adjustments to be received on August 28, 2009 upon final inspection of the equipment by the purchaser to ensure there are no material operating deficiencies. Pure estimates that its net indebtedness will reduce by approximately $39.0 million, net of closing costs, post closing adjustments and the sale of inventories. A significant amount of capital resources and management time have been invested over the last four years developing Pure's well fracturing operations. Management is proud of the operational success that has finally been generated from the perseverance and hard work of Pure's employees in developing this business, however, due to the significant capital resources required to further grow and support this business operation and the current limited return on this investment, management has determined that a more defined focus on production testing and wireline for Pure's well completions operations will provide Pure and its shareholders with a greater long-term return on capital invested. As a result of the sale, Pure has recorded an impairment of $16.9 million, $11.8 million net of tax, in its second quarter financial results to reflect the difference between the carrying value of the fracturing assets versus the estimated sales price, net of post closing adjustments. Despite the lower proceeds received versus book value, management believes that the value generated from the immediate reduction of Pure's debt and investment in alternative areas of higher return operations, such as production testing, will provide greater future value for Pure's shareholders. The sale of the Corporation's well fracturing assets is part of Pure's focus on improving its balance sheet and providing Pure with the ability to act upon potential opportunities for expansion and growth in the Corporation's remaining business operations. /T/ Results of Operations US Completion Services ---------------------------------------------------------------------------- Three months ended June 30 ($ thousands) (unaudited) 2009 2008 Variance % Change ---------------------------------------------------------------------------- Revenue $ 12,991 $ 22,142 $ (9,151) (41%) Operating expenses 11,889 17,878 (5,989) (33%) ---------------------------------------------------------------------------- Gross margin $ 1,102 $ 4,264 $ (3,162) (74%) ---------------------------------------------------------------------------- Gross margin % 8% 19% (11%) (58%) Average units available during the period: Production testing 33.3 31.0 2.3 7% Wireline 6.0 3.0 3.0 100% Fracturing spreads 3.0 3.0 - 0% ---------------------------------------------------------------------------- Number of jobs completed: Production testing 1,104 1,937 (833) (43%) Wireline 297 234 63 27% Fracturing 177 369 (192) (52%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six months ended June 30 ($ thousands) (unaudited) 2009 2008 Variance % Change ---------------------------------------------------------------------------- Revenue $ 37,258 $ 35,804 $ 1,454 4% Operating expenses 30,925 29,517 1,408 5% ---------------------------------------------------------------------------- Gross margin $ 6,333 $ 6,287 $ 46 1% ---------------------------------------------------------------------------- Gross margin % 17% 18% (1%) (6%) Average units available during the period: Production testing 33.7 28.9 4.8 17% Wireline 6.0 3.0 3.0 100% Fracturing spreads 3.0 3.0 - 0% ---------------------------------------------------------------------------- Number of jobs completed: Production testing 2,679 3,849 (1,170) (30%) Wireline 696 406 290 71% Fracturing 369 520 (151) (29%) ---------------------------------------------------------------------------- /T/ Low industry activity combined with competitive pricing pressure for Pure's services caused revenue in the USCS segment to decline to $13.0 million during the quarter from the $22.1 million generated in the second quarter of 2008. The largest activity and revenue declines were experienced in the segment's well fracturing and production testing operations. The decline in well fracturing activity was due to a significant slowdown in industry activity in the Piceance basin in Colorado, which is the well fracturing division's primary area of operation. During the quarter, the division operated only one of its three fracturing spreads. To help mitigate the impact of the lower activity levels in the Piceance basin, one of the division's fracturing spreads was transferred to Wyoming where the division successfully completed its first fracturing job in Wyoming. Following completion of this job, the fracturing spread was relocated to North Dakota where it commenced fracturing operations for a long-term customer in July. Activity in the segment's production testing division was negatively impacted by low natural gas prices which caused a sharp decline in industry activity in Colorado and Wyoming. Activity in the division's oil-focused North Dakota operation was negatively impacted by spring breakup conditions which prevented the movement of equipment onto wet lease locations during the quarter. In addition, low oil prices during the early part of the quarter hampered industry activity in North Dakota. On a positive note, the division's strong customer relationships in Colorado combined with a novel well testing approach introduced by Pure allowed Pure to offset the impact of lower industry activity in Colorado during the quarter and generate strong utilization of its production testing equipment in the state. The novel production testing process introduced by Pure allows the division to simultaneously test up to 10 wells on a single well site location. This new approach allows Pure's customers to bring their wells onto production faster, thus saving Pure's customers the cost associated with extended production testing time combined with the advantage of allowing the customer's wells to begin commercial production quicker. Activity increased for the segment's wireline operations in the quarter versus the second quarter of 2008. The higher job count attained by the division in the quarter was due to the increase in number of wireline units operating in the division combined with the division's strong customer relationships and operational performance. During the quarter the wireline division was awarded a significant contract with a new customer in Wyoming completing technical high pressure perforating operations on a 24 hour basis. Work for this customer is expected to continue in the third quarter, with the possibility of increasing the amount of work for this customer due to strong operational performance to date. The lower overall activity levels generated in the USCS segment during the quarter and high fixed operating costs associated with the segment's well fracturing division caused gross margin as a percentage of revenue to decline to 8% in the quarter versus the 19% gross margin attained in the second quarter of 2008. Gross margin was $1.1 million during the quarter versus $4.3 million in the second quarter of 2008. To help mitigate the impact of the lower activity and revenue rates, the USCS segment implemented a number of cost saving initiatives including staff reductions, wage rollbacks, and supplier cost reductions. However, the high fixed cost structure of the segment's well fracturing and wireline divisions prevented the cost reduction initiatives from fully offsetting the impact of the lower activity levels and revenue rate reductions experienced in the quarter. On a year to date basis, the USCS segment has generated $37.3 million in revenue which exceeds the $35.8 million in revenue generated by the segment in the first six months of 2008. The higher revenue result year to date is due to the high revenue contribution from the segment's well fracturing division in the first quarter of 2009 relative to the first quarter of 2008. In addition, the increase in wireline and production testing equipment operating in the segment subsequent to the second quarter of 2008 has positively impacted revenue as well. The positive contribution from the first quarter of 2009 resulted in $6.3 million in gross margin year to date, which is consistent with the $6.3 million in gross margin generated in the first six months of 2008 in spite of the lower financial results generated in the second quarter of 2009. The strong contribution from the first quarter of 2009 combined with the cost reduction initiatives implemented year to date have allowed the USCS segment to attain a gross margin as a percentage of revenue of 17% year to date which is comparable to the 18% achieved in the comparative period of 2008. As discussed previously, the Corporation entered into a definitive agreement on August 6, 2009 to sell its well fracturing division. This division generated $5.7 million in revenue and incurred a gross margin loss of $0.5 million during the second quarter of 2009 versus $11.5 million in revenue and $1.3 million in gross margin in the second quarter of 2008. Year to date, the well fracturing division has generated $17.4 million in revenue and $1.2 million in gross margin versus $15.4 million in revenue and $0.6 million in gross margin in the first six months of 2008. /T/ Canadian Completion Services ---------------------------------------------------------------------------- Three months ended June 30 ($ thousands) (unaudited) 2009 2008 Variance % Change ---------------------------------------------------------------------------- Revenue $ 5,390 $ 7,124 $ (1,734) (24%) Operating expenses 6,956 7,657 (701) (9%) ---------------------------------------------------------------------------- Gross margin $ (1,566) $ (533) $ (1,033) (194%) ---------------------------------------------------------------------------- Gross margin % (29%) (7%) (22%) (314%) Average units available during the period: Production testing 39.4 36.3 3.1 9% Wireline 38.4 37.0 1.4 4% ---------------------------------------------------------------------------- Number of jobs completed: Production testing 455 453 2 0% Wireline 605 850 (245) (29%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six months ended June 30 ($ thousands) (unaudited) 2009 2008 Variance % Change ---------------------------------------------------------------------------- Revenue $ 17,716 $ 25,461 $ (7,745) (30%) Operating expenses 17,684 20,554 (2,870) (14%) ---------------------------------------------------------------------------- Gross margin $ 32 $ 4,907 $ (4,875) (99%) ---------------------------------------------------------------------------- Gross margin % 0% 19% (19%) (100%) Average units available during the period: Production testing 37.2 38.3 (1.1) (3%) Wireline 36.4 37.0 (0.6) (2%) ---------------------------------------------------------------------------- Number of jobs completed: Production testing 1,834 2,896 (1,062) (37%) Wireline 1,591 2,344 (753) (32%) ---------------------------------------------------------------------------- /T/ Revenue for the CCS segment declined by 24% to $5.4 million in the quarter from $7.1 million in the second quarter of 2008. The decline in revenue is primarily related to the segment's wireline division which experienced a 29% decline in jobs completed and a 28% decline in average job pricing in the quarter versus the second quarter of 2008. While industry activity during the second quarter is traditionally low due to spring breakup conditions, activity was further hampered by low natural gas prices and uncertainty surrounding a number of changes in Alberta provincial royalty rates that came into effect January 1, 2009. Temporary royalty incentives were introduced during the first quarter of 2009 in an effort to promote drilling during 2009, however, low cash flows caused by low commodity prices, combined with uncertainty in the credit and equity markets have limited the ability of oil and natural gas exploration and production companies to increase their investment in the province at this time. Stronger results achieved in the production testing division, which experienced a slight increase in jobs completed in the quarter versus the second quarter of 2008, partially mitigated the decline in activity and pricing experienced in the wireline division. This increase in activity was associated with the expansion of the production testing division's high pressure northern British Columbia activity. In addition to benefiting from higher activity, the complexity of this work results in higher pricing for the division's services which experienced a 43% increase in average job pricing in the quarter versus the second quarter of 2008 which had less northern activity. Average pricing in the production testing division increased due to the impact of pass-through items such as equipment rentals, transportation and certain equipment maintenance associated with these northern projects. While these pass-through items increase average revenue rates, they have a nominal impact on the division's gross margin as these items are generally passed through to customers at cost. As a result of the lower activity and pricing levels for the segment's wireline division combined with higher costs associated with seasonal equipment maintenance for both divisions, the CCS segment incurred a negative gross margin of $1.6 million during the quarter versus the $0.5 million negative gross margin incurred in the second quarter of 2008. In response to the lower activity and reduced margins, the CCS segment has undertaken a number of cost reduction measures, including staffing reductions, wage rollbacks, reduction in support costs, and the reduction of discretionary spending. The CCS segment has also chosen to temporarily park excess wireline and production testing units in response to the lower activity and to eliminate all variable costs related to these units. These units will be brought back into service once warranted by improved activity in the industry. On a year to date basis, the CCS segment has generated $17.7 million in revenue versus $25.5 million generated in the first six months of 2008. This 30% revenue decline is consistent with the 35% reduction in total jobs completed by the segment. Similar to the discussion above for the second quarter, lower average pricing has been experienced in the segment's wireline division, which has been partially mitigated by higher average pricing in the production testing division due to its increased exposure to northern British Columbia work. The lower revenue and activity levels have resulted in the segment's gross margin declining to break-even year to date versus a positive $4.9 million gross margin generated in the first six months of 2008. The first six months of 2008 benefited from a much stronger first quarter than the first quarter of 2009 due to higher natural gas prices. This higher activity resulted in higher revenue and gross margins as a percentage of revenue in the first two quarters of 2008 versus 2009. /T/ Drilling Services ---------------------------------------------------------------------------- Three months ended June 30 ($ thousands) (unaudited) 2009 2008 Variance % Change ---------------------------------------------------------------------------- Revenue $ 478 $ 2,821 $ (2,343) (83%) Operating expenses 1,059 2,743 (1,684) (61%) ---------------------------------------------------------------------------- Gross margin $ (581) $ 78 $ (659) (845%) ---------------------------------------------------------------------------- Gross margin % (122%) 3% (125%) (4,167%) Average units available during the period: Drilling rigs 10.0 10.0 - 0% Mud motors 62.0 59.0 3.0 5% Utilization: Drilling rigs 4% 17% (13%) (76%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six months ended June 30 ($ thousands) (unaudited) 2009 2008 Variance % Change ---------------------------------------------------------------------------- Revenue $ 9,536 $ 17,517 $ (7,981) (46%) Operating expenses 7,895 12,296 (4,401) (36%) ---------------------------------------------------------------------------- Gross margin $ 1,641 $ 5,221 $ (3,580) (69%) ---------------------------------------------------------------------------- Gross margin % 17% 30% (13%) (43%) Average units available during the period: Drilling rigs 10.0 10.0 - 0% Mud motors 58.4 59.0 (0.6) (1%) Utilization: Drilling rigs 21% 45% (24%) (53%) ---------------------------------------------------------------------------- /T/ While industry drilling activity is traditionally seasonally low during the second quarter due to spring breakup in the WCSB, low gas prices resulted in industry drilling activity for the second quarter of 2009 being the lowest since the 1990's (source: Daily Oil Bulletin). Industry drilling rig utilization was 10% during the quarter versus 19% in the second quarter of 2008 CAODC. Similar to the lower industry utilization, utilization of Pure's drilling rigs declined to 4% during the quarter from 17% in the second quarter of 2008. The lower activity, combined with a 23% decline in average pricing for the segment's drilling rig services, caused revenue to decline to $0.5 million during the quarter from $2.8 million in the second quarter of 2008. The lower activity also caused revenue for the segment's directional drilling operation to decrease by 83% to $0.1 million during the quarter. Average day pricing for the segment's drilling rigs decreased to approximately $10,000 per day during the quarter from $13,000 per day in the second quarter of 2008. The decline in revenue was due to a combination of intense competitive pricing pressure as well as a reduction in third party pass-through revenue items such as fuel, equipment rentals and trucking. The decreased revenue for the Drilling Services segment combined with ongoing fixed costs resulted in a negative gross margin of $0.6 million during the quarter versus a positive gross margin of $0.1 million in the second quarter of 2008. In response to the lower activity currently being experienced, similar to the other segments, management has taken steps to reduce operating costs through the reduction of staffing levels. In addition, the CAODC voted to reduce field wages by approximately 10% effective May 1, 2009. This wage reduction largely reverses the previous wage increase implemented by the CAODC in October 2008. While the field staff wage reductions will help reduce operating costs, management expects these cost savings will continue to be largely offset by reduced revenue rates in response to competitive pricing in the industry. The lower activity experienced in the second quarter is consistent with the lower activity experienced in the first quarter, resulting in the Drilling Services segment generating $9.5 million in revenue year to date versus the $17.5 million generated in the first six months of 2008. Year to date utilization for the industry's drilling rigs is only 23% versus the 37% experienced in the first six months of 2008 CAODC. Utilization of the segment's drilling rigs is consistent with industry at 21% versus the 45% utilization the division attained in the first six months of 2008. Similar to the second quarter results, the lower year to date activity levels combined with a 10% reduction in average pricing have caused gross margin to decline to $1.6 million year to date versus $5.2 million in the first six months of 2008. General and Administrative Expenses General and administrative expenses decreased during the quarter to $4.5 million from $4.8 million in the second quarter of 2008. The decrease in general and administrative costs is due to cost reductions implemented by the Corporation in response to the lower activity levels being experienced by the Corporation's operating divisions. These cost reductions included layoffs and wage rollbacks in addition to a reduction in discretionary spending. General and administrative expenses also benefited from a $0.1 million reduction in stock-based compensation expense in the quarter versus the second quarter of 2008 as the majority of the compensation expense for previously granted options has been fully amortized into income in previous periods. Year to date, general and administrative expenses are $8.9 million versus the $10.1 million incurred in the first six months of 2008. In addition to the impact of cost reduction initiatives, general and administrative expenses have benefited year to date from the receipt of $0.7 million from the Corporation's former legal counsel in settlement of a malpractice claim initiated by the Corporation related to legal advice previously provided by the Corporation's former legal counsel. General and administrative costs also benefited from lower stock-based compensation expense during the period which reduced to $0.2 million year to date versus $0.9 million in the first six months of 2008. The first quarter of 2008 incurred $0.5 million in additional stock-based compensation expense related to the cancellation of various outstanding options. Partially offsetting the cost reductions discussed above were severance costs of $0.2 million associated with staff reductions implemented year to date. Depreciation and Amortization Expense Depreciation and amortization expense was $3.7 million during the quarter which is consistent with the second quarter of 2008. Increased depreciation associated with equipment added subsequent to the second quarter of 2008 was offset by lower depreciation from the Corporation's drilling assets due to the lower activity levels experienced during the quarter. Depreciation for the drilling assets is recognized based on activity levels for the rigs, therefore, as a result of the lower activity, less depreciation was recognized. Asset Impairment As a result of the sale of the Corporation's well fracturing assets subsequent to the quarter, an impairment of $16.9 million was recorded in the Corporation's second quarter results to reflect the lower selling price of the assets versus their carrying value at the time of sale. While the sale occurred subsequent to quarter end, management believes this subsequent event provides evidence of an impairment in the carrying value of the Corporation's well fracturing assets as at June 30, 2009, thus the carrying value of the assets at June 30 was reduced to reflect the net recoverable value of the assets. Interest Expense While average debt increased $18.2 million in the quarter versus the second quarter of 2008, a 53% decline in prime interest rates, plus the use of lower rate bankers acceptances during the quarter, allowed interest expense to decrease to $0.4 million in the quarter versus $0.6 million in the first quarter of 2008. The lower average interest rates year to date have also resulted in interest expense declining to $0.9 million year to date versus $1.3 million in the first six months of 2008. Other (Income) Expenses Other expenses in the second quarter are primarily comprised of a $0.1 million foreign exchange loss which is offset by a net $0.1 million gain from sales of older or redundant wireline and production testing equipment. Total proceeds recognized from these sales of $1.4 million were applied against the Corporation's outstanding debt facilities. Year to date the Corporation has recognized $0.2 million in foreign exchange gains from it US operations and $0.2 million in gains on equipment sales. Income Tax Expense Due to the net loss incurred during the quarter, Pure recorded an income tax expense recovery of $7.2 million during the quarter. This tax recovery represents an effective tax rate of 26.9% versus the Corporation's statutory rates for its Canadian and US operations of 29.2% and 37.6%, respectively. The lower effective tax rate recovery is due to the impact of non-deductible expense items and amendments to the Corporation's prior years tax filings associated with adjustments to the Corporation's intercompany transfer pricing charge amounts. Liquidity and Capital Resources Pure ended the quarter with $3.0 million in cash and $76.1 million outstanding on the Corporation's debt facilities compared to $4.2 million in cash and $65.3 million outstanding on these facilities as at December 31, 2008. Net debt, long-term debt less positive working capital, increased to $63.9 million from $35.1 million as at December 31, 2008. This increase in net debt arose from the addition of CanSub's net debt of $18.8 million and the incurrence of $3.7 million in transaction costs upon the merger of Pure and CanSub. In addition, the negative $2.4 million in funds flow from operations generated year to date, combined with $5.5 million invested in property, plant and equipment year to date also negatively impacted the Corporation's net debt balance. Pure's long-term debt balance will be reduced significantly subsequent to quarter end as a result of the disposition of the Corporation's well fracturing assets. The Corporation's board of directors has approved a nominal $2.0 million capital budget for 2009 which will be used as required to maintain and supplement the Corporation's existing operating capacity and capabilities. These capital expenditures are in addition to approximately $6.0 million in capital expenditures which were carried over from 2008. Management is currently reviewing the capital expenditure budget required for Pure's CCS business operation after completion of the CanSub merger, however, at this time no material capital expenditure requirements are anticipated. In addition to the capital expenditures discussed above, the Corporation has the following operating and debt commitments over the next five years: /T/ ---------------------------------------------------------------------------- Payments Due by Period ---------------------------------------------------------------------------- Contractual Obligations Less than 1 After 5 ($ thousands) Total year 1 - 3 years 4 - 5 years years ---------------------------------------------------------------------------- Long-term debt obligations (1) $ 75,833 $ 6,432 $ 66,766 $ 809 $ 1,826 Operating leases 42,741 9,810 13,492 9,257 10,182 ---------------------------------------------------------------------------- Total Contractual Obligations $ 118,574 $ 16,242 $ 80,258 $ 10,066 $ 12,008 ---------------------------------------------------------------------------- (1) Long-term debt obligations represent balances outstanding under the extendible revolving loan facility and the non-revolving loan facility and the obligations in the table above assumes the revolving facility is not renewed by March 31, 2010. /T/ Previously included in the Corporation's contractual obligations was a take-or-pay sand supply contract to support Pure's US well fracturing operations. The anticipated obligation under this contract as at the June 30, 2009 was $45.0 million. The Corporation will be released from this outstanding contractual obligation on closing of the sale of the Corporation's well fracturing operation. As such, no amount for this obligation has been included in the contractual obligations table detailed above. In conjunction with the CanSub merger, the Corporation renewed and expanded its existing credit facilities to provide a secured $18.0 million demand revolving operating credit facility ("Operating Facility") and a secured $80.0 million one year extendible revolving credit facility ("Revolving Facility"). The Revolving Facility is subject to renewal on March 31, 2010, and if not extended would term out with 25% of the outstanding balance being repaid over one year and the remaining balance due upon expiry of the one year amortization period. Borrowings under the Operating Facility will bear interest at either: (i) the lender's prime rate plus 1.50%, or (ii) bankers acceptance rates plus 2.75%. Borrowings under the Revolving Facility will bear interest at either: (i) the lender's prime rate plus 2.50%, or (ii) bankers acceptance rates plus 4.00%. The other terms of the new facilities, including financial covenants and borrowing limits, are similar to those contained in Pure's previous credit facilities. Pure's financial position will improve significantly with the disposition of the Corporation's well fracturing assets. With these proceeds from sale combined with Pure's existing debt facilities, management believes the Corporation is well positioned to manage through the weakness in industry activity levels that are expected to continue into 2010. As at August 12, 2009, the Corporation had 23,740,647 common shares issued and outstanding and 2,181,332 stock options issued and outstanding, of which 485,166 were vested. Changes in Accounting Policies On January 1, 2009, the Corporation adopted new accounting standards dealing with Intangible Assets issued by the Canadian Institute of Chartered Accountants ("CICA"). These new standards, which apply to fiscal years beginning on or after October 1, 2008 have been adopted retrospectively resulting in a restatement of prior period financial statements. The revisions to the various accounting standards align the definition of Intangible Assets under Canadian GAAP with that under IFRS. Section 1000, "Financial Statement Concepts" was revised to remove material that permitted the recognition of assets that might not otherwise meet the definition of an asset and to add guidance from the IASB's "Framework for the Preparation and Presentation of Financial Statements" that will help distinguish assets from expenses. Section 3064 "Goodwill and Intangible Assets", which replaces Section 3052 "Goodwill and Other Intangible Assets", gives guidance on the recognition of intangible assets as well as the recognition and measurement of internally developed intangible assets. As a result of the adoption of the new Section 3064, the intangible assets related to pre-operating expenditures for start-up activities in the United States have been reversed and balances for prior periods restated to reflect the change. The resulting impact on the comparative December 31, 2008 balance sheet is as follows: /T/ ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Previously Reported Restated ---------------------------------------------------------------------------- Opening retained earnings, January 1, 2008 25,310 24,322 Ending retained earnings, December 31, 2008 26,322 25,614 Intangible assets 1,671 266 Future income taxes 4,886 4,366 Accumulated other comprehensive income 4,349 4,172 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- /T/ For the comparative income statement, amortization for the three and six months ended June 30, 2008 decreased by $0.1 million and $0.2 million, respectively, and future income tax expense increased by $0.0 million and $0.1 million respectively. In January 2009, the CICA issued additional new or revised Canadian accounting standards for business combinations, consolidated financial statements and accounting for non-controlling interests and transactions with non-controlling interest holders. The purpose of these standards and revisions are to further align the Canadian GAAP with IFRS. These standards are to be applied prospectively to transactions on or after January 1, 2011. The Corporation does not anticipate that these standards will have a material impact on the Corporation's financial statements unless the Corporation completes a business combination after January 1, 2011 or creates a non-controlling interest in a subsidiary. In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed Canadian publicly accountable enterprises will be required to adopt International Financial Reporting Standards ("IFRS") for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. There are a number of differences between IFRS and Canadian generally accepted accounting principles ("GAAP") which may result in a number of changes to the Corporation's accounting policies and disclosures as a result of the transition to IFRS. The transition from current GAAP to IFRS is a significant undertaking. The Corporation is in the process of reviewing the potential impact of IFRS on the Corporation's financial accounting and reporting processes. The Corporation has established an IFRS conversion steering committee which will be reviewing the Corporation's existing accounting policies and disclosures during 2009 and assessing the impact to these policies and disclosures in reference to standards differences between IFRS and GAAP. Based on an initial review of the differences between IFRS and GAAP, the Corporation's steering committee has identified a number of areas which may result in significant adjustments to the Corporation's accounting policies and disclosures. The Committee's primary focus for 2009 will be to concentrate on these areas where significant effort will be required to adjust the Corporation's current accounting policies to conform to IFRS. The Committee anticipates completing its assessment of high impact areas during 2009 and based on this assessment, the Committee will begin to undertake the process of quantifying the impact of these IFRS changes on the Corporation's financial statements at the end of 2009 and into 2010. Risks and uncertainties A complete discussion on business risks faced by the Corporation may be found under "Risk Factors" in the Corporation's Annual Information Form dated March 18, 2009 which is available under the Corporation's profile at www.sedar.com. Outlook Industry activity continues to be depressed in both Canada and the US and there is a great amount of uncertainty and speculation as to when higher activity will once again return to the industry. The impact of lower industry activity on individual companies is further complicated by the markets in which companies compete. The diversity in activity levels throughout the industry is evidenced in Pure's operations. For example, activity in Pure's Saskatchewan and North Dakota operations is expected to be high relative to other areas due to the focus on oil development in these areas, and activity in Pure's technical deep natural gas focused completions work is expected to benefit from the continued industry development of non-conventional natural gas resource plays. In contrast, activity in other areas such as shallow natural gas development is expected to remain low in the current low natural gas price environment. As discussed in previous reports, the diversity of Pure's operations will be key in Pure's short and long-term success. The merger with CanSub provides Pure with further diversification strength through customer and geographic diversification. CanSub operates in certain locations, such as Saskatchewan, where Pure did not previously have operations and has established a strong foothold in the growing unconventional resource plays in northeastern British Columbia. The focus for the Corporation for the remainder of 2009 will be to integrate the Pure and CanSub operations and leverage off of the operating strengths of each company in order to gain further operational efficiencies and expand upon areas of growth. Part of this strategy will be to leverage off of Pure's expanded areas of operation in Canada and the US by relocating equipment into areas of higher activity. For example, subsequent to the quarter end, the Corporation transferred three production testing units to Pennsylvania for work in the Marcellus shale play in Northeastern US. These operations commenced in August. Additional equipment transfers between Canada and the US are being reviewed in order to support the continued growth of the Corporation's US operations. The Corporation's financial position has been improved significantly with the sale of Pure's well fracturing assets subsequent to quarter end. While this sale will initially decrease the contribution from the Corporation's US operation, the sale will provide the financial resources required to continue to manage through the current weakness in industry activity and will also provide the Corporation with the flexibility to act upon potential opportunities that may arise to expand the Corporation's core wireline and production testing operations. This divestiture will also provide Pure's management team with additional time to focus on managing its core business operations. Management is optimistic that the fundamentals of oil and natural gas supply and demand will eventually create an environment of higher activity, however, the timing of this recovery cannot be predicted with certainty. As such, the primary focus of management during this period of low activity is to continue to focus on maximizing the opportunities the Corporation has during this time period and continue to improve the strength of Pure's balance sheet, which will allow the Corporation to be in a position to prosper once activity levels increase again in the future. Forward-looking Statements This press release contains certain forward-looking statements and other information that are based on the Corporation's current expectations, estimates, projections and assumptions made by management in light of its experience and perception of historical trends, current conditions, anticipated future developments and other factors believed by management to be relevant. All statements and other information contained in this press release that address expectations or projections about the future are future-looking statements. Some of the forward-looking statements may be identified by words such as "may", "would", "could", "will", "intends", "expects", "believes", "plans", "anticipates", "estimates", "continues", "maintains", "projects", "indicates", "outlook", "proposed", "objective" and other similar expressions. These statements speak only as of the date of this press release. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed below and under "Risks and uncertainties" discussed in the Corporation's MD&A of the audited December 31, 2008 financial statements and the most recent Annual Information Form, Information Circular, quarterly reports, material change reports and news releases. The Corporation cannot assure investors that actual results will be consistent with the forward-looking statements and readers are cautioned not to place undue reliance on them. The forward-looking statements are provided as of the date of this press release and, except as required pursuant to applicable securities laws and regulations, the Corporation assumes no obligation to update or revise such statements to reflect new events or circumstances. The forward-looking statements and information contained in this press release reflect several major factors, expectations and assumptions of the Corporation, including without limitation, that the Corporation will continue to conduct its operations in a manner substantially consistent with past operations, other than its well fracturing operations; the general continuance of current or, if applicable, assumed industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) taxation, royalty and regulatory regimes; certain commodity prices and other cost assumptions; certain conditions regarding natural gas storage in North America; and the continued availability of adequate debt and/or equity financing and cash flow from the Corporation's operations to fund its capital and operating requirements as needed; the extent of its liabilities; and the closing of the sale of the Corporation's well fracturing assets. Many of these factors, expectations and assumptions are based on management's knowledge and experience in the industry and on public disclosure of industry participants and analysts relating to anticipated exploration and development programs of oil and gas producers, the effect of changes to regulatory, taxation and royalty regimes, expected active rig counts and industry equipment utilization in the WCSB and the Rocky Mountain region and other matters. The Corporation believes that the material factors, expectations and assumptions reflected in the forward-looking statements and information are reasonable; however, no assurances can be given that these factors, expectations and assumptions will prove to be correct. In particular, this press release contains forward-looking information pertaining to the following: ability to reduce costs in response to lower industry activity levels; success of marketing programs; capital expenditure programs; ability to move equipment within operating locations; availability of debt financing and ability to renew the Corporation's existing facilities, at acceptable terms; supply and demand for oilfield services and industry activity levels; oil and natural gas prices; oil and natural gas drilling activity; treatment under governmental royalty, collection of accounts receivable; operating risk liability; expectations regarding market prices and costs; expansion of services and operations in Canada and the United States; the closing of the sale of the Corporation's well fracturing operations; the release of the Corporation's commitments under its sand supply contract on completion of the sale of the Corporation's well fracturing operations; the anticipated synergies, operating efficiencies and cost savings resulting from the merger of the Corporation and CanSub; and competitive conditions. The Corporation's actual results could differ materially from those anticipated in such forward-looking statements as a result of the risk factors set forth below and elsewhere in this press release: failure to realize anticipated benefits from the merger of the Corporation and CanSub; failure to satisfy closing conditions in relation to the sale of the Corporation's well fracturing operations; general economic conditions in Canada and the United States; changes in the level of capital expenditures made by oil and natural gas producers and the resultant effect on demand for oilfield services during drilling and completion of oil and natural gas wells; volatility in market prices for oil and natural gas and the effect of this volatility on the demand for oilfield services generally; risks inherent in the Corporation's ability to generate sufficient cash flow from operations to meet its current and future obligations; increases in debt service charges; the Corporation's ability to access external sources of debt and equity capital; changes in legislation and the regulatory environment, including uncertainties with respect to implementing binding targets for reductions of emissions; uncertainties in weather and temperature affecting the duration of the oilfield service periods and the activities that can be completed; competition; sourcing, pricing and availability of raw materials, consumables, component parts, equipment, suppliers, facilities, and skilled management, technical and field personnel; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; ability to integrate technological advances and match advances of competition; credit risk to which the Corporation is exposed in the conduct of its business; and changes to the royalty regimes applicable to entities operating in the WCSB or the Rocky Mountain region. /T/ PURE ENERGY SERVICES LTD. Consolidated Balance Sheets ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (Unaudited, stated in thousands of dollars) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, December 31, 2009 2008 As restated ---------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 2,962 $ 4,201 Accounts receivable 16,528 37,304 Inventory 6,172 5,041 Deposits and prepaid expenses 2,716 1,996 ---------------------------------------------------------------------------- 28,378 48,542 Property and equipment 175,574 179,002 Future income taxes 27,116 - Intangible assets - 266 ---------------------------------------------------------------------------- $ 231,068 $ 227,810 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities $ 14,659 16,598 Income taxes payable 1,353 1,455 Deferred government grant 234 270 Current portion of long-term debt 6,681 7,909 ---------------------------------------------------------------------------- 22,927 26,232 Long-term debt 69,384 57,405 Future income taxes 6,250 4,366 ---------------------------------------------------------------------------- 98,561 88,003 ---------------------------------------------------------------------------- Shareholders' equity Share capital 120,913 106,510 Contributed surplus 3,683 3,511 Accumulated other comprehensive income 1,992 4,172 Retained earnings, as restated 5,919 25,614 ---------------------------------------------------------------------------- 132,507 139,807 ---------------------------------------------------------------------------- $ 231,068 $ 227,810 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- PURE ENERGY SERVICES LTD. Consolidated Statements of Loss and Retained Earnings For the three and six months ended June 30 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (Unaudited, stated in thousands of dollars, except per share amounts) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------------------------------------- 2009 2008 2009 2008 As restated As restated ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Revenue $ 18,859 $ 32,087 $ 64,510 $ 78,782 Operating expenses 19,904 28,278 56,504 62,367 ---------------------------------------------------------------------------- Gross margin (1,045) 3,809 8,006 16,415 Expenses Selling, general and administrative 4,513 4,847 8,917 10,144 Depreciation and amortization 3,739 3,696 7,804 7,402 Impairment of property and equipment 16,925 - 16,925 - Impairment of intangible assets 247 - 247 - Interest on long-term debt 365 591 854 1,255 Other interest 6 11 6 90 Gain on sale of equipment (74) (10) (155) (13) Foreign exchange loss (gain) 106 (8) (182) 8 ---------------------------------------------------------------------------- Loss before income taxes (26,872) (5,318) (26,410) (2,471) ---------------------------------------------------------------------------- Income taxes Current expense 301 376 712 1,002 Future expense reduction (7,519) (1,946) (7,427) (1,783) ---------------------------------------------------------------------------- (7,218) (1,570) (6,715) (781) ---------------------------------------------------------------------------- Net loss (19,654) (3,748) (19,695) (1,690) Retained earnings, beginning of period, as re-stated 25,573 26,380 25,614 24,322 ---------------------------------------------------------------------------- Retained earnings, end of period $ 5,919 $ 22,632 $ 5,919 $ 22,632 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Loss per share Basic $ (1.18) $ (0.24) $ (1.21) $ (0.11) Diluted $ (1.18) $ (0.24) $ (1.21) $ (0.11) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- PURE ENERGY SERVICES LTD. Consolidated Statements of Cash Flows For the three and six months ended June 30 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (Unaudited, stated in thousands of dollars) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------------------------------------- 2009 2008 2009 2008 As restated As restated ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cash provided by (used in) Operating activities Net Loss $(19,654) $ (3,748) $(19,695) $ (1,690) Items not involving cash: Depreciation and amortization 3,739 3,696 7,804 7,402 Impairment of property and equipment 16,925 - 16,925 - Impairment of intangible assets 247 - 247 - Future income tax expense reduction (7,519) (1,946) (7,427) (1,783) Stock-based compensation 81 182 172 862 Gain on sale of equipment (74) (10) (155) (13) Realized foreign exchange gain - - (288) - Unrealized foreign exchange loss - 5 - - ---------------------------------------------------------------------------- (6,255) (1,821) (2,417) 4,778 Changes in non-cash working capital balances 14,613 11,234 22,759 2,392 ---------------------------------------------------------------------------- 8,358 9,413 20,342 7,170 ---------------------------------------------------------------------------- Investing activities Purchases of property and equipment (2,696) (7,812) (5,547) (10,068) Proceeds from the sale of equipment 1,361 47 1,692 76 Business acquisition, net of cash acquired (5,524) - (5,524) - Changes in non-cash working capital balances (23) (168) (2,212) (1,393) ---------------------------------------------------------------------------- (6,882) (7,933) (11,591) (11,385) ---------------------------------------------------------------------------- Financing activities Operating loan (1,657) (4,197) - 2,636 Net (repayment) of / proceeds from revolving term loans 1,572 3,559 (5,917) 3,559 Repayment of fixed term loans (3,783) (56) (3,977) (139) Issue of share capital, net of issuance costs (20) 50 (20) 50 ---------------------------------------------------------------------------- (3,888) (644) (9,914) 6,106 ---------------------------------------------------------------------------- Increase (decrease) in cash (2,412) 836 (1,163) 1,891 Effect of translation on foreign currency cash and cash equivalents (373) (4) (76) 97 Cash, beginning of period 5,747 3,199 4,201 2,043 ---------------------------------------------------------------------------- Cash, end of period $ 2,962 $ 4,031 $ 2,962 $ 4,031 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- /T/