Pure Energy Services Ltd. announces results for Q4 2010 and the year ended December 31, 2010

Mar. 17, 2011 (Canada NewsWire Group) --

TSX-PSV

CALGARY, March 17 /CNW/ - Pure Energy Services Ltd. is pleased to announce its results for Q4 2010 and the year ended December 31, 2010.  Results presented for the three month periods ended December 31, 2010 and 2009 are unaudited.  Unless otherwise indicated, references in this news release to "$" or "Dollars" are to Canadian dollars.

(1)   Refer to "Non-GAAP Measures"

BUSINESS OVERVIEW

The Corporation provides well completion and production related oilfield services to oil and natural gas exploration and development companies in western Canada and certain regions in the United States ("US").

The Corporation's continuing operations are divided into three separate reporting segments: Canadian Completions Services ("CCS"), US Completions Services ("USCS") and Corporate Administration ("Corporate"). The CCS segment conducts operations in the Western Canadian Sedimentary Basin ("WCSB") through its two operating divisions:  wireline and well testing. The USCS segment conducts operations in the Rocky Mountain, North Dakota and Appalachian Basin regions of the US through its two operating divisions: wireline and well testing.  The Corporate segment is a cost center which includes corporate administration and other costs not specifically attributable to the CCS and USCS segments.  Operations for both the CCS and USCS segments are impacted by seasonality, with the CCS segment typically experiencing higher activity levels in the winter months and the USCS segment experiencing higher activity levels in the non winter months.

Effective October 1, 2010, the Corporation sold its drilling rig division (including this division's property, equipment and operations) and effective April 20, 2010 the Corporation sold its drilling equipment rental division.  As a result of these transactions, the financial results of these two divisions (which previously comprised the Corporation's "Drilling" segment) have been reflected as discontinued operations for the years ended December 31, 2010 and 2009.

Q4 2010 AND YEAR ENDED 2010 HIGHLIGHTS FROM CONTINUING OPERATIONS

Pure's Q4 2010 consolidated financial results reflected the robust drilling and well completion activity levels in the WCSB tempered by the results of the US operations which reflected the seasonal Q4 slow-down combined with staffing expenses related to the ramp up in activity expected in several of the core US operating areas in 2011.  The sale of the drilling rig division on October 1, 2010 (for net proceeds of $33.5 million) has allowed Pure to achieve its objective of significantly deleveraging the balance sheet.  Pure exited 2010 with a strengthened financial position as working capital exceeded long-term debt by $10.4 million with available but undrawn amounts on the Corporation's credit facilities at December 31, 2010 of approximately $39.3 million.    

During Q4 2010, Pure realized significantly improved revenue, EBITDA and net earnings from continuing operations on a consolidated basis over the comparable Q4 2009 period reflecting the improved activity levels and financial results from both the CCS and USCS operating segments.  Drilling and completion activity levels in both the WCSB and in Pure's US core operating areas increased quarter over quarter primarily due to:

These factors contributed to a 52% increase in the number of wells drilled (rig released) in the WCSB from 2,665 in Q4 2009 to 4,061 in Q4 2010 (source: Nickle's Energy Group).   

In the US, evidence of the recovery in activity levels was reflected through the significantly increased drilling rig counts in some of Pure's core operating areas.  In North Dakota, the monthly average active rig counts rose from 62 in December 2009 to 146 during December 2010, while the rig counts increased in Pennsylvania and Colorado from 63 to 102 and 40 to 64, respectively, for the same periods (US rig count data from Baker Hughes Rotary Rig Count report).

Consolidated revenue from continuing operations in Q4 2010 of $55.1 million was 84% higher than the $29.9 million recognized in Q4 2009 reflecting significantly higher revenue for both the CCS and USCS operating segments.  The CCS segment benefited from increased equipment utilization and improved pricing, while the USCS segment benefited from expanded equipment fleets and a shift to higher revenue work.  Consolidated gross margins more than doubled from 13% in Q4 2009 to 30% in Q4 2010 reflecting the huge improvement in CCS margins from 10% in Q4 2009 to 35% in Q4 2010.  The USCS margins during Q4 2010 of 20% (which were in line with the 19% margins recorded in Q4 2009) were reduced by hiring, training and travel costs to expand crews in the busier US areas of North Dakota and Pennsylvania.  Improved pricing for services in the US was not implemented until 2011 as a significant portion of 2010 work was at fixed pricing rates contracted during 2009.  The improved consolidated operating results in the current quarter led to the significantly improved EBITDA from continuing operations from the negative $1.1 million recorded in Q4 2009 to the positive $10.0 million recorded in Q4 2010.  Net earnings from continuing operations were $4.4 million ($0.19 per share - basic) in the current quarter compared to a net loss of $3.1 million (negative $0.13 per share) reported in Q4 2009. 

On a full year basis, Pure recorded significantly improved revenue, gross margin percentage, EBITDA and net earnings from continuing operations in 2010 as compared to 2009.  Consolidated revenue rose from $95.0 million in 2009 to $175.7 million in 2010 (an 85% increase) reflecting higher equipment utilization in the current year, combined with price increases (primarily for CCS) that were recognized in the second half of 2010.  Consolidated gross margins improved dramatically from the 13% recognized in calendar 2009 to the 25% recognized in 2010, reflecting the significant improvement in CCS margins from 7% in 2009 to a more robust 26% recognized in 2010.  CCS margins benefited from the increased equipment utilization and pricing as well as operational efficiencies obtained from the integration of the operations of Canadian Sub-Surface Energy Services ("CanSub"), which was acquired during Q2 2009.  The USCS segment posted margins of 23% in 2010 which were in line with the 23% margins posted in 2009.  Margins in the US in 2010 were constrained by the lower pricing rates carried over from 2009 and negatively impacted by high staffing and equipment rental expenses combined with integration costs associated with the acquisition of a wireline business in Q2 2010.

The year over year improvement in consolidated operating results from continuing operations led to the improved EBITDA of $21.1 million recorded in 2010 compared to the EBITDA of negative $4.3 million recorded in 2009.  Net earnings from continuing operations improved to $4.9 million ($0.21 per share - basic) in 2010 from the net loss of $12.3 million (negative $0.61 per share) posted in 2009.

During 2010, Pure continued to increase its high pressure equipment fleet by bringing 7 additional high pressure well testing units into service, 5 of which were added to the Canadian testing fleet and the remaining 2 units added to the US testing fleet.  Most of the new Canadian units were deployed to a major client in the Horn River region of British Columbia for work involving fracturing fluid recovery and flow testing for a multi-well drilling program targeting shale gas.  The 2 units added to the US fleet are currently working in the Marcellus shales in Pennsylvania.

During January 2011, the Corporation's Board of Directors approved a $38 million capital expenditure budget for 2011 which includes the following (Canada and the US combined): approximately $16 million for well testing operations and approximately $14 million for wireline operations for revenue generating equipment and/or equipment that will be used to replace existing, rented equipment with the objective of reducing operating expenses and improving margins.  The remaining $8 million is slated for the refurbishment of existing equipment, facility expansions and other infrastructure.  A significant portion of the additional revenue generating equipment is geared towards the high pressure operating environments that are characteristic of some of the emerging resource plays located in both the western Canada and US areas where Pure operates. 

OUTLOOK

Over the past 18 months, Pure's operations have been significantly restructured and the balance sheet significantly improved.  The following non-core businesses have been sold during that period: the US fracturing division in Q3 2009, the drilling equipment rental business in Q2 2010 and the drilling rig division in Q4 2010.  In addition, the core service lines of wireline and well testing have been expanded with the acquisition of CanSub in Q2 2009 and the acquisition of a US wireline business in Q2 2010.  As a result of these transactions, Pure now has 2 remaining core service lines in which management has extensive expertise.  The balance sheet at December 31, 2010 was in a strong position, giving the Corporation the ability to further expand these service lines.

Pure's management is optimistic about industry activity levels in 2011 based on the current  robust drilling rig counts in western Canada and certain core US operating areas combined with strong prices for oil and natural gas liquids.

Pure continues to benefit from the high demand for its services in the emerging resource plays, given the locations of the Corporation's operating facilities and the significant amount of wireline and well testing equipment capable of working in high pressure environments.  Improved pricing for services implemented during the second half of 2010 in Canada and implemented in Q1 2011 in the US, should positively impact margins and profitability going forward into 2011.  

The primary focus areas for Pure for 2011 are as follows:

• The recruitment and retention of staff to handle the Corporation's growth.  Pure is investing significant efforts in the implementation of its "Superior Value" program which includes increased training and education programs for field and support staff to address the critical personnel issues of recruitment, retention and succession planning.  In addition, retention bonus programs, wage adjustments and other compensation plans have also been recently implemented.
  
  
• Continuing to build the operational infrastructure in the US.  This includes adding equipment to those areas of high activity, increasing sales and marketing efforts to expand the existing client base and increasing the local staff complement in some of the busier US operating areas.  USCS management will be focused on improving operating gross margins in 2011.
  
  
• Continuing to be a leader in high pressure work in Canada and certain US operating areas.  With its highly trained staff and large amount of equipment capable of operating in high pressure environments, Pure is well positioned to benefit from the high demand for services in the deep basin and some of the emerging resource plays in western Canada and the US.  An additional 14 high pressure well testing packages are planned to be added to the Canada and US well testing fleets for 2011 to enable Pure to continue to be a leader in this business.
  
  
• Evaluating acquisition opportunities in Canada and the US.  Pure will evaluate potential acquisition opportunities that provide business synergies with the Corporation's core service lines and/or the establishment of new core operating areas.

DISCONTINUED OPERATIONS - DISPOSITION OF DRILLING RIG, DRILLING EQUIPMENT RENTALS AND WELL FRACTURING DIVISIONS

Effective October 1, 2010, the drilling rig division was sold for net proceeds of $33.5 million to a private investment group and effective April 20, 2010 the drilling equipment rentals division was sold to an industry peer in exchange for the peer's US wireline assets and operations and a cash payment of $2.4 million.  As a result of these sales, the financial results for these divisions have been disclosed as discontinued operations (in the "Drilling" segment) for the three and twelve-month periods ended December 31, 2010 and 2009.     

On August 14, 2009, the Corporation sold its US well fracturing assets and associated inventory to a competitor for net proceeds of $38.8 million. As a result of this disposition, the well fracturing operations have also been disclosed as discontinued operations for the three months and years ended December 31, 2010 and 2009.

RESULTS OF CONTINUING OPERATIONS

FINANCIAL SUMMARY BY SEGMENT⁽¹⁾

The break-down of consolidated financial results by segment for the three months ended December 31, 2010 and 2009 is as follows:

The break-down of consolidated financial results by segment for the years ended December 31, 2010 and 2009 is as follows:

Pure operates one of the largest wireline and well testing fleets in the WCSB.  A significant portion of the Corporation's equipment fleet at December 31, 2010 (26 of the 70 wireline units and 31 of the 68 well testing units) is capable of operating in the high pressure environments encountered in many of the emerging resource plays in western Canada.  Pure's exposure to these high activity areas has contributed to the robust equipment utilization rates in 2010. 

As a result of increased equipment utilization and generally improved pricing, the CCS segment realized revenue during Q4 2010 of $38.4 million, a significant increase over the $20.5 million recorded in Q4 2009.  Wireline division revenue increased by 51% quarter over quarter reflecting increased equipment utilization (jobs were up 62%).  However, the revenue per job decreased due to the significant activity in the shallower oil basins in central and southern Alberta and southeast Saskatchewan which have lower associated pricing.  Well testing division revenues increased 185% on a quarter over quarter basis reflecting the increased job count (also 62%) and significantly increased revenue per job.  The higher revenue per job reflects the impact of two large projects in the Horn River region of British Columbia.  Both projects involved fracturing fluid recovery and flow testing for multi-well drilling programs targeting shale gas and ran from October through December 2010 with completion of each in January 2011.  One of the projects involved 5 high pressure testing packages while the other project involved one testing package plus a large crew to man equipment owned by the client.  Both projects had significant amounts of auxiliary equipment (i.e. high pressure pipe, line heaters, etc) which led to high overall daily revenues.  A portion of the auxiliary equipment was redeployed to other client work in February and March 2011.  

The higher utilization rates and improved pricing for both the wireline and well testing divisions resulted in the significant improvement in CCS' blended margins from 10% in Q4 2009 to 35% in Q4 2010.  The lower margins recorded in the prior period partially reflected the integration costs associated with the CanSub acquisition which closed during Q2 2009.  The well testing business (which has a primarily variable cost structure) can see margins ramp up significantly with improvements in pricing and additional billings for the use of auxiliary equipment.  The wireline business (which has a high fixed cost component) can realize strong incremental margins with higher revenue levels.  The fixed operating costs associated with the Corporation's wireline business have been significantly reduced on a quarter over quarter basis due to the successful integration of the CanSub and Pure wireline businesses.  Increased staff costs (resulting from a tightening labour market) impacted margins in Q4 2010 and will also impact margins in 2011. 

Selling, general and administrative expenses ("SG&A") in CCS increased from $1.9 million in Q4 2009 to $3.0 million in Q4 2010 reflecting the effects of higher activity levels in the current quarter, combined with increased wage expense.  As a percentage of revenue, SG&A improved from 9.2% of revenue in Q4 2009 to 7.8% of revenue in Q4 2010.  SG&A expenses for CCS are targeted to be in the range of 9% on an annualized basis going forward.

For the year ended December 31, 2010, CCS' revenue of $114.7 million was more than double the $56.7 million reported in the 2009 year.  The prior year revenue figure only included the CanSub results from June 22 - December 31.   In addition, the current year's revenue reflected an increased equipment fleet (for the well testing division) combined with higher equipment utilization rates and improved pricing for both the wireline and well testing divisions.  The pricing improvements were realized over the second half of 2010.

The number of wells drilled (rig released) in the WCSB increased 45% on a year over year basis from 8,367 in calendar 2009 to 12,122 in 2010 (source: Nickles Energy Group).  As a result of the higher equipment utilization, higher pricing and rationalization of operating costs, blended margins for calendar 2010 improved significantly, climbing from 7% in 2009 to 26% in 2010.  SG&A expenses for 2010 of $10.9 million were 9.5% of revenue, which was significantly better than the 13.2% of revenue in the prior year.

Going into 2011, the CCS division will be focusing on the critical issues of staff hiring and retention through implementation of the "Superior Value" program and various other compensation programs.  In addition, CCS will be looking to expand its position as a leading provider of high pressure services in the WSCB, particularly in the well testing business where an additional 12 high pressure testing packages are planned for the CCS fleet in 2011.

Drilling rig counts and associated well completion activity levels during 2010 increased over 2009 in several of the USCS' core operating areas including North Dakota (Bakken Basin), Pennsylvania (Marcellus Shales) and Colorado (Piceance Basin).  Despite the increased activity levels, pricing for the majority of USCS' work in 2010 was based on lower, fixed pricing levels contracted during 2009.  Improved pricing rates have been implemented during Q1 2011.     

The expanded equipment fleets in both the well testing and wireline divisions, combined with a shift in the well testing job mix to a greater portion of high revenue type of work, led to the 76% increase in USCS' revenue from $9.5 million recognized in Q4 2009 to $16.7 million in Q4 2010.  Utilization rates in the testing division were similar on a quarter over quarter basis as reductions in work in Colorado and Wyoming were offset by increased work in North Dakota and Pennsylvania.  The significant increase in the number of wireline jobs was due to the acquisition of 10 wireline units (9 of which remained in the US and the remaining unit sent to Canada) as part of the purchase of equipment and operations from an industry peer that was completed during Q2 2010.  Of the 9 units added to the US wireline fleet, only 3 were crewed and working during Q4 2010.  Total segment revenue on a USD basis was USD $8.9 million in Q4 2009 and USD $16.3 million in Q4 2010.  Average CDN$ / USD exchange rates decreased from the prior period from approximately 1.06 in Q4 2009 to 1.02 in Q4 2010.

Although equipment utilization in the well testing division was essentially flat quarter over quarter, the shift in job mix away from the lower revenue per day work in Wyoming and Colorado to more of the higher revenue per day work in North Dakota and Pennsylvania contributed to the 47% increase in revenue from Q4 2009 to Q4 2010. All services performed from the Pennsylvania base (which was established at the end of 2009) were in the Marcellus shales and involved high pressure units and auxiliary equipment which command higher day rates than conventional equipment utilized in the other US regions. In addition, well testing revenue benefited from increased billings for auxiliary equipment and jobs where only crews were supplied. The increased wireline division revenue of 182% on a quarter over quarter basis reflected the 187% increase in job count from the expanded wireline fleet. There were 11 wireline units operating in Q4 2010 compared to 6 units operating in Q4 2009.    

The blended margin percentage for the USCS segment for Q4 2010 of 20% was consistent with the blended margin for Q4 2009 of 19%. Margins in both divisions were negatively impacted in the current quarter by hiring and training costs associated with the ramp up of staff for increased workloads expected in 2011. In addition, due to a shortage of local labour in certain operating areas in Q4 2010 (primarily in North Dakota and Pennsylvania), current quarter margins for both divisions were constrained due to the high travel and subsistence costs associated with the redeployment of crews from Pure's other operating areas. Well testing margins in the current quarter continued to be impacted by high rental costs for auxiliary equipment. Wireline margins during Q4 2010 were challenged from the lack of client diversification in Colorado and Wyoming as the major clients in those areas completed less work than expected. The wireline division also had high repairs and maintenance expenses during Q4 2010 as the lower workload provided an opportunity to have necessary inspections and maintenance programs completed.   

SG&A expense increased on a quarter over quarter basis from $0.9 million in Q4 2009 to $2.0 million in Q4 2010 reflecting the significant growth in the US operations combined with a one-time charge of $0.4 million related to a court judgment against USCS issued in February 2011. As part of the judgment, a US state court of appeals upheld a lower court ruling against USCS related to employee overtime claims for years prior to 2009. As a percentage of revenue, SG&A expenses dropped from 9.8% in Q4 2009 to 9.3% in Q4 2010 (excluding the impact of the judgment in Q4 2010). The targeted annual SG&A run rate going forward for the USCS segment is 9% of revenue.

For the year ended December 31, 2010, the USCS segment recorded revenue of $60.9 million compared to revenue of $38.3 million for the 2009 year. On a USD basis, revenues were USD $59.1 million and USD $38.3 million respectively for 2010 and 2009. Average CDN$/USD exchange rates decreased from approximately 1.14 in the prior year to approximately 1.03 for the current year. Both the wireline and well testing divisions realized increased equipment utilization rates in 2010 due to the recovery in industry activity levels from the 2009 year which were challenged by the global credit crisis and low oil and natural gas prices. Revenue in calendar 2010 for the wireline division did not increase in proportion to the increased job count as 2009 revenues benefited from several lucrative projects for two major customers in Wyoming and Colorado in the first half of 2009.  

The blended margin percentage for the USCS segment for calendar 2010 of 23% was in line with the blended margin for the 2009 year reflecting increased well testing margins offset by lower wireline margins. Well testing division margins of 28% in the current year period were better than the 23% in the prior year primarily reflecting higher utilization rates and specialty well control work done. Small price increases were offset by increased hiring and training costs associated with staff expansions. In addition, the prior year well testing margins were negatively impacted by set-up costs of the Pennsylvania operations. The wireline division margins in the current year were only 14% and reflected the integration costs incurred in Q2 and Q3 2010 of the acquired wireline business, the set-up costs associated with the new North Dakota wireline station in Q1 2010 and the low wireline revenue stream (in relation to the size of the staff complement) in Q4 2010. The stronger wireline margins in 2009 were partly due to lucrative project work for the two major customers in Wyoming and Colorado.

SG&A for calendar 2010 was $6.2 million, a significant increase over the $2.7 million recognized in 2009. The increase primarily reflects the higher staff levels in 2010 to accommodate the segment's growth combined with a one-time severance expense of $0.35 million to the former head of USCS and the one-time court judgment noted above for $0.4 million. In addition, the prior year expenses were reduced by the receipt of $0.7 million from the Corporation's former US legal counsel in settlement of a malpractice claim initiated by Pure. 

USCS' management will be focusing their efforts in 2011 on improving gross margins in both the well testing and wireline divisions through:

• Hiring of more local field staff in the growing areas of North Dakota and Pennsylvania to reduce costs of mobilizing staff from other areas;
  
  
• Expansion of the client base (particularly for the wireline division), in those areas where the revenue stream is dependent on a few major clients. Additional and/or more regular revenue streams will be required to improve margins in the high fixed cost wireline business. The planned establishment during 2011 of a wireline base in Pennsylvania should increase the overall utilization of the wireline fleet and crews; and
  
  
• Replacing rental equipment to reduce operating costs. The USCS segment has allocated a portion of its 2011 capital expenditure budget to the purchase of equipment such as high pressure pipe and sand traps (used in the well testing business) and certain wireline equipment to replace equipment that is currently being rented.

OTHER EXPENSES - CONTINUING OPERATIONS

Depreciation and Amortization Expense

Depreciation and amortization expense increased from $2.8 million in Q4 2009 to $3.2 million in Q4 2010. This increase reflected a quarter over quarter increase in the average net book values of property and equipment from $80.1 million in Q4 2009 to $83.9 million in Q4 2010 combined with the accelerated depreciation during Q4 2010 of certain computer software no longer in use. On a year over year basis, depreciation and amortization expense increased 9% from $10.3 million to $11.2 million. This reflected a 6% increase in the average net book value of property and equipment from $75.3 million in calendar 2009 to $79.8 million in calendar 2010 combined with the accelerated software depreciation in 2010.

Total Interest

Total interest of $0.2 million in Q4 2010 was significantly lower than the $0.6 million recorded in Q4 2009 reflecting the decrease in average drawn debt balances (approximately $18.7 million in Q4 2010 compared to $49.6 million in Q4 2009). The debt reduction was due primarily to the $33.5 million in net proceeds from the sale of the drilling rig division in Q4 2010.  

Total interest for the year ended December 31, 2010 of $2.1 million was consistent with the expense incurred in the prior year. Although the average drawn debt balances were higher in the prior year (approximately $58.2 million in 2009 compared to $46.2 million in 2010), this was offset by lower interest rates charged by the Corporation's lender in 2009. The higher overall interest rates charged in the current year primarily reflect the increase in the Canadian prime lending rates during 2010.    

Impairment of Property Held for Sale

At December 31, 2009, Pure's CCS segment had three redundant operating facilities for sale which were classified as "property held for sale" on the balance sheet. An impairment loss of $1.0 million was recorded for one of these facilities during Q4 2009 to reduce the carrying value to the facility's estimated fair value. During 2010, two of these three facilities were sold (see discussion below in "gain (loss) on sale of property and equipment"). During Q4 2010, Pure's management decided to retain the remaining property for use in CCS' operations due to the increased industry activity in western Canada. As a result, this facility was reclassified to "property and equipment" on the balance sheet at December 31, 2010 and a $0.1 million impairment loss was taken during Q4 2010.

Gain (Loss) on Sale of Property and Equipment

The loss on sale incurred in Q4 2010 of $0.2 million resulted from the disposal of previously decommissioned well testing units and related equipment. The gain on sale of property and equipment of $1.0 million recognized in Q4 2009 related to the disposal of nine older wireline units and one operating facility (all identified as redundant as part of the integration of the CanSub operations in the second half of 2009).

The gain on sale of property and equipment of $0.6 million for calendar 2010 primarily reflects a gain on sale of $0.8 million from the disposal of two redundant operating facilities during Q3 2010 net of the Q4 2010 loss on sale of well testing units and related equipment discussed above. The gain on sale of $1.3 million recorded in calendar 2009 reflects the gain from Q4 2009 discussed above plus additional gains from disposals of equipment in Q3 2009 as part of the CanSub integration. 

Foreign Exchange (Gain) Loss

The Q4 2009 and calendar 2009 foreign exchange gains of $0.7 million and $0.5 million respectively, reflect the release of a portion of the cumulative gains from the foreign currency translation of the net investment of the Corporation's US operations into earnings due to the reduction in the net investment that occurred during 2009. There were no such reductions in the Corporation's net investment in its US operations during Q4 2010 or calendar 2010 (where foreign exchange losses related to Canadian dollar denominated current liabilities of the USCS segment).

INCOME TAX EXPENSE - CONTINUING OPERATIONS

Pure recorded a total income tax expense from continuing operations in calendar 2010 of $3.3 million on net earnings before income tax of $8.2 million. Based on a blended Canadian/US income tax rate of approximately 30%, the expected income tax expense should be approximately $2.5 million. The additional $0.8 million of income tax expense recognized is attributed to several items including certain expenses that are not deductible for tax and adjustments related to amendments to previous years' tax returns. 

As at December 31, 2010, the Corporation had non-capital losses and deferred expense pools that can be used to reduce future taxable income in Canada and the US of approximately $65 million and $38 million, respectively. Based on management's estimates, these losses and deferred expense pools are more likely than not to be realized in future periods and, as such, a future income tax asset has been recorded on the balance sheet.

RESULTS OF DISCONTINUED OPERATIONS

The net loss from discontinued operations for the three month periods and years ended December 31, 2010 and 2009 was as follows:

Effective October 1, 2010 the Corporation sold its drilling rig division assets and operations to a private investment group for net proceeds of $33.5 million. Since the net proceeds were less than the carrying value of the related drilling rig equipment sold, an impairment charge of $9.9 million was recognized in Q3 2010. The net proceeds consisted of $31.0 million in cash plus $2.5 million in the form of a note receivable. The note receivable was received in full by December 31, 2010. The drilling equipment rentals division was sold on April 20, 2010 in exchange for an industry peer's US wireline operations. As a result of the sale of these two divisions, the related financial results have been classified as discontinued operations under the "Drilling" segment for the three month and year end periods ended December 31, 2010 and 2009. 

On August 14, 2009 the Corporation sold all of its well fracturing division assets (formerly a part of the USCS segment). As such, the financial results of the fracturing division for the three month and year end periods December 31, 2010 and 2009 have also been classified as discontinued operations. 

For calendar 2010, drilling segment revenue was $21.7 million, all of which was generated from January 1 - September 30. The drilling rig division accounted for $20.3 million of this revenue amount based on average rig utilization rates for the nine-month period of 44% (compared to industry average for that period of 37% - Source: CAODC). During calendar 2009, the drilling rig division accounted for $16.2 million of the total $19.7 million of segment revenue. Rig utilization rates for calendar 2009 were only 28% (compared to industry average of 24%) due to the significant industry slowdown during that year. Drilling rig division margins during the 2010 period were $3.9 million (or 19% of sales) compared to margins of $2.9 million (or 18% of sales) for calendar 2009. Despite the lower utilization percentage in 2009, margin percentages were about the same in both periods as reduced pricing was not implemented until the second half of 2009 and continued through to the beginning of Q3 2010. Due to the high variable cost nature of the rig business, few operating expenses are incurred when the rigs are not working. 

THREE YEAR OPERATING RESULTS

2010 versus 2009

Revenues and net earnings from continuing operations increased significantly from 2009 to 2010 reflecting a recovery in drilling and completion activity levels in Canada and the US and related recoveries in Pure's equipment utilization rates and pricing for services. A portion of the increased revenues relate to having a full year of operating results from the CanSub business which was acquired in June 2009. Revenues and net loss from total operations for 2010 and 2009 reflect the impact of the two drilling segment divisions (i.e. drilling rig division and drilling equipment rentals division) both of which were sold during 2010 and therefore reclassified to discontinued operations. The drilling rig division was sold to a private investment group for net proceeds of $33.5 million and the drilling equipment rental division was sold to an industry peer in exchange for the peer's US wireline operations.

The decline in total assets from $183.8 million at December 31, 2009 to $154.3 million at December 31, 2010 primarily reflects the sale of the drilling rig division which had a net book value of property and equipment at December 31, 2009 of $43.7 million. The net proceeds from disposal of $33.5 million were used to pay down debt. Funds flow from continuing operations during 2010 of $19.9 million was used to finance the capital expenditures from continuing operations of $15.6 million and pay down debt.

The decline in total long-term liabilities from $47.9 million at December 31, 2009 to $8.4 million at December 31, 2010 primarily reflects the pay down of long-term debt of $33.5 million from proceeds of the drilling rig division disposal.

2009 versus 2008

Despite the addition of CanSub's operations during June 2009, the calendar 2009 revenue from continuing operations was lower than the revenue from continuing operations for calendar 2008. This reflected the significantly decreased industry activity levels in 2009 resulting from the global credit crisis that occurred in the fall of 2008. As a result of this crisis, oil and natural gas prices fell significantly in late 2008 and through 2009 and Pure's customers had reduced access to debt and equity markets. These factors led to reduced pricing for services and reduced equipment utilization rates resulting in lower revenues, reduced margins and an erosion of net earnings. 

Revenue and net earnings from total operations during 2009 and 2008 reflected the discontinued operations of the two drilling segment divisions combined with the US fracturing division. The US fracturing division was sold during August 2009 for net proceeds of $38.8 million; all of which was used to pay down debt.

Total assets declined from $227.8 million at December 31, 2008 to $183.8 million at December 31, 2009 primarily reflecting the following:

• Sale of the fracturing business (which had a net book value of property and equipment of $53.0 million at December 31, 2009);
• Reduction in accounts receivable balance of $14.0 million due to lower revenue levels in 2009 and sale of the fracturing division;
• Depreciation of equipment of $14.8 million in 2009 with no net additions of equipment (i.e. purchases of equipment equaled proceeds from disposals in 2009); and
• The above were offset by the CanSub acquisition which added total assets at acquisition date of $44.4 million. The CanSub acquisition was financed entirely through the issue of shares in Pure. 

The decrease in total liabilities from $61.8 million at December 31, 2008 to $47.9 million at December 31, 2009 partially reflected the $38.8 million reduction in debt from the fracturing sale proceeds offset by the assumed long-term debt from the CanSub acquisition of $20.8 million.   

SUMMARY OF QUARTERLY RESULTS ⁽¹⁾

The impact of a global recession during the fall of 2008 led to significantly reduced oil and natural gas prices and reduced access to debt and equity markets for the Corporation's customers. As a result of these factors, industry activity levels declined sharply in both Canada and the US commencing in Q4 2008. In Q1 2009, the number of drilling rigs operating in the US during the quarter was approximately 50% lower than the peak number of rigs operating in the US during 2008. Drilling activity in Canada during Q1 2009 was also the lowest seen during a first quarter since 1999 (source: Daily Oil Bulletin). These lower industry activity levels resulted in lower operating results for the Corporation during the quarter compared to Q1 2008.

Activity levels continued to fall in Q2 2009 for all of the Corporation's operating segments. The impact of lower industry activity in both Canada and the US was further exacerbated by the seasonal activity decline in the Corporation's Canadian and North Dakota operations associated with spring break-up conditions that prevented the movement of equipment for the majority of the quarter. In response to the lower activity levels and competitive pricing pressure for the Corporation's services experienced in Q1 and Q2 of 2009, the Corporation undertook a number of cost cutting measures such as staff reductions and wage rollbacks intended to reduce operating costs. These cost cutting measures helped to mitigate some of the impact of the margin compression caused by the lower activity levels and reduced pricing for services.

On June 22, 2009 the Corporation acquired CanSub and merged its Canadian completions operations with CanSub, creating one of the largest wireline and well testing service providers in the WCSB. The Q2 2009 financial results included 8 days of revenue and operating results from CanSub.

Activity levels and pricing continued to be depressed in both Canada and the US during Q3 2009, resulting in a continued strain on Pure's revenue and margins. Pure's financial position was further challenged by the $20.8 million of long-term debt assumed as part of the CanSub acquisition. As part of an effort to refocus the Corporation's operations and strengthen the balance sheet, Pure sold its well fracturing assets effective August 14, 2009 for net proceeds of $38.8 million. As a result of this sale, a $16.9 million impairment was recognized to reflect the proceeds received on the sale being lower than the carrying value of the related assets. The financial results for the well fracturing operations for the eight quarters reflected in the chart above have been disclosed as discontinued operations.

Activity levels in Canada during Q4 2009 improved over Q3 2009, due in part to the typical increase for winter drilling and completion activities but also due to higher commodity prices for oil and natural gas. In addition, many of the Corporation's customers benefited from the infusion of capital from equity offerings completed during Q3 and Q4 2009, as capital markets became more receptive to oil and natural gas exploration and development companies. The drilling rig division posted improved utilization rates of 47% in Q4 2009 compared to the 34% posted in Q4 2008. Activity levels for Q4 2009 in the CCS segment's wireline and well testing divisions also realized improved equipment utilization rates over Q4 2008. However, margins for both the Drilling and CCS segments remained constrained due to the continuing competitive pricing for these services. In the US, equipment utilization rates also improved in Q4 2009 over the Q3 2009 levels, but similar to Canada, competitive pricing continued to constrain margins.

Drilling and completion activity levels in Canada continued to recover in Q1 2010, due to the improved commodity prices and improved financial position of Pure's customers. During Q1 2010, the Corporation's Canadian equipment fleets (CCS and Drilling segments) realized significantly higher utilization rates than the comparable Q1 2009 period. However, margins in both of these Canadian segments continued to be constrained by competitive pricing levels carried over from 2009. For CCS' operations, the negative impact of the lower pricing was partially offset by a streamlining of operating costs achieved through the full integration of CanSub's operations. In the USCS segment, revenues and gross margins improved over Q4 2009 due to higher equipment utilization as the active rig count increased in some of the segment's core operating areas. However, gross margins remained constrained due to the impact of competitive pricing that was implemented in the second half of 2009 as well as additional costs incurred in Q1 2010 to staff up in several of the segment's growing core operating areas in North Dakota and Pennsylvania.

During Q2 2010, the robust oil prices and stabilized natural gas prices resulted in a further recovery in drilling and completion activity levels in both Canada and the US. As a result of the improved equipment utilization rates, Pure recorded improved revenue and margins for all operating segments in Q2 2010 over the comparable Q2 2009. The strengthening activity levels allowed Pure to implement modest price increases for some of its services at the end of Q2 2010 and into Q3 2010 with the target of further improving margins over the second half of 2010.

On April 20, 2010, Pure acquired the US wireline assets and operations of an industry peer (including 10 wireline units) in exchange for Pure's non-core "Motorworks" drilling equipment rentals division and a cash payment of $2.4 million. As a result of this transaction, the Corporation's US wireline fleet expanded from 8 units to 17 units with the remaining wireline unit being added to the Canadian wireline fleet. The objective of this acquisition was to increase the US wireline capability to attract and retain more of the large customers operating in the Corporation's core US operating areas. As a result of the sale of Motorworks, the drilling equipment rental division financial results have been classified as discontinued operations for the eight quarters reflected in the chart above.

During Q3 2010, due to the strengthening drilling and completion activity levels in both western Canada and Pure's operating areas in the US, the Corporation realized strong equipment utilization rates and improved pricing for the majority of its service offerings. As a result, the Corporation realized significantly increased revenues, margins and net earnings from continuing operations compared to Q3 2009. 

On October 1, 2010, the Corporation sold its drilling rig division for net proceeds of $33.5 million, all of which was used to pay down debt. As a result of this sale, the drilling rig division has been classified as discontinued operations for the eight quarters in the above chart. This transaction significantly improved Pure's financial position as the Corporation exited year end December 31, 2010 with a net working capital surplus (i.e. working capital net of long-term debt) of $10.4 million. A year earlier, on December 31, 2009, the Corporation had a working capital deficit of $32.3 million. 

During Q4 2010, the CCS segment posted significantly improved revenue and gross margins over the comparable Q4 2009 period as the number of wells drilled (rig released) in western Canada increased by 52% on a quarter over quarter basis (from 2,665 in Q4 2009 to 4,061 in Q4 2010). The higher activity levels allowed Pure to implement additional pricing increases which positively impacted margins. However, a portion of these pricing increases were needed to absorb rising labour costs which reflected a tightening labour market. For the USCS segment, the strong activity levels in Q4 2010 in the core operating areas of North Dakota and Pennsylvania were offset by lower activity levels in Wyoming and Colorado (as two major clients in these areas delayed work until 2011). As a result of a lack of available field staff in the busy North Dakota and Pennsylvania regions, staff from other areas were brought in to crew equipment which negatively impacted margins. These factors both negatively impacted revenue and margins for USCS during Q4 2010. To address these issues, management of the USCS segment will be focusing efforts in 2011 on increasing local staff levels in all US operating areas plus expanding the client base in an attempt to obtain a more predictable revenue stream and improve gross margins.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2010 Pure's working capital exceeded long-term debt by $10.4 million, a significant improvement over the working capital deficit (i.e. long-term debt higher than working capital) of $32.3 million at December 31, 2009. The improvement of $42.7 million resulted primarily from:

• Net proceeds of $33.5 million from the disposal of the drilling rig division during Q4 2010
• Net proceeds of $5.4 million from the sale of two redundant operating facilities during Q3 2010
• Funds flow from continuing operations generated during calendar 2010 of $19.5 million
• Less: capital expenditures from continuing operations for calendar 2010 of $15.6 million. 

In January 2011, as a result of the Corporation's improved financial condition and in response to the strengthened industry activity levels, Pure announced a $38 million capital expenditure budget for 2011. The budget includes approximately $16 million for well testing operations and approximately $14 million for wireline operations (for the CCS and USCS segments combined) for revenue generating equipment and/or equipment that will reduce operating expenses. The remaining $8 million is planned for refurbishment of existing equipment, facility expansions and other infrastructure.  

In addition to Pure's capital expenditure program for 2011, the Corporation has the following operating lease, purchase commitments and debt commitments over the next five years:

At December 31, 2010 Pure had aggregate available but undrawn credit facilities of $39.3 million broken down as follows: Canadian Revolving Facility - $25.0 million; Canadian Operating Facility - $11.8 million; and US Revolving Loan - $2.5 million. The Corporation believes that its available credit facilities, combined with funds flow from operations, will provide sufficient capital resources to fund near-term capital expenditures and ongoing operations. Pure's management continues to evaluate its capital and operational spending programs in response to industry conditions.

SHARE CAPITAL

As at March 15, 2011, the Corporation had 23.9 million shares issued and outstanding and 1.6 million options issued and outstanding, of which 0.3 million were vested.

NON-GAAP MEASURES

EBITDA, EBITDAS and Funds flow from operations do not have standardized meanings prescribed by Canadian GAAP. Management believes that, in addition to net earnings (loss), EBITDA and EBITDAS are useful supplemental measures. EBITDA and EBITDAS are provided as measures of operating performance without reference to financing decisions, depreciation 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 earnings (loss) determined in accordance with Canadian GAAP as an indicator of the Corporation's performance. The Corporation's method of calculating EBITDA and EBITDAS may differ from that of other entities and accordingly may not be comparable to measures used by other entities. See section titled "Reconciliation of EBITDA and EBITDAS to Net Earnings (Loss)" below.

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 flow from operations does not have a standardized meaning prescribed by Canadian GAAP and may not be comparable to similar measures provided by other entities.

RECONCILIATION OF EBITDA AND EBITDAS TO NET EARNINGS (LOSS) - CONTINUING OPERATIONS

FORWARD-LOOKING STATEMENTS

This news 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 news release that address expectations or projections about the future are forward-looking statements. Some of the forward-looking statements may be identified by words such as "may", "would", "could", "will", "intends", "targets", "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 news 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 in the "Risks and Uncertainties" sections in 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 news 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 news 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, drilling equipment rental operations and the drilling rig 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; the continuance of current or future increased pricing for the Corporation's services; certain commodity prices and other cost assumptions; certain conditions regarding oil and natural gas supply, demand and 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; and the extent of its liabilities. 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 natural 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 US Rocky Mountain, North Dakota and Appalachian Basin regions 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 news release contains forward-looking information pertaining to the following: 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 credit 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 programs or regimes; collection of accounts receivable; operating risk liability; expectations regarding market prices and costs; expansion of services and operations in Canada and the US; the integration of assets and personnel from acquisitions; increases in the pricing for the Corporation's services; reduction of debt levels; net working capital levels; the amount and timing of recognition of income tax recoveries, income tax losses and deferred expense pools; future customer work; expected levels of the Corporation's sales, general and administrative expenses; and competitive conditions.

Consolidated Balance Sheets
As at December 31,

Consolidated Statements of Earnings (Loss) and Retained Earnings (Deficit)

Consolidated Statements of Comprehensive Income (Loss)
and Accumulated Other Comprehensive Income (Loss)

Consolidated Statements of Cash Flows

Kevin Delaney
Chief Executive Officer
E-mail:  kdelaney@pure-energy.ca

Chris Martin
Chief Financial Officer
E-mail:  cmartin@pure-energy.ca

Phone:  (403) 262-4000
Fax:  (403) 262-4005