Cathedral Energy Services Ltd. Reports Results for 2015 Q2 and 2015 Q3 Dividend

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, Aug. 13, 2015 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" /TSX: CET) announces its consolidated financial results for the three and six months ended June 30, 2015 and 2014.  Dollars in 000's except per share amounts.

This news release contains "forward-looking statements" within the meaning of applicable Canadian securities laws.  For a full disclosure of forward-looking statements and the risks to which they are subject, see "Forward-Looking Statements" later in this news release.

2015 Q2 KEY TAKEAWAYS
Revenues and profitability significantly affected by reduced industry activity and pricing pressures due to the decline in commodity prices;

Q2 revenues of $29,679 in 2015 compared to $56,797 in 2014, a 48% decline;

Year-to-date revenues of $79,756 for 2015 and 2014 year-to-date revenues of $124,817, a decline of 36%;

Adjusted EBITDAS was a loss of $(1,237) in 2015 Q2 compared to $6,151 in 2014 Q2 and year-to-date EBITDAS of $4,549 in 2015 compared to $14,732 in 2014;

Net loss of ($15,266) for the period includes $10,768 write-down of tax attributes as result of settlement agreement with Canada Revenue Agency;

An amendment to our credit facility was negotiated with our lenders in the quarter to reduce overall facility size and obtain relaxation of financial covenants through to 2016 Q3;

Management continued to focus on initiatives; to reduce costs, improve margins and to better position our product offering in the market through improving our sales and marketing capabilities; and

Cathedral's proprietary directional technology and customer service focus continues to be a key factor in retaining and securing work in a challenging industry environment.

FINANCIAL HIGHLIGHTS
Dollars in 000's except per share amounts

		Three months ended June 30				Six months ended June 30
			2015		2014		2015		2014
Revenues		$	29,679	$	56,797	$	79,756	$	124,817
Adjusted gross margin % ^(1)			11.3%		19.8%		16.9%		20.1%
Adjusted EBITDAS ^(1)		$	(1,237)	$	6,151	$	4,549	$	14,732
	Diluted per share	$	(0.03)	$	0.17	$	0.13	$	0.41
	As % of revenues		-4%		11%		6%		12%
Funds from operations ^(1)		$	(853)	$	3,767	$	3,112	$	11,887
	Diluted per share	$	(0.02)	$	0.10	$	0.09	$	0.33
Earnings (loss) before income taxes		$	(6,342)	$	1,023	$	(7,137)	$	3,899
	Basic per share	$	(0.17)	$	0.03	$	(0.20)	$	0.11
	Diluted per share	$	(0.17)	$	0.03	$	(0.20)	$	0.11
Write-down of deferred taxes related to CRA settlement		$	(10,768)	$	-	$	(10,768)	$	-
Net earnings (loss)		$	(15,266)	$	253	$	(15,990)	$	2,702
	Basic per share	$	(0.42)	$	0.01	$	(0.44)	$	0.07
	Diluted per share	$	(0.42)	$	0.01	$	(0.44)	$	0.07
Dividends declared per share		$	0.04	$	0.0825	$	0.08	$	0.1650
Property and equipment additions - cash basis		$	1,845	$	7,062	$	6,148	$	16,979
Weighted average shares outstanding
	Basic (000s)		36,295		36,230		36,295		36,208
	Diluted (000s)		36,295		36,253		36,295		36,235
							June 30		December 31
							2015		2014
Working capital						$	17,820	$	38,135
Total assets						$	176,071	$	230,534
Loans and borrowings excluding current portion						$	32,793	$	56,142
Shareholders' equity						$	112,639	$	128,368

OUTLOOK

As we anticipated, 2015 Q2 was a challenging quarter for the Company from a financial performance perspective.  Soft crude oil prices in the first half of the year resulted in oil and gas producers adopting a very cautious approach to their capital spending.  As a consequence, North American drilling and completions activity dropped dramatically which are the key drivers of the Company's business.  In Canada, an early and lengthy spring break-up compared to previous years negatively impacted Canadian operations.  In the U.S. directional business we were successful in gaining new opportunities based on showing customers how our technology and services could reduce their drilling times. These new opportunities helped offset work with customers who significantly reduced their capital spending, however, we still experienced activity reductions consistent with the overall industry declines. Throughout the quarter, we continued to experience pricing pressure on our services which we were partly able to accommodate through reducing our variable costs to preserve margins, however, the impact was still muted by overall lower activity levels.

Sustained WTI pricing in the $60 bbl. range through May and June, accompanied by customer indications they would be increasing their drilling and completions programs, originally supported our earlier outlook that the second half of 2015 would have higher activity levels than experienced in the first half.  This outlook changed dramatically in July when oil prices rapidly declined again into the sub-$50 bbl. range and into the $45 bbl. range in early August.  This recent drop in oil prices was driven by the Saudi strategy to maintain market share, the potential removal of sanctions against Iran, economic instability in China and Greece and indications that U.S. storage levels and production was not decreasing at the rates previously expected with lower drilling activity.  The current oil price volatility and continued oil pricing in the current sub-$50 bbl. range will likely delay a rebound in activity levels with the result that the outlook for the Company for the second half of the year is very uncertain at this time.

Going into this downturn, we focused on three priorities for our business:

1.     Adjust our cost structure and financial obligations to reflect the decline in activity levels and protect our balance sheet;

2.     Preserve our key employee base so when industry conditions improve we are able to ramp up quickly; and

3.     Continue to pursue operational improvements and execute on our strategic objectives to position Cathedral to be a stronger company in the future.

In Q2 we continued our focus on cost reductions.  Adjusted SG&A in 2015 Q2 was reduced a further 14% over 2015 Q1 and was reduced 23% from 2014 Q4 levels.  These reductions have exceeded our initially targeted reduction in SG&A of 20%.  Unfortunately the bulk of our cost reductions have had to come from workforce and compensation reductions. At the end of July, our employee count has been reduced 39% since December.  Salary and wage rollbacks ranging from 5% to over 20% have been implemented at all levels in the Company.  We have been able to maintain our core employee base throughout this downturn which will position us well for an eventual industry recovery.  We continue to look for short and long-term efficiency and cost savings opportunities.

Our bank debt was further reduced in Q2 to $32,881 from $35,000 at the end of Q1 2015.  We also amended our credit facility to reduce standby fees and obtained relaxation on our covenants to provide us with more financial flexibility.  The amended credit facility should also support revenue growth when industry activity levels increase.

Our original capital expenditure program for 2015 was targeted at $7,000 and has subsequently increased to $7,200.  Our current capital expenditure focus is on upgrading our FUSION™ Measurement-While-Drilling (MWD) technology platform to incorporate next generation features and increasing the capacity of our nDURANCE® motor fleet.  

Our proprietary MWD platform and motors provide our customers superior reliability and performance compared to other systems and have been a significant contributor to new sales and client retention in 2015.  In 2015 we began renting our proprietary motors and Electro-Magnetic Measurement-While-Drilling ("EM-MWD") systems on a stand-alone basis.  Incremental motor rental revenue in 2015 Q2 affirmed our business plan in this area.  In the U.S. our EM-MWD continues to be recognized for its performance advantages in difficult formations resulting in us securing new customer opportunities with both stand-alone and packaged solutions.  We are also seeing opportunities for increased application for our proprietary dual telemetry MWD system in the U.S.  Our dual telemetry system allows data to be transmitted via mud pulse, electro-magnetic or both simultaneously which offers clients reduced drilling times in formation areas and situations where EM transmission signal can be temporarily disrupted. 

We continue to push forward and invest in our strategic improvement initiatives to set our company to be in a stronger position coming out of this downturn.   Our marketing and sales efforts are much better focused on articulating our advantages to customers which has allowed us to gain work and offset pricing pressure.  With customers now focused on cost reduction and drilling performance, our capabilities play well in this environment. As a service provider we are in a unique position from a cost impact perspective as our ability to reduce drilling days can result in significant cost savings for our customers.  During the quarter, we continued to achieve records for drilling performance with customers in both Canada and the U.S. which reinforces our customer value proposition. 

As we go into the second half of 2015 we will continue to focus on the things in our business we can control, deploying our technology and expertise to assist our customers reduce their costs and continuing to demonstrate our quality, safety and integrity with our employees and customers.  We remain confident that we will come out of this current downturn in a very strong position to deliver increased value to our customers and our shareholders.

DIVIDENDS

It is the intent of the Company to pay quarterly dividends to shareholders.  The Board of Directors will review the amount of dividends on a quarterly basis with due consideration to current performance, historical and future trends in the business, the expected sustainability of those trends and enacted tax legislation which will affect future taxes payable as well as required long-term debt repayments, maintenance capital expenditures required to sustain performance and future growth capital expenditures.  The Directors have approved a 2015 Q3 dividend in the amount of $0.04 per share which will have a date of record of September 30, 2015 and a payment date of October 15, 2015. 

2015 CAPITAL PROGRAM

During the six months ended June 30, 2015 Company invested $6,148 (2014 - $16,979) in property and equipment.  The following table details the current period's net property and equipment additions:

				Six months ended
				June 30, 2015
Property and equipment additions:
	Growth capital ^(1)		$	4,109
	Maintenance capital^(1)			837
	Replacement capital ^(1)			497
	Infrastructure capital^(1)			705
Total cash additions				6,148
Less: proceeds on disposal of property and equipment				(2,151)
Less: proceeds on disposal of land and buildings				(6,174)
Net property and equipment additions ^(1)			$	(2,177)
^(1)See "NON-GAAP MEASUREMENTS"

The major additions for growth capital were $2,728 for additional drilling motors and related equipment for specific job requirements, $78 for MWD equipment and $1,303 for additional ancillary production testing equipment to reduce future rental costs.  Infrastructure capital relates to the construction of an operation facility in Oklahoma that was completed and subject to a sale and leaseback in 2015 Q1.  Maintenance capital included $416 related to MWD upgrades, $29 for ancillary motor components, $42 for production testing units and ancillary equipment, $181 for automobiles and $169 related to shop, office and computer equipment additions.

Cathedral's 2015 capital budget has increased slightly from $7,000 to $7,200 which includes $4,700 of growth capital, $1,700 of maintenance and replacement capital and $800 of infrastructure expenditures. 

Cathedral intends to finance its 2015 capital budget from proceeds from the Oklahoma City facility sale and leaseback, proceeds from redundant asset sales and recoveries from tools lost-in-hole and if necessary, its existing credit facility.

The following is a summary of major equipment owned by the Company:

	June 30	December 31	June 30
	2015	2014	2014
Directional drilling - MWD systems	140	140	140
Production testing units	66	66	66

RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30

	Three months ended June 30, 2015							Three months ended June 30, 2014
		Directional		Production					Directional		Production
Revenues		drilling		testing		Total			drilling		testing		Total
Canada	$	6,629	$	2,936	$	9,565		$	12,821	$	7,991	$	20,812
United States		15,290		4,824		20,114			28,636		7,349		35,985
Total	$	21,919	$	7,760	$	29,679		$	41,457	$	15,340	$	56,797

Revenues    2015 Q2 revenues were $29,679 which represented a decrease of $27,118 or 48% from 2014 Q2 revenues of $56,797.  All divisions experienced decreases compared to 2014 Q2.  In 2015 Q1 there was an industry wide activity decline due to reductions in commodity prices and day rate decreases directly related to pricing concessions granted to customers due to market conditions.  These declines continued into 2015 Q2, which also had the impact of an early spring break-up for Canadian operations.  2014 Q2 saw several divisions achieve record revenues.  U.S. directional drilling achieved an all-time quarterly record for revenues and Canadian directional drilling and Canadian production testing had records for Q2 revenues.  The active land rig count for both Canada and U.S. was down approximately 51% in 2015 Q2.  Canadian wells completed fell approximately 62% in 2015 Q2 compared to 2014 Q2.  Land rig count is a key driver of activity levels in the directional drilling industry and wells completed is a key driver for production testing industry.

Canadian directional drilling revenues decreased to $6,629 in 2015 Q2 from $12,821 in 2014 Q2; a 48% decrease.  This decrease was the result of: i) a 47% decrease in activity days to 522 in 2015 Q2 from 987 in 2014 Q2; and ii) a 20% decrease in the average day rate to $10,370 in 2015 Q2 from $12,941 in 2014 Q2.  Offsetting these declines was an increase of $1,168 on the rental of Cathedral's CLAW mud motor for 2015 Q2 revenues of $1,216.

U.S. directional drilling revenues decreased to $15,290 in 2015 Q2 from $28,636 in 2014 Q2; a 47% decrease.  This decrease was the result of: i) a 45% decrease in activity days to 1,254 in 2015 Q2 from 2,264 in 2014 Q2; and ii) a 4% decrease in the average day rate to $12,022 in 2015 Q2 from $12,517 in 2014 Q2 (when converted to Canadian dollars).  All U.S. districts experienced a decrease in activity levels except the Northeast district which added a significant customer in the last year.  The U.S. average day rates in Canadian dollars decreased slightly due to the stronger U.S. dollar.  Rates in USD fell to $9,784 USD in 2015 Q2 from $11,480 USD in 2014 Q2, a 15% decline. 

Canadian production testing revenues decreased to $2,936 in 2015 Q2 from $7,991 in 2014 Q2; a 63% decrease.  The decrease was due to the reduction in operating days due to the industry downturn.

U.S. production testing revenues decreased to $4,824 in 2015 Q2 from $7,349 in 2014 Q2, a 34% decrease.  The decrease was due to the reduction in operating days due to the industry downturn.

Gross margin and adjusted gross margin    Gross margin for 2015 Q2 was (6.1%) compared to 11.4% in 2014 Q2.  Adjusted gross margin (see Non-GAAP Measurements) for 2015 Q2 was $3,355 or 11.3% compared to $11,220 or 19.8% for 2014 Q2, a decline of 8.5%.   

The Company implemented a number of cost reductions in 2015 Q1 which included reductions for external services and for field, support and office staff, including work force adjustments and wage rollbacks.  Overall costs were lower than in 2014 Q2, but higher as a percentage of revenue basis.  The revenue day rate declines for directional drilling divisions, especially Canadian operations, resulted in lower gross margin despite the cost reductions.

Although there was a reduction in the fixed component of direct cost of sales of 23% compared with 2014 Q2, the overall impact of these costs on margins was greater in 2015 Q2 due to the reduction in revenues.  On a percentage of revenue basis the fixed costs increased 7.1% from 2014 Q2.  As stated above, the 2015 Q2 adjusted gross margin had decreased by 8.5%, the remaining 1.1% reduction in adjusted gross margin relates to increases in repairs offset by reductions in field labour.

Depreciation allocated to cost of sales increased to $5,134 in 2015 Q2 from $4,733 in 2014 Q2.  Depreciation included in cost of sales as a percentage of revenue was 17.3% for 2015 Q2 and 8.3% in 2014 Q2.

Selling, general and administrative expenses ("SG&A")     SG&A expenses were $4,724 in 2015 Q2; a decrease of $1,467 compared with $6,191 in 2014 Q2. 

Adjusted SG&A (see Non-GAAP Measurements) was $4,621 in 2015 Q2 compared to $6,255 in 2014 Q2, a decrease of $1,634 or 26%.  As a percentage of revenue, adjusted SG&A was 16% in 2015 Q2 and 11% in 2014 Q2. Adjusted SG&A decreased primarily due to work force reductions, wage rollbacks and reduction in variable compensation.  SG&A wage rollbacks were implemented February 1, 2015 at a range of 5% to 15% with an average reduction of 10%.  Staffing costs included in SG&A include executives, sales, accounting, human resources, payroll, safety, research and development and related support staff.   

Gain on disposal of property and equipment     During 2015 Q2, the Company had a gain on disposal of property and equipment of $135 compared to $880 in 2014 Q2.  These gains are mainly due to recoveries of lost-in-hole equipment costs including previously expensed depreciation on the related assets.  The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter. 

Foreign exchange loss     The Company had foreign exchange gain of $543 in 2015 Q2 compared to $478 in 2014 Q2 due to the fluctuations in the Canadian dollar relative to the U.S. dollar.  The Company's foreign operations are denominated in a currency other than the Canadian dollar and therefore, upon consolidation gains and losses due to fluctuations in the foreign currency exchange rates are recorded in other comprehensive income ("OCI") on the balance sheet as a component of equity.  However, gains and losses in the Canadian entity on U.S. denominated intercompany balances continue to be recognized in the statement of income.  Included in the 2015 Q2 foreign currency gains are unrealized gains of $647 (2014 Q2 - $332) related to intercompany balances.

Finance costs     Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $446 for 2015 Q2 versus $606 for 2014 Q2.  The decrease in finance costs relate mainly to a decreased utilization of the Company's credit facility and to a lesser extent decreases in interest rates.

Income tax     For 2015 Q2, the Company had net income tax expense of $8,924 compared to $770 in 2014 Q2.  Included in the 2015 Q2 amount is a charge to earnings of $10,768 related to a write-off of a portion of the tax attributes obtained as part of the December 18, 2009 conversion from an income trust to a corporation ("Conversion").  On April 21, 2015, the Company received a proposal letter from the Canada Revenue Agency ("CRA") which disclosed its intention to challenge all of the tax attributes obtained as part of the Conversion under the general anti-avoidance rules of the Income Tax Act (Canada).  Subsequently, Cathedral elected to enter into the agreement with CRA as a highly satisfactory solution to avoid potential costly and time consuming legal proceedings and allow management to focus its efforts on business operations and enhancing shareholder value.  The CRA agreement will not give rise to any cash outlay by Cathedral for prior taxation years. Cathedral continues to have access to a portion of the tax attributes obtained as part of the Conversion to offset federal and provincial taxes in subsequent taxation years.

Excluding this and other minor adjustments to prior period amounts, the tax recovery related to the current year was $1,844 (29% effective rate) in 2015 Q2 compared to expense of $806 (79% effective rate) in 2014.  The 2015 Q2 effective rate is in line with anticipated annual rates, however, the 2014 Q2 effective rate was impacted by estimated tax losses in Canada and estimated taxable income in the U.S.

RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30

	Six months ended June 30, 2015							Six months ended June 30, 2014
		Directional		Production					Directional		Production
Revenues		drilling		testing		Total			drilling		testing		Total
Canada	$	21,673	$	7,934	$	29,607		$	41,611	$	16,569	$	58,180
United States		37,043		13,106		50,149			52,308		14,329		66,637
Total	$	58,716	$	21,040	$	79,756		$	93,919	$	30,898	$	124,817

Revenues    2015 revenues were $79,756 which represented a decrease of $45,061 or 36% from 2014 revenues of $124,817.  All areas experienced decreases due mainly to overall decline in drilling activity as a result of reduction in commodity prices.  2014 Q2 saw several divisions achieve record revenues.  U.S. directional drilling achieved an all-time quarterly record for revenues and Canadian directional drilling and Canadian production testing had records for Q2 revenues.  The active land rig count for Canada was down 44% and down 37% for U.S. in 2015.

Canadian directional drilling revenues decreased to $21,673 in 2015 from $41,611 in 2014; a 48% decrease.  This decrease was the result of: i) a 47% decrease in activity days to 1,939 in 2015 from 3,636 in 2014; and ii) a 9% decrease in the average day rate to $10,420 in 2015 from $11,397 in 2014.  Offsetting these declines was an increase of $1,297 on the rental of Cathedral's CLAW mud motor for 2015 revenues of $1,468.   

U.S. directional drilling revenues decreased to $37,043 in 2015 from $52,308 in 2014; a 29% decrease.  This decrease was the result of: i) a 30% decrease in activity days to 2,921 in 2015 from 4,144 in 2014; and ii) a slight decrease in the average day rate to $12,511 in 2015 from $12,525 in 2014 (when converted to Canadian dollars).  All U.S. districts experienced a decrease in activity levels except the Northeast district which added a significant customer in the last year.  The division had set an all-time revenue record in 2014 Q2.  The U.S. average day rates in Canadian dollars were relatively unchanged due to the stronger U.S. dollar.  Rates in USD fell to $10,147 USD in 2015 from $11,427 USD in 2014, an 11% decline.  As with Canadian directional, there were pressures from clients to reduce pricing.  

Canadian production testing revenues decreased to $7,934 in 2015 from $16,569 in 2014; a 52% decrease.  The decrease was due to the reduction in operating days due to the industry downturn. 

U.S. production testing revenues decreased to $13,106 in 2015 from $14,329 in 2014, a 9% decrease.  The decrease was due to the reduction in operating days due to the industry downturn.

Gross margin and adjusted gross margin    Gross margin for 2015 was 4.0% compared to 12.7% in 2014.  Adjusted gross margin (see Non-GAAP Measurements) for 2015 was $13,475 or 16.9% compared to $25,145 or 20.1% for 2014, a decline of 3.2%.   

The Company implemented a number of cost reductions in 2015 Q1 which included reductions for external services and for field, support and office staff, including work force adjustments and wage rollbacks.  Overall costs were lower than in 2014, but higher as a percentage of revenue basis.

Although there was a reduction in the fixed component of direct cost of sales of 17.6% compared with 2014, the overall impact of these costs on margins was greater in 2015 due to the reduction in revenues.  On a percentage of revenue basis the fixed costs increased 3.9% from 2014.  As stated above, the year-to-date adjusted gross margin had decreased by 3.2%, the remaining 0.7% net reduction in adjusted gross margin relates mainly to increases in repairs offset by reductions in field labour.

Depreciation allocated to cost of sales increased to $10,225 in 2015 from $9,197 in 2014.  Depreciation included in cost of sales as a percentage of revenue was 12.8% for 2015 and 7.4% in 2014.

Selling, general and administrative expenses ("SG&A")     SG&A expenses were $10,317 in 2015; a decrease of $2,052 compared with $12,369 in 2014. 

Adjusted SG&A (see Non-GAAP Measurements) was $9,977 in 2015 compared to $12,219 in 2014, a decrease of $2,242 or 18%.  As a percentage of revenue, adjusted SG&A was 13% in 2015 and 10% in 2014. Adjusted SG&A decreased primarily due to work force reductions, wage rollbacks and reduction in variable compensation.  SG&A wage rollbacks were implemented February 1, 2015 at a range of 5% to 15% with an average reduction of 10%.  Staffing costs included in SG&A include executives, sales, accounting, human resources, payroll, safety, research and development and related support staff.   

Gain on disposal of property and equipment     In 2015 Q1 the Company completed the sale and leaseback of its Oklahoma City operating facility.  This resulted in a gain on sale of land and buildings of $456.  The Company has entered into a 15 year lease on the related assets.  During 2015, the Company had a gain on disposal of property and equipment of $1,304 compared to $1,614 in 2014.  These gains are mainly due to recoveries of lost-in-hole equipment costs including previously expensed depreciation on the related assets.  The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter. 

Foreign exchange loss     The Company had foreign exchange loss of $883 in 2015 compared to $19 in 2014 due to the fluctuations in the Canadian dollar relative to the U.S. dollar.  The Company's foreign operations are denominated in a currency other than the Canadian dollar and therefore, upon consolidation gains and losses due to fluctuations in the foreign currency exchange rates are recorded in other comprehensive income ("OCI") on the balance sheet as a component of equity.  However, gains and losses in the Canadian entity on U.S. denominated intercompany balances continue to be recognized in the statement of income.  Included in the 2015 foreign currency loss are unrealized losses of $629 (2014 - $122) related to intercompany balances.

Finance costs     Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $913 for 2015 versus $1,202 for 2014.  The decrease in finance costs relate mainly to a decreased utilization of the Company's credit facility and to a lesser extent decreases in interest rates.

Income tax     For 2015, the Company had net income tax expense of $8,853 compared to $1,197 in 2014.  Included in this figure is a charge to earnings of $10,768 related to a write-off of a portion of the tax attributes obtained as part of the December 18, 2009 conversion from an income trust to a corporation.  On April 21, 2015, the Company received a proposal letter from the CRA which disclosed its intention to challenge all of the tax attributes obtained as part of the Conversion under the general anti-avoidance rules of the Income Tax Act (Canada).  Subsequently, Cathedral elected to enter into the agreement with CRA as a highly satisfactory solution to avoid potential costly and time consuming legal proceedings and allow management to focus its efforts on business operations and enhancing shareholder value.  The CRA agreement will not give rise to any cash outlay by Cathedral for prior taxation years. Cathedral continues to have access to a portion of the tax attributes obtained as part of the Conversion to offset federal and provincial taxes in subsequent taxation years.

Excluding this and other minor adjustments to prior period amounts, the tax recovery related to the current year was $1,576 (22% effective rate) in 2015 Q2 compared to expense of $1,233 (32% effective rate) in 2014.  The 2015 effective rate is in line with anticipated annual rates, however, the 2014 Q2 effective rate was impacted by estimated tax losses in Canada and estimated taxable income in the U.S.

LIQUIDITY AND CAPITAL RESOURCES

Overview     On an annualized basis the Company's principal source of liquidity is cash generated from operations.    In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity.   For the period ended June 30, 2015, the Company had funds from operations (see Non-GAAP Measurements) of $3,112 (2014 - $11,887).  The decrease in funds from operations is due to a reductions in cash from operations due to lower activity levels and reductions in revenue day rates.

Working capital     At June 30, 2015 the Company had working capital of $17,820 (December 31, 2014 - $38,135) and a working capital ratio of 1.6 to 1 (December 31, 2014 – 1.8 to 1).  The lower working capital level was directly related to the reduction in activity levels and collection of accounts receivable.

Credit facility     The Company has a 3 year committed revolving credit facility that expires in August 2017.  The credit facility was amended on June 12, 2015 (the "Amendment") to reduce the facility to $60,000 (previously $85,000), increase the accordion feature to $35,000 (previously $25,000) and to provide a temporary relaxation of financial covenants.  The accordion feature is subject to approval of the syndicate of lenders which currently consists of The Bank of Nova Scotia and National Bank of Canada. 

After the Amendment discussed above, the facility bears interest at the bank's prime rate plus 0.50% to 4.00% or bankers' acceptance rate plus 1.75% to 5.25% with interest payable monthly.  Interest rate spreads for the credit facility depends on the level of funded debt to EBITDAS (earnings before interest on long-term debt, taxes, depreciation, amortization and non-cash compensation expense – as defined in the credit agreement).

The credit facility is secured by a general security agreement over all present and future personal property and is subject to certain covenants regarding the payment of dividends.  As at June 30, 2015 the Company is in compliance with all covenants under the credit facility including the following financial covenants:

	June 30, 2015
Debt service ratio - must be not less than 2.50:1	5.65 : 1
Funded debt to EBITDAS (as defined in the credit facility) - must be not greater than 3.00:1	1.36 : 1

The financial covenants associated with the amended credit facility are as follows:

Quarter ending:	Maximum Funded Debt to EBITDA Ratio	Minimum Debt Service Ratio
September  30, 2015	3.75	2.00
December 31, 2015	4.75	1.25
March 31, 2016	4.25	1.75
June 30, 2016	3.75	2.25
September 30, 2016	3.50	2.50
December 31, 2016 and thereafter	3.00	2.50

The following table outlines the current credit facility:

					June 30		December 31
						2015		2014
Total credit facility					$	60,000	$	85,000
Drawings on credit facility:
	Operating loan					881		1,069
	Revolving term loan					32,000		55,000
	Letters of credit					1,362		700
Total drawn facility					$	34,243	$	56,769
Undrawn portion of credit facility					$	25,757	$	28,231
Net debt (see NON-GAAP MEASUREMENTS):
	Loans and borrowings, net of current portion				$	32,793	$	56,142
	Working capital:
		Current assets			$	46,240	$	83,392
		Current liabilities				(28,420)		(45,257)
	Working capital				$	17,820	$	38,135
Net debt					$	14,973	$	18,007

Contractual obligations    In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's MD&A for the year ended December 31, 2014.  As at June 30, 2015, the Company had a commitment to purchase approximately $61 of equipment.  Cathedral anticipates expending these funds in 2015 Q3.  In connection with the sale and leaseback of its Oklahoma City operating facility, the company issued a letter of credit in the amount of $531 USD.

Contingencies     On October 29, 2014 Cathedral received a letter from one of its U.S. clients alleging a down-hole drilling incident which impacted two of their wells in December 2013.  The client had indicated potential damages of $3,000 USD and in 2015 Q2 increased this indication to $3,700 USD.  Cathedral does not normally carry insurance for this type of incident.  Cathedral is currently in the process of investigating the particulars related to this letter to understand its potential liability and the impact any liability may have on the Company.  Due to the uncertainty around what amount, if any, and the means of settlement, the Company has made no provision in the financial statements for this incident.

The Company's wholly-owned subsidiary, Cathedral Energy Services Inc. ("INC"), has been named in a legal action in Houston, Texas commenced by a former employee and was subsequently joined by one former employee and two former consultants.  INC has also been named in a second legal action in Denver, Colorado by a former employee.  In both these legal actions the employees and consultants (collectively "Claimants") allege that they were improperly classified as exempt under the Fair Labour Standards Act and therefore entitled to unpaid overtime.  Legal actions involving similar alleged violations have been filed in the United States against a number of other oilfield service companies. The Claimants assert that they will seek to have the action certified as a collective action which may result in additional employees, former employees or consultants of INC joining the actions. INC has filed a defense to the first action, is in the process of filing a defense on the second action and intends to vigorously defend the same including, without limitation, any motion which may be brought for certification. Based upon a preliminary assessment of information available and certain assumptions the Company believes to be reasonable at this time, Cathedral believes it has a number of defenses to the claims asserted and the action is not currently believed to be material to the Company.

Share capital     At August 13, 2015, the Company has 36,295,380 common shares and 1,695,197 options outstanding with a weighted average exercise price of $4.49.

In 2015 Q1, the Company issued 729,000 stock options to directors, officers and employees with an exercise price of $2.13 per share.

RISK FACTORS

The MD&A for the year ended December 31, 2014, which is included in the Company's 2014 Annual Report, includes an overview on risk factors associated with the Company and its operating entities.  Those risk factors remain in effect as at June 30, 2015 except as noted below.

Tax related risks associated with conversion          This entire section no longer applies due to the settlement with CRA discussed previously.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
June 30, 2015 and December 31, 2014
Dollars in '000s
(unaudited)

		June 30		December 31
			2015		2014
Assets
Current assets:
	Cash and cash equivalents	$	711	$	5,109
	Trade receivables		27,013		58,770
	Income taxes refundable		256		-
	Prepaid expenses		1,680		2,383
	Inventories		16,580		17,130
Total current assets			46,240		83,392
Property and equipment			121,985		131,877
Intangible assets			1,998		1,905
Deferred tax assets			-		7,512
Goodwill			5,848		5,848
Total non-current assets			129,831		147,142
Total assets		$	176,071	$	230,534
Liabilities and Shareholders' Equity
Current liabilities:
	Operating loan	$	881	$	1,069
	Trade and other payables		21,131		35,201
	Dividends payable		1,452		2,994
	Income taxes payable		-		1,232
	Loans and borrowings		758		857
	Deferred revenue		4,198		3,904
Total current liabilities			28,420		45,257
Loans and borrowings			32,793		56,142
Deferred tax liabilities			2,219		767
Total non-current liabilities			35,012		56,909
Total liabilities			63,432		102,166
Shareholders' equity:
	Share capital		74,481		74,481
	Contributed surplus		9,362		9,261
	Accumulated other comprehensive income		6,914		3,850
	Retained earnings		21,882		40,776
Total shareholders' equity			112,639		128,368
Total liabilities and shareholders' equity		$	176,071	$	230,534

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Three and six months ended June 30, 2015 and 2014
Dollars in '000s except per share amounts
(unaudited) 

			Three months ended June 30				Six months ended June 30
			2015		2014		2015		2014
Revenues		$	29,679	$	56,797	$	79,756	$	124,817
Cost of sales:
	Direct costs		(26,324)		(45,577)		(66,281)		(99,672)
	Depreciation		(5,134)		(4,733)		(10,225)		(9,197)
	Share-based compensation		(19)		(25)		(34)		(73)
Total cost of sales			(31,477)		(50,335)		(76,540)		(108,942)
Gross margin			(1,798)		6,462		3,216		15,875
Selling, general and administrative expenses:
	Direct costs		(4,639)		(6,095)		(10,161)		(12,130)
	Depreciation		(44)		(69)		(88)		(130)
	Share-based compensation		(41)		(27)		(68)		(109)
Total selling, general and administrative expenses			(4,724)		(6,191)		(10,317)		(12,369)
			(6,522)		271		(7,101)		3,506
Gain on disposal of property and equipment			135		880		1,304		1,614
Gain (loss) on disposal of land and buildings			(52)		-		456		-
Earnings (loss) from operating activities			(6,439)		1,151		(5,341)		5,120
Finance costs			(446)		(606)		(913)		(1,202)
Foreign exchange gain (loss)			543		478		(883)		(19)
Earnings (loss) before income taxes			(6,342)		1,023		(7,137)		3,899
Income tax recovery (expense):
	Current		535		(1,504)		52		(1,231)
	Deferred curent year		1,210		734		1,764		34
	Deferred adjustment to prior years		(10,669)		-		(10,669)		-
Total income tax expense			(8,924)		(770)		(8,853)		(1,197)
Net earnings (loss)			(15,266)		253		(15,990)		2,702
Other comprehensive income (loss):
	Foreign currency translation differences for foreign operations		(742)		(1,298)		3,064		(915)
Total comprehensive income (loss)		$	(16,008)	$	(1,045)	$	(12,926)	$	1,787
Net earnings (loss) per share
	Basic	$	(0.42)	$	0.01	$	(0.44)	$	0.07
	Diluted	$	(0.42)	$	0.01	$	(0.44)	$	0.07

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three and six months ended June 30, 2015 and 2014
Dollars in '000s
(unaudited)

				Three months ended June 30				Six months ended June 30
				2015		2014		2015		2014
Cash provided by (used in):
Operating activities:
	Net earnings (loss)		$	(15,266)	$	253	$	(15,990)	$	2,702
	Items not involving cash:
		Depreciation		5,178		4,802		10,313		9,327
		Total income tax (recovery) expense		8,924		770		8,853		1,197
		Unrealized foreign exchange (gain) loss on intercompany balances		(647)		(332)		629		122
		Finance costs		446		606		913		1,202
		Share-based compensation		60		52		102		182
		Gain on disposal of property and equipment		(135)		(880)		(1,304)		(1,614)
		Gain (loss) on disposal of land and building		52		-		(456)		-
	Cash flow from operations			(1,388)		5,271		3,060		13,118
	Changes in non-cash operating working capital			2,143		7,455		20,954		1,142
	Income taxes paid			(258)		(968)		(1,585)		(908)
Cash flow from operating activities				497		11,758		22,429		13,352
Investing activities:
	Property and equipment additions			(1,845)		(7,062)		(6,148)		(16,979)
	Intangible asset additions			(39)		(287)		(189)		(338)
	Proceeds on disposal of property and equipment			479		2,094		2,151		3,200
	Proceeds on disposal of land and buildings			-		-		6,174		-
	Changes in non-cash investing working capital			(498)		(2,192)		(93)		(1,305)
Cash flow from (used for) investing activities				(1,903)		(7,447)		1,895		(15,422)
Financing activities:
	Change in operating loan			881		(5,899)		(155)		(474)
	Advances on loans and borrowings			-		8,000		-		13,000
	Repayments on loans and borrowings			(3,160)		(155)		(23,340)		(322)
	Interest paid			(774)		(595)		(1,129)		(1,173)
	Proceeds on exercise of share options			-		282		-		382
	Dividends paid			(1,452)		(2,985)		(4,446)		(5,969)
Cash flow from (used for) financing activities				(4,505)		(1,352)		(29,070)		5,444
Effect of exchange rate on changes in cash and cash equivalents				(99)		54		348		88
Change in cash and cash equivalents				(6,010)		3,013		(4,398)		3,462
Cash and cash equivalents, beginning of period				6,721		738		5,109		289
Cash and cash equivalents, end of period			$	711	$	3,751	$	711	$	3,751

FORWARD LOOKING STATEMENTS

This news release contains certain forward-looking statements and forward-looking information (collectively referred to herein as "forward-looking statements") within the meaning of applicable Canadian securities laws.  All statements other than statements of present or historical fact are forward-looking statements.  Forward-looking statements are often, but not always, identified by the use of words such as "anticipate", "achieve", "believe", "plan", "intend", "objective", "continuous", "ongoing", "estimate", "outlook", "expect", "may", "will", "project", "should" or similar words suggesting future outcomes.  In particular, this news release contains forward-looking statements relating to, among other things: oil price volatility will likely delay a rebound in activity levels; adjusted cost structure; position to be a stronger company; preserve key employee base; maintaining core employee base will position us well for an eventual industry recovery; continue to look for short and long-term efficiency and cost savings opportunities; amended credit facility should also support revenue growth when industry activity levels increase; projected capital expenditures and commitments and the financing thereof; seeing opportunities for increased application for our proprietary dual telemetry MWD system in the U.S.; invest in our strategic improvement initiatives to set our company to be in a stronger position coming out of this downturn; deploying our technology and expertise to assist our customers reduce their costs and continuing to demonstrate our quality, safety and integrity with our employees and customers; come out of this current downturn in a very strong position to deliver increased value to our customers and our shareholders; and dividends.

Various material factors and assumptions are typically applied in drawing conclusions or making the forecasts or projections set out in forward-looking statements.  Those material factors and assumptions are based on information currently available to the Company, including information obtained from third party industry analysts and other third party sources.  In some instances, material assumptions and material factors are presented elsewhere in this news release in connection with the forward-looking statements.  You are cautioned that the following list of material factors and assumptions is not exhaustive.  Specific material factors and assumptions include, but are not limited to:

• the performance of Cathedral's businesses, including current business and economic trends;
• oil and natural gas commodity prices and production levels;
• capital expenditure programs and other expenditures by Cathedral and its customers:
• the ability of Cathedral to retain and hire qualified personnel;
• the ability of Cathedral to obtain parts, consumables, equipment, technology, and supplies in a timely manner to carry out its activities;
• the ability of Cathedral to maintain good working relationships with key suppliers;
• the ability of Cathedral to market its services successfully to existing and new customers and reliance on major customers;
• risks associated with technology development and intellectual property rights;
• the ability of Cathedral to maintain safety performance
• the ability of Cathedral to obtain timely financing on acceptable terms;
• the ability to obtain sufficient insurance coverage to mitigate operational risks;
• currency exchange and interest rates;
• risks associated with foreign operations;
• risks associated with acquisitions and business development efforts;
• environmental risks
• risks associated with winding up operations in Venezuela, including the ability to sell Cathedral's interest in the Venezuela joint venture;
• changes under governmental regulatory regimes and tax, environmental and other laws in Canada, United States ("U.S.") and Venezuela; and
• competitive risks.

Forward-looking statements are not a guarantee of future performance and involve a number of risks and uncertainties some of which are described herein.  Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause the Company's actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements.  These risks and uncertainties include, but are not limited to, the risks identified in this news release and in the Company's Annual Information Form under the heading "Risk Factors".  Any forward-looking statements are made as of the date hereof and, except as required by law, the Company assumes no obligation to publicly update or revise such statements to reflect new information, subsequent or otherwise.

All forward-looking statements contained in this news release are expressly qualified by this cautionary statement. Further information about the factors affecting forward-looking statements is available in the Company's current Annual Information Form and Annual Report which have been filed with Canadian provincial securities commissions and are available on www.sedar.com.

NON-GAAP MEASUREMENTS

Cathedral uses certain performance measures throughout this document that are not defined under GAAP. Management believes that these measures provide supplemental financial information that is useful in the evaluation of Cathedral's operations and are commonly used by other oil and gas service companies. Investors should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with GAAP as an indicator of Cathedral's performance. Cathedral's method of calculating these measures may differ from that of other organizations, and accordingly, may not be comparable.

The specific measures being referred to include the following:

i)      "Adjusted gross margin" - calculated as gross margin plus non-cash items (depreciation and share-based compensation); is considered a primary indicator of operating performance (see tabular calculation);

ii)     "Adjusted gross margin %" - calculated as adjusted gross margin divided by revenues; is considered a primary indicator of operating performance (see tabular calculation);

iii)     "Adjusted selling, general and administrative expenses" ("Adjusted SG&A") – defined as selling, general and administrative expenses excluding non-cash depreciation and share-based compensation, non-recurring executive compensation (such as severance) and excluding expenses related to operations in Venezuela.

iv)    "Adjusted EBITDAS" - defined as earnings before share of income/loss from associate, finance costs, unrealized foreign exchange on intercompany balances, unrealized foreign exchange due to hyper-inflation accounting, taxes, non-recurring gains and losses on disposal of property and equipment (see non-GAAP measurement), depreciation and share-based compensation plus dividends from associate; is considered an indicator of the Company's ability to generate funds flow from operations prior to consideration of how activities are financed, how the results are taxed and measured and non-cash expenses (see tabular calculation);

v)     "Funds from operations" - calculated as cash flow from operating activities before changes in non-cash working capital and income taxes paid less current tax expense; is considered an indicator of the Company's ability to generate funds flow from operations on an after tax basis but excluding changes in non-cash working capital which is financed using the Company's operating loan (see tabular calculation);

vi)    "Growth property and equipment additions" or "Growth capital" – is capital spending which is intended to result in incremental revenues or decreased operating costs.  Growth capital is considered to be a key measure as it represents the total expenditures on property and equipment expected to add incremental revenues and funds flow to the Company;

vii)   "Maintenance property and equipment additions" or "Maintenance capital" – is capital spending incurred in order to refurbish or replace previously acquired other than "replacement property and equipment additions" described below. Such additions do not provide incremental revenues. Maintenance capital is a key component in understanding the sustainability of the Company's business as cash resources retained within Cathedral must be sufficient to meet maintenance capital needs to replenish the assets for future cash generation;

viii)   "Replacement property and equipment additions" or "Replacement capital" – is capital spending incurred in order to replace equipment that is lost downhole.  Cathedral recovers lost-in-hole costs including previously expensed depreciation on the related assets from customers.  Such additions do not provide incremental revenues.  The identification of replacement property and equipment additions is considered important as such additions are financed by way of proceeds on disposal of property and equipment (see discussion within the news release on "gain on disposal of property and equipment);

ix)    "Infrastructure property and equipment additions" or "Infrastructure capital" – is capital spending incurred on land, buildings and leasehold improvements. Infrastructure capital is a component in understanding the sustainability of the Company's business as cash resources retained within Cathedral must be sufficient to meet maintenance capital needs;

x)     "Non-recurring gains and losses on disposal of property and equipment" – are disposals of property and equipment that do not occur on a regular or periodic basis.  Unlike the lost-in-hole recoveries the proceeds from these gains are not used on equivalent replacement property.  These are often on non-field equipment such as land and buildings;

xi)    "Net property and equipment additions" – is property and equipment additions expenditures less proceeds on the disposal of property and equipment.  Cathedral uses net property and equipment additions to assess net cash flows related to the financing of Cathedral's property and equipment additions; and

xii)   "Net debt" – is loans and borrowing less working capital.  Management uses net debt as a metric to shows the Company's overall debt level.

The following tables provide reconciliations from GAAP measurements to non-GAAP measurements referred to in this news release:

Adjusted gross margin

			Three months ended June 30				Six months ended June 30
			2015		2014		2015		2014
Gross margin		$	(1,798)	$	6,462	$	3,216	$	15,875
Add non-cash items included in cost of sales:
	Depreciation		5,134		4,733		10,225		9,197
	Share-based compensation		19		25		34		73
Adjusted gross margin		$	3,355	$	11,220	$	13,475	$	25,145
Adjusted gross margin %			11.3%		19.8%		16.9%		20.1%

Adjusted SG&A

			Three months ended June 30				Six months ended June 30
			2015		2014		2015		2014
Total selling, general and administrative expenses		$	4,724	$	6,191	$	10,317	$	12,369
Less:
	Non-recurring compensation		-		-		(134)		-
	Expenses related to international operations		(18)		160		(50)		89
	Depreciation		(44)		(69)		(88)		(130)
	Share-based compensation		(41)		(27)		(68)		(109)
Adjusted selling, general and administrative expenses		$	4,621	$	6,255	$	9,977	$	12,219

Adjusted EBITDAS

			Three months ended June 30				Six months ended June 30
			2015		2014		2015		2014
Earnings (loss) before income taxes		$	(6,342)	$	1,023	$	(7,137)	$	3,899
Add:
	Depreciation included in cost of sales		5,134		4,733		10,225		9,197
	Depreciation included in selling, general and administrative expenses		44		69		88		130
	Share-based compensation included in cost of sales		19		25		34		73
	Share-based compensation included in selling, general and administrative expenses		41		27		68		109
	Finance costs		446		606		913		1,202
EBITDAS			(658)		6,483		4,191		14,610
	Unrealized foreign exchange (gain) loss on intercompany balances		(647)		(332)		629		122
	Non-recurring compensation		16		-		185		-
	Non-recurring (gain) loss on disposal of land and building		52		-		(456)		-
Adjusted EBITDAS		$	(1,237)	$	6,151	$	4,549	$	14,732

Funds from operations

			Three months ended June 30				Six months ended June 30
			2015		2014		2015		2014
Cash flow from operating activities		$	497	$	11,758	$	22,429	$	13,352
Add (deduct):
	Changes in non-cash operating working capital		(2,143)		(7,455)		(20,954)		(1,142)
	Income taxes paid		258		968		1,585		908
	Current tax recovery (expense)		535		(1,504)		52		(1,231)
Funds from operations		$	(853)	$	3,767	$	3,112	$	11,887

Funds from operations

			Three months ended March 31
			2015		2014
Cash flow from operating activities		$	21,932	$	1,594
Add (deduct):
	Changes in non-cash operating working capital		(18,811)		6,313
	Income taxes paid (recovered)		1,327		(60)
	Current tax recovery (expense)		(483)		273
Funds from operations		$	3,965	$	8,120

Cathedral Energy Services Ltd. (the "Company" or "Cathedral"), based in Calgary, Alberta is incorporated under the Business Corporations Act (Alberta) and operates in the U.S. under Cathedral Energy Services Inc.  The Company is publicly traded on the Toronto Stock Exchange under the symbol "CET".  Cathedral, is a trusted partner to North American energy companies requiring high performance directional drilling services and dependable flowback and production testing solutions. We work in partnership with our customers to tailor our equipment and expertise to meet their specific geographical and technical needs.  Our experience, technologies and responsive personnel enable our customers to achieve higher efficiencies and lower project costs.  For more information, visit www.cathedralenergyservices.com.

SOURCE Cathedral Energy Services Ltd.

Requests for further information should be directed to: P. Scott MacFarlane, President and Chief Executive Officer, Michael F. Hill, Chief Financial Officer or Randy Pustanyk, Executive Vice President and Chief Operating Officer, Cathedral Energy Services Ltd., 6030 3 Street S.E., Calgary, Alberta T2H 1K2, Telephone: [phone], Fax: [phone], www.cathedralenergyservices.com