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PHX Energy Services Corp. | 2011 Annual Report

-2-

statements and information included in this MD&A should not be unduly relied upon. These forward-looking statements and

information speak only as of the date of this MD&A.

In particular, forward-looking information and statements contained in this MD&A include, without limitation:

The 2012 capital expenditure budget has been approved by the Board of Directors and is projected to be

$38.9 million. PHX Energy plans to expand its fleet with the addition of 28 MWD systems, down hole

performance drilling motors and the required ancillary equipment. As a result, further reductions to the level of

third party equipment rentals are anticipated.

Growth in international areas is expected in 2012 with the addition of a fifth rig in Albania late in 2011,

improvements to the reliability of the Resistivity While Drilling (“RWD”) fleet deployed and work recently

awarded in Russia, and the commencement of full service operations in Colombia expected late in the middle

of the year.

PHX Energy is concentrated on growing in all of its US operating regions.

At December 31, 2011, the Corporation had on order an additional 9 positive pulse MWD systems, all of

which are expected to be delivered during the end of the first quarter, and the Corporation expects to add 14

positive pulse and 5 CLT-EM MWD systems by mid-year. As a result, by the end of 2012 the Corporation

expects to have a fleet of 218 MWD systems, which would be comprised of 147 positive pulse MWD systems,

64 CLT EM-MWD systems and 7 RWD systems.

The Corporation’s objective is to maintain a strong balance sheet moving forward in 2012.

PHX Energy believes the reliability issues with respect to its RWD tool are now resolved.

The Corporation is examining cost reduction efforts in all areas but specifically regarding third party equipment

rental costs and within its down hole performance drilling motor repair operations. Management believes that

strategies can be put into place to improve margins and profitability in the upcoming year.

It is expected that the Permian Basin in Texas, Mid-Continent region in Oklahoma, and Bakken play in North

Dakota will contribute to Phoenix USA’s growth in 2012, along with activity within the Utica shale in Ohio.

The Corporation’s presence in Albania grew with the addition of a permanent Operations Manager and the

Corporation is continuing to hire, train, and develop local Albanian staff which is expected to create greater

efficiencies and profitability.

Management’s Discussion & Analysis

-3-

PHX Energy would like to leverage its infrastructure in Albania by expanding its Eastern European operations

into other countries if the opportunity arises.

PHX Energy is optimistic towards the 2012 growth potential for Russia and expects that additional job

capacity could be added.

The Corporation's ability to maintain the current level of dividends to its shareholders is dependent upon the

realization of cash flow from operations, and if the Corporation does not meet its budgeted cash flow from

operations, dividends to shareholders may be reduced.

If a sustained period of market uncertainty and financial market volatility persists in 2012, the Corporation's

activity levels, cash flows and access to credit may be negatively impacted, and the expenditure level would

be reduced accordingly.

The Corporation believes that future cash flows generated by the operations and access to additional liquidity

through capital and banking markets will be adequate to meet its financial obligations.

Cost reduction strategies and initiatives PHX Energy undertook in 2011 will continue to produce benefits into

2012.

In 2012, PHX Energy will continue to focus on capturing greater market share in its US and international

locations and on increasing operating margins in all areas, with the ultimate goal of generating EBITDA that

represents a greater percent of revenue.

The Northeast US region’s activity has slowed with lower natural gas prices, however, the Corporation

expects to remain active in the Marcellus shale, albeit at lower activity levels than in past years, and enter the

Utica shale.

There is also optimism towards the ability for operators in certain areas of South America to benefit from the

technologies that have helped create the momentum in North American horizontal drilling activity, and the

Corporation believes it is positioned to be at the forefront of this trend.

As the 2012-year progresses, PHX Energy will continue to examine its international operations, expanding

where markets and revenues are promising and scrutinizing areas that are underperforming. The Corporation

believes its international operations are heading in the right direction and in future anticipates that they will

represent 20 percent of consolidated revenue.

PHX Energy believes that its robust Canadian operations will also continue to thrive.

PHX Energy Services Corp. | 2011 Annual Report

-4-

The above are stated under the headings: "Overall Performance", “Operating Costs and Expenses", “Segmented

Information”, "Cash Flow and Dividends", "Cash Requirements for Capital Expenditures", “Proposed Transactions”,

“Financial Instruments”, and "Outlook". In addition, all information contained within the Financial Instruments and Business

Risk section of this report contains forward-looking statements.

In addition to other material factors, expectations and assumptions which may be identified in this MD&A and other

continuous disclosure documents of the Corporation referenced herein, assumptions have been made in respect of such

forward-looking statements and information regarding, among other things: the Corporation will continue to conduct its

operations in a manner consistent with past operations; the general continuance of current industry conditions; anticipated

financial performance, business prospects, impact of competition, strategies, the general stability of the economic and

political environment in which the Corporation operates; exchange and interest rates; tax laws; the sufficiency of budgeted

capital expenditures in carrying out planned activities; the availability and cost of labour and services and the adequacy of

cash flow; debt and ability to obtain financing on acceptable terms to fund its planned expenditures, which are subject to

change based on commodity prices; market conditions and future oil and natural gas prices; and potential timing delays.

Although Management considers these material factors, expectations and assumptions to be reasonable based on

information currently available to it, no assurance can be given that they will prove to be correct.

Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other

factors that could affect the Corporation's operations and financial results are included in reports on file with the Canadian

Securities Regulatory Authorities and may be accessed through the SEDAR website (www.sedar.com) or at the

Corporation's website. The forward-looking statements and information contained in this MD&A are expressly qualified by

this cautionary statement. The Corporation does not undertake any obligation to publicly update or revise any forward-

looking statements or information, whether as a result of new information, future events or otherwise, except as may be

required by applicable securities laws.

About

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orp.

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Energy’s perform

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-6-

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2010

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ance measures

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ecember 31,

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2011

260,063 1

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by drilling days)

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-7-

quarter level of

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late in 2011, im

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all of its US op

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and 69 percent

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PHX Energy Services Corp. | 2011 Annual Report

-8-

As a result of strong demand for services in 2011, a record level of capital expenditures, $49.3 million, was incurred in the

year. These expenditures were financed by cash flow from operations and borrowing under the Corporation’s extendible

debt facility. With these capital expenditures, PHX Energy’s job capacity increased by 27 percent to 190 concurrent jobs

from 150 in 2010 through the addition of 38 positive pulse MWD systems and two RWD systems. As at December 31, 2011,

the Corporation’s MWD fleet consisted of 124 positive pulse MWD systems, 59 current loop telemetry electromagnetic (“CLT

EM”) MWD systems, and 7 RWD systems. Of these, 97 MWD systems were deployed in Canada, 72 in the US, 8 in Russia,

5 in Albania, and 4 in both Peru and Colombia.

At December 31, 2011, the Corporation had on order an additional 9 positive pulse MWD systems, all of which are expected

to be delivered during the end of the first quarter, and the Corporation expects to add 14 positive pulse and 5 CLT-EM MWD

systems by mid-year. As a result, by the end of 2012 the Corporation expects to have a fleet of 218 MWD systems, which would

be comprised of 147 positive pulse MWD systems, 64 CLT EM-MWD systems and 7 RWD systems.

In light of the Corporation’s increased requirements for capital expenditures, in 2011 PHX Energy increased its extendible debt

facility with its bank by $40.0 million. As a result the total debt facility, including a $10.0 million demand overdraft revolving

facility, was $90.0 million at the end of the 2011-year. The Corporation’s objective is to maintain a strong balance sheet moving

forward in 2012. PHX Energy exited the 2011-year with net debt (long-term debt less working capital) of $11.1 million.

The Corporation paid dividends to its shareholders in 2011 of $0.48 per share (2010 - $0.48 per share), or $12.5 million for

the year (2010 - $12.2 million). PHX Energy ended 2011 with a conservative cash dividend payout ratio of 29 percent (cash

dividends paid divided by funds from operations). In light of this and strong current and forecasted operational activity levels,

the Board of Directors has approved a 50 percent increase in the monthly dividend to $0.06 per share, or $0.72 on an

annualized basis, from $0.04 per share, or $0.48 on an annualized basis. This dividend increase will be effective for the

Corporation’s March 2012 dividend that will be payable on April 13, 2012 to shareholders of record at the close of business

on March 30, 2012 and PHX dividends are designated as an “eligible dividend” within the meaning of subsection 89(1) of the

Income Tax Act (Canada). The ex-dividend date is March 28, 2012.

Equity Financing There were no equity financings undertaken by the Corporation in the 2011 and 2010-years. The Corporation has financed

its operations through its internally generated cash flows and bank borrowings.

Management’s Discussion & Analysis

-9-

Business Acquisitions The Corporation did not complete any business acquisitions in 2011 nor in 2010. PHX Energy has been successful in

growing its business internally by strategically targeting US and international markets, and increasing its market share in

Canada and the US with superior services and technology.

Key Drivers of the Corporation’s Business PHX Energy considers the following to be the key drivers of its business.

World demand for natural gas and oil commodities directly affect oil and natural gas prices. These in turn have

a direct impact on the Corporation’s customers’ level of cash flows and their ability to fund capital drilling

programs with the use of debt or equity financing, ultimately impacting PHX Energy’s activity levels.

New drilling technologies must be continually developed for the Corporation to further expand and meet the

ongoing demands from its customers, oil and natural gas producing companies, for greater operating

efficiencies.

Superior customer service and satisfaction must be delivered and achieved consistently in order to retain

business.

The Corporation must attract, train and retain key personnel in order to ensure future growth.

Policies in areas such as taxation put in place by government authorities can affect the profitability and overall

activity levels of the industry, the Corporation and its customers.

Key Performance Measures There are several performance measures that are used by the Corporation to assess its performance relative to its strategies

and goals, the most significant of which are:

EBITDA and EBITDA as a percentage of revenue;

gross profit margin;

dividends as a percentage of cash flow before changes in non-cash working capital;

the reliability of the Corporation’s equipment and ability to provide high quality services in the field; and

health and safety performance targets.

PHX Energ

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| 2011 Annual Re

ty and St

stry ars, well fracturi

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in 2011 re

advanced

IndusSource: B

393

Hor

dustry ndustry also follo

e average horizo

nt increase (depi

o 1,879 in 2011

he Bakken in No

rce: Peters & C

ately 69 percent

epresented an a

fracturing techn

try AveraBaker Hughes

376

769

43%

2007

rizontal (Hz)

ows a similar tre

ontal and directio

icted in the char

from 1,546 in

rth Dakota, Perm

Co Limited). Fo

t of total rigs run

all-time high as U

niques in conjunc

ge Yearly

553

372

92

49%

2008

Directiona

end, with an incr

onal rig count in

rt below), where

2010. The incre

mian Basin in we

r the year ende

nning on a daily

US producers, lik

ction with horizo

y US Horiz

456

25

al (Dir) H

-11-

reasing number

the 2011-year w

as the average

eased activity in

est Texas, Eagle

ed December 31

basis (2010 – 6

ke Canada, real

ontal drilling.

zontal & D

201

657

60%

2009

Horizontal & Di

of horizontal an

was 1,305 rigs a

total number of

n the US in 201

eford in Texas, a

1, 2011, horizon

68 percent). The

lized the benefit

Directiona

822

222

1

68%

2010

rectional

Management’s

nd directional we

as compared to

rigs drilling per

1 was concentr

and the Marcellu

ntal and directio

e horizontal and

ts of improved e

l Rig Cou

1,0,044

Hz & Dir as %

s Discussion & An

ells drilling on a

1,044 rigs in 20

day increased b

rated in the reso

us in the northea

onal rigs represe

d directional rig c

economics that u

nt

74

230

1,305

69%

2011

% of Total Activ

alysis

daily

10; a

by 22

ource

astern

ented

count

utilize

vity

PHX Energ

ResThree-M

Reve

(Stated in t

Revenue

Consolida

Corporatio

reached i

Decembe

third quar

respective

a fourth q

Consolida

approxima

Industry a

drilling do

percent).

represent

(Sources:

With stron

Energy ge

$197.3 m

consolidat

Consolida

consolidat

correspon

internation

gy Services Corp.

ults ofMonth Perio

nue

thousands of dolla

ated revenue fo

on’s history, $73

n the third qua

r due to the Chr

rter. US and i

ely, for the 2011-

quarter record a

ated day rates o

ately 18 percent

activity continued

minated activity

US horizontal a

ing approximate

Daily Oil Bulleti

ng quarterly reve

enerated record

million in the 20

ted revenue, wa

ated operating d

ted day rates fo

nding 2010-perio

nal activity.

| 2011 Annual Re

f Operaod and Year

ars)

or the three-mo

3.6 million (2010

rter of 2011. As

ristmas holiday

nternational rev

-quarter as com

and increased b

on average for t

higher than the

d to follow favora

in Canada, app

and directional a

ely 69 percent

n and Baker Hu

enues throughou

consolidated re

010-year; an inc

as 36 and 9 pe

days increased

or the year end

od. The 2011

port

ations r Ended Dec

Three-mont

2

73,

onth period end

0 – $57.5 million

s is typical in th

season and as

venue, as a pe

pared to 36 and

by 8 percent to

the three-month

day rates of $10

able trends for P

roximately repre

activity has rem

of the rigs runn

ghes)

ut the 2011-year

evenue for the y

crease of 32 pe

ercent, respectiv

by 17 percent

ded December 3

rates are a re

-12-

cember 31,

th periods ended D

011 2010

606 57,519

ed December 3

n), which is only

he fourth quarte

a result, the fou

ercentage of tot

9 percent in 20

o 6,210 days in

period ended D

0,009 in the four

PHX Energy’s se

esenting a record

mained consisten

ning per day in

r and growth in a

year ended Dec

ercent. US an

ely, for the 201

to a record 23,

31, 2011 increa

esult of stronge

2011

December 31,

% Change

28

31, 2011 was

y 6 percent low

er of the year,

urth quarter’s ac

tal consolidated

10. Like revenu

2011 as comp

December 31, 2

rth quarter of 20

ector. In the 201

d 92 percent of t

nt with the reco

n the fourth qua

all of the Corpor

cember 31, 201

nd international

1-year as comp

,458 days comp

ased by 13 perc

er customer dem

Year

2011

260,063 1

the second hig

wer than the all-t

activity tapered

ctivity levels wer

revenue, were

ue, consolidated

pared to 5,747

2011 increased

10.

11-quarter, horiz

total industry dri

rd levels achiev

arter of 2011 (2

ration’s geograph

1 of $260.1 mil

revenue, as a

pared to 43 and

pared to 20,115

cent to $11,086

mand for servic

rs ended Decembe

2010 % Cha

197,277

ghest quarter in

time record that

off near the en

re below those i

e 32 and 9 per

operating days

in the 2010-qua

to $11,853, whi

zontal and direct

lling days (2010

ved in past qua

2010 – 68 perc

hical segments,

llion as compare

percentage of

d 7 percent in 2

5 in 2010. Ave

6 from $9,808 in

ces aided by h

er 31,

ange

32

n the

t was

nd of

n the

rcent,

were

arter.

ich is

tional

– 79

rters,

cent).

PHX

ed to

total

2010.

erage

n the

igher

Opera

(Stated in t

Direct cost

Depreciatio (included

Gross profi excludin

Direct cos

amortizati

revenue w

2010-perio

amortizati

PHX Ene

rates achi

Furthermo

equipmen

third party

The Corpo

revenue,

Decembe

million, or

Adversely

hole perfo

with respe

cost redu

margins a

Depreciat

as compa

increased

Corporatio

ating Cos

thousands of dolla

s

on & amortization d in direct costs)

it as percentage og depreciation & a

sts are compris

on on the Corp

was 30 percent f

od. For the yea

on) was 29 perc

rgy’s margins in

ieved in its North

ore, Managemen

nt additions to bo

y equipment rent

oration’s third pa

as compared to

r 31, 2011, third

8 percent of rev

y affecting PHX

ormance drilling

ect to the Corpo

ction efforts in t

and profitability in

ion and amortiza

ared to $3.4 mill

by 40 percent

on’s record level

sts and Ex

ars except percent

of revenue amortization

sed of field and

poration’s equip

for the three-mon

r ended Decem

cent as compare

n the three-mont

h American ope

nt’s cost reductio

oth PHX Energy

tal costs.

arty equipment r

o $5.1 million, o

d party equipme

venue, in 2010.

Energy’s margin

motor repair cos

ration’s RWD to

these, and all a

n the upcoming y

ation for the thre

lion in the 2010

to $16.2 millio

ls of capital expe

xpenses

tages)

Three-mon

2

56,

4,

3

d shop expense

pment. Excluding

nth period ended

ber 31, 2011, g

ed to 27 percent

th period and ye

rations and from

on strategies ha

y’s MWD and do

rentals for the fo

or 9 percent of

ent rentals were

ns in the 2011-q

sts in all regions

ool, which PHX E

areas, and Mana

year.

ee-month period

0-quarter. For th

n from $11.6 m

enditure program

-13-

th periods ended

2011 2010

,253 46,419

,447 3,402

30% 25%

es, and under th

g depreciation

d December 31,

ross profit as a

in 2010.

ear ended Dece

m increased inter

ve started to ha

own hole perform

ourth quarter of 2

revenue, in the

$15.1 million, o

uarter and year

s and lower activ

Energy believes

agement believe

d ended Decemb

he year ended

million in 2010.

ms in 2010 and 2

December 31,

% Change

21

31

he new IFRS s

and amortizatio

, 2011 as compa

percentage of r

ember 31, 2011

rnational activity

ave an impact on

mance drilling m

2011 were $2.8

e corresponding

or 6 percent of

were increased

vity in Russia ca

have been reso

es that strategie

ber 31, 2011 inc

December 31, 2

The increase

2011.

Management’s

Year

2011

201,251 1

16,171

29%

standards, inclu

on, gross profit

ared to 25 perce

revenue (exclud

benefitted from

y, where day rate

n profitability, inc

motor fleet that ha

million, or 4 per

2010-quarter.

consolidated re

d third party equi

aused by equipm

olved. The Corp

es can be put in

creased by 31 pe

2011, depreciat

in both periods

s Discussion & An

rs ended Decembe

2010 % Cha

156,025

11,565

27%

de depreciation

as a percentag

ent in the compa

ing depreciation

m higher average

es are at a prem

cluding record ca

ave begun to re

rcent of consolid

For the year e

venue, versus $

ipment rentals, d

ment reliability is

poration is exam

nto place to imp

ercent to $4.4 m

ion and amortiz

s is the result o

alysis

er 31,

ange

29

40

n and

ge of

rable

n and

e day

mium.

apital

educe

dated

nded

$16.5

down

ssues

mining

prove

million

zation

of the

PHX Energy Services Corp. | 2011 Annual Report

-14-

(Stated in thousands of dollars except percentages)

Three-month periods ended December 31, Years ended December 31,

2011 2010 % Change 2011 2010 % Change

Selling, general and administrative (“SG&A”) costs 8,512 10,526 (19) 31,618 27,045 17

Share-based payments (included in SG&A costs) 483 2,526 (81) 2,971 4,073 (27)

SG&A costs excluding share-based payments as a percentage of revenue 11% 14% 11% 12%

SG&A costs for the three-month period ended December 31, 2011 decreased by 19 percent to $8.5 million as compared to

$10.5 million in 2010. Included in SG&A costs under IFRS are share-based payments of $0.5 million in the 2011-quarter as

compared to a $2.5 million in the 2010 comparable period. Excluding these costs, in both the 2011 and 2010-quarters SG&A

costs were $8.0 million, despite activity in 2011 being greater. As a result, the SG&A cost excluding share-based payments

represented 11 percent of consolidated revenue in the 2011 three-month period compared to 14 percent in the 2010-period.

For the year ended December 31, 2011, SG&A costs increased by 17 percent to $31.6 million as compared to $27.0 million

in 2010. Excluding share-based payments of $3.0 million in the 2011-year and $4.1 million in the corresponding 2010-year,

SG&A costs as a percentage of consolidated revenue were 11 and 12 percent, respectively.

SG&A costs, excluding share-based payments, generally increased in dollar terms during the 2011-year due to payroll

related costs associated with the greater activity and additional expenses with respect to the growth and expansion of PHX

Energy’s international operations.

Share-based payments relate to the amortization of the fair values of issued options of the Corporation using the Black-

Scholes model. In the three-month period and year ended December 31, 2011, share-based payments decreased by 81

percent and 27 percent, respectively. The decrease in the 2011-year is related predominantly to a re-statement made to the

fair value of options previously reported in 2010 as a result of the transition to IFRS.

Management’s Discussion & Analysis

-15-

(Stated in thousands of dollars)

Three-month periods ended December 31, Years ended December 31,

2011 2010 % Change 2011 2010 % Change

Research and development expense 503 360 40 2,124 1,809 17

Research and development (“R&D”) expenditures charged to net earnings during each of the three-month periods ended

December 31, 2011 and 2010 were $0.5 million and $0.4 million, respectively. In addition, during the same 2011-period,

$0.1 million (2010 - $0.2 million) were capitalized as development costs on certain projects.

For the year ended December 31, 2011, R&D expenditures of $3.2 million were incurred, of which $1.1 million were

capitalized as deferred development costs. R&D expenditures for the year ended December 31, 2010 were $2.5 million, of

which $0.7 million were capitalized.

PHX Energy continues to focus on its mandate to provide leading edge technologies to its clients.

(Stated in thousands of dollars)

Three-month periods ended December 31, Years ended December 31,

2011 2010 % Change 2011 2010 % Change

Finance expense 646 320 102 2,097 713 194

Finance expenses relate to interest charges on the Corporation’s long-term and short-term bank facilities. For the three-

month period ended December 31, 2011, finance charges increased to $0.6 million from $0.3 million in the 2010-period.

Finance charges increased to $2.1 million in the 2011-year from $0.7 million in 2010. In order to fund PHX Energy’s

extensive capital expenditure programs in 2010 and 2011, additional bank borrowings were incurred.

(Stated in thousands of dollars)

Three-month periods ended December 31, Years ended December 31,

2011 2010 % Change 2011 2010 % Change

Other income 1,859 1,441 29 5,589 3,575 56

For the three-month period and year ended December 31, 2011, other income is represented by gains on disposition of

drilling equipment of $1.9 million (2010 - $1.4 million) and $5.6 million (2010 - $3.6 million), respectively. The dispositions of

drilling equipment relate primarily to equipment lost in well bores that are uncontrollable in nature. The gain reported is net of

any asset retirements that are made before the end of the equipment's useful life and self-insured down hole equipment

losses, if any. Gains typically result from insurance programs undertaken whereby proceeds for the lost equipment are at

current replacement values, which are higher than the respective equipment's book value. There was a higher occurrence of

losses in both the 2011-quarter and year as compared to the corresponding 2010-periods.

PHX Energ

(Stated in t

Other expe

Other exp

million (20

Decembe

debt prov

primarily t

dollar and

and Cana

(Stated in t

Provision fo

The provi

recovery o

million as

for 2011 is

recognitio

as an inco

recovery i

(Stated in t

Net earni

Earnings

EBITDA

EBITDA p

EBITDA a

The Corp

both incre

ended De

gy Services Corp.

thousands of dolla

ense

pense for the th

010 - $1.4 millio

r 31, 2011, othe

visions of $0.4 m

to the revaluatio

d Russian ruble

adian receivables

thousands of dolla

or (Recovery of) in

sion for income

of $2.7 million in

compared to a

s 26.5 percent.

on of deferred ta

ome trust, the C

n both 2010-qua

thousands of dolla

ngs

per share – dilute

per share – diluted

as a percentage o

oration’s level o

eased due to hig

ecember 31, 201

| 2011 Annual Re

ars)

hree-month perio

on) and a bad d

er expense is re

million (2010 - $

on of Canadian d

against the Can

s.

ars)

ncome taxes

e taxes for the th

n the 2010-period

recovery of $1.2

The provisions

x assets for fore

Corporation was

arter and year.

ars except per sha

ed

d

of revenue

of net earnings a

her activity and

1 was 18 percen

port

Three-mont

2

1,

od ended Decem

debt provision o

presented by a

$0.2 million). T

denominated int

nadian dollar. T

Three-mont

hree-month peri

d. For the year

2 million in 2010

are higher than

eign losses and

entitled to dedu

are and percentage

Three-m

1

and EBITDA for

overall profitabil

nt (2010 – 6 perc

-16-

th periods ended D

011 2010

079 1,363

mber 31, 2011

of $0.2 million (2

foreign exchang

The foreign exc

ter-company loa

The bad debt pro

th periods ended

2011

3,189

iod ended Dece

ended Decembe

0. The expected

the expected ra

the non-deducti

uct its distributio

es)

month periods ende

2011 201

5,284 2,65

0.19 0.1

13,566 3,69

0.48 0.1

18% 6%

r the three-mont

lity. EBITDA as

cent) and for the

December 31,

% Change

(21)

is represented

2010 – recover

ge loss of $1.4 m

change loss in t

ans held in foreig

ovisions in the 2

December 31,

2010

(2,685)

ember 31, 2011

er 31, 2011, the

d combined Can

ate in both the 20

ibility of share-b

ons from its taxa

ed December 31,

10 % Change

58 99

10 90

96 267

13 269

%

th period and ye

s a percentage o

e 2011-year was

Year

2011

1,823

by foreign exch

ry of $58,000).

million (2010 - $

the three-month

gn subsidiaries w

2011-year relate

Year

201

8,41

was $3.2 millio

provision for inc

adian federal an

011-quarter and

based payments

able income and

Year

2011

18,328

0.65

45,007

1.59

17%

ear ended Dece

of revenue for the

s 17 percent (201

rs ended Decembe

2010 % Cha

2,326

hange losses of

For the year e

$2.1 million) and

h 2011-period is

with a fluctuatin

primarily to Rus

rs ended Decembe

11 2

11 (1

on as compared

come taxes was

nd provincial tax

year due to the

. Previously in

d that resulted i

rs ended Decembe

2010 % Cha

14,162

0.52

25,212

0.93

13%

ember 31, 2011

e three-month p

10 – 13 percent)

er 31,

ange

(22)

$0.9

ended

d bad

s due

g US

ssian

er 31,

2010

1,228)

d to a

s $8.4

x rate

non-

2010

n the

er 31,

ange

29

25

79

71

have

period

).

Segm

The Corp

Saskatche

of the US;

Canad

(Stated in t

Revenue

Reportable

PHX Ene

$31.4 mill

these qua

Corporatio

increased

Horizonta

the three-

Daily Oil B

PHX Ener

31, 2011

quarter. T

Pekisko, D

Annual Ca

million ge

day rates

The numb

31, 2011

compariso

days in 2

mented Inf

oration reports t

ewan, British Co

; and internation

da

thousands of dolla

e segment profit be

rgy’s Canadian

ion) and operat

arterly results are

on’s quality serv

by 13 percent t

l and directional

-month period en

Bulletin) The Co

rgy’s horizontal o

represented app

The most active

Duvernay and Ba

anadian revenue

nerated in the 2

from $9,970 in 2

ber of horizontal

increased by 36

on, the Corporat

2010. Oil well d

formation

three operating

olumbia, Ontario

ally in Albania, P

ars)

efore tax

operations had

ing days increas

e second only to

vices and due to

o $11,725 in the

drilling activity

nded December

orporation contin

oil well drilling ac

proximately 72 p

areas for the C

akken.

e for 2011 repre

2010-year. Con

2010 to $11,318

and directional

6 percent to 13

tion’s Canadian

drilling activity (a

n:

segments on a

o, and Manitoba;

Peru, Russia and

Three-mont

2

43,

10,

a record fourth

sed by 23 perce

o those achieve

o the presence o

e 2011-quarter fr

in the Canadian

31, 2011 to 40,

nued to actively

ctivity (as measu

percent of its ov

Corporation in th

esented an all-tim

tributing to this

in the 2011-yea

operating days

9,359 days as

drilling days inc

as measured b

-17-

geographical b

throughout the

d Colombia.

th periods ended D

011 2010

842 31,436

499 5,681

quarter; revenu

ent to 3,739 day

ed in the third qu

of a higher prop

rom $10,382 in t

industry increas

601 days as co

drill in oil and liq

ured by operatin

erall Canadian a

he 2011-quarter

me high, $144.4

revenue level w

ar.

realized in the C

compared to 10

creased by 29 p

y operating day

basis throughout

Gulf Coast, No

December 31,

% Change

39

85

ue increased by

ys (2010 - 3,028

uarter of 2011. I

portion of horizon

the 2010-quarter

sed by 33 perce

mpared to 30,48

quids rich natura

ng days) for the t

activity, which is

were in the Mo

4 million, and wa

was a 14 percen

Canadian indust

02,293 days in 2

percent to 12,76

ys) represented

Management’s

t the Canadian p

rtheast and Roc

Year

2011

144,416

28,952

y 39 percent to $

days). In the C

In light of the st

ntal gamma jobs

r.

ent, as measured

83 days in the 2

al gas areas in w

three-month per

s down from 85

ontney, Cardium

as 47 percent gr

t increase in PH

try during the ye

2010. (Source:

60 days in the 2

d approximately

s Discussion & An

provinces of Alb

cky Mountain reg

rs ended Decembe

2010 % Cha

98,580

13,859

$43.8 million (20

Corporation’s his

rong demand fo

s, average day

d by drilling day

2010-period. (So

western Canada

iod ended Dece

percent in the 2

m, Swan Hills, Vi

reater than the $

HX Energy’s ave

ear ended Dece

Daily Oil Bulleti

011-year from 9

75 percent of

alysis

berta,

gions

er 31,

ange

47

109

010 -

story,

or the

rates

ys, for

ource:

a and

mber

2010-

iking,

$98.6

erage

mber

in) In

9,888

PHX

PHX Energy Services Corp. | 2011 Annual Report

-18-

Energy’s Canadian activity for the year ended December 31, 2011 (2010 – 76 percent) with the remainder of activity primarily

related to liquids rich natural gas.

Reportable segment profit before tax for the three-month period ended December 31, 2011 increased by 85 percent to $10.5

million from $5.7 million in the 2010-quarter. For the year ended December 31, 2011, reportable segment profit before tax

increased by 109 percent to $29.0 million from $13.9 million in 2010. The increases in both 2011-periods were primarily due

to higher activity and resulting margins achieved.

United States

(Stated in thousands of dollars)

Three-month periods ended December 31, Years ended December 31,

2011 2010 % Change 2011 2010 % Change

Revenue 23,477 20,842 13 93,483 85,158 10

Reportable segment (loss) profit before tax (579) (1,346) (57) 3,489 5,267 (34)

For the three-month period ended December 31, 2011, US revenue of $23.5 million was generated compared to $20.8

million in the 2010-period, a 13 percent increase. The Corporation’s US operating days in the fourth quarter decreased by 14

percent to 2,015 days from 2,340 days in the 2010-quarter; however, this was offset by a 31 percent increase in overall day

rates realized in the 2011-quarter, $11,651 compared to $8,907 in the 2010-quarter. Horizontal drilling typically demands a

higher day rate than directional drilling due to extra personnel required, and horizontal oil well drilling represented

approximately 39 percent of Phoenix USA’s overall activity, as measured by drilling days, in the three-month period ended

December 31, 2011 as compared to 26 percent in the 2010-period.

In comparison, US industry activity, as measured by the average number of horizontal and directional rigs running on a daily

basis, increased by 20 percent to 1,384 rigs in the fourth quarter of 2011 from 1,155 rigs in 2010. (Source: Baker Hughes)

The Corporation’s US revenue for the year ended December 31, 2011 increased by 10 percent to $93.5 million from $85.2

million in the comparable 2010-period. Phoenix USA achieved a 13 percent increase in its average day rates, $10,432 in

2011 as compared to $9,201 in 2010, and US operating days decreased slightly by 3 percent, 8,961 days in the 2011-year

compared to 9,255 days in 2010-year. In addition, US revenue was adversely impacted in 2011 due to a strengthening

Canadian dollar against the US dollar.

In 2011, Phoenix USA was active in oil and liquids rich natural gas drilling areas such as the Permian Basin, Barnett,

Eagleford and Bakken. Additionally, the Lower Huron and Marcellus, where operators drill for dry gas, were active areas. US

industry activity, as measured by the average number of horizontal and directional rigs running on a daily basis, increased by

Management’s Discussion & Analysis

-19-

25 percent for the year ended December 31, 2011 to 1,305 rigs, 69 percent of total activity, as compared to 1,044 rigs, 68

percent of total activity in the 2010-year.

PHX Energy has been focused on expanding its core US markets as the US continues to be one of the largest markets in the

world. The Corporation expanded its Gulf Coast operations in 2011 by opening two new Operations Centers, one in the

Permian Basin in Midland, Texas and the other in the Mid-Continent region in Oklahoma City, Oklahoma. The Corporation

also, late in the year, launched a new proprietary power section for its down hole performance drilling motor fleet that was

designed specifically for drilling conditions in the Bakken region. It is expected that these areas will contribute to Phoenix

USA’s growth in 2012 along with activity within the Utica shale in Ohio.

Reportable segment loss before tax for the three-month period ended December 31, 2011 decreased by 57 percent to $0.6

million from $1.3 million in the 2010-period. For the year ended December 31, 2011, reportable segment profit before tax

decreased by 34 percent to $3.5 million from $5.3 million in 2010. The decline was caused by lower activity levels in the

fourth quarter, along with higher third party equipment rental charges and down hole performance drilling motor repair costs.

International (Stated in thousands of dollars)

Three-month periods ended December 31, Years ended December 31,

2011 2010 % Change 2011 2010 % Change

Revenue 6,287 5,241 20 22,164 13,539 64

Reportable segment profit before tax 917 933 (2) 3,666 3,833 (4)

PHX Energy’s international operations are gaining momentum and revenue and operating days set new quarterly and annual

records for the Corporation. For the three-month period ended December 31, 2011, international revenue increased by 20

percent to $6.3 million from $5.2 million in the 2010-quarter and international operating days also increased 20 percent from

379 days in 2010 to 456 days in 2011. The Corporation generated 9 percent of its consolidated revenue from international

operations in both three-month periods. Revenue increased by 64 percent to $22.2 million for the 2011-year as compared to

$13.5 million in 2010 and operating days increased from 973 days in 2010 to 1,737 days in 2011; a 79 percent increase.

The Corporation’s most active international area in 2011, as in the past, was Albania. PHX Energy commenced providing

drilling services on a fifth rig in November 2011 and has successfully drilled in excess of 160 wells in Albania since 2008.

The Corporation’s presence in the Country grew with the addition of a permanent Operations Manager and the Corporation is

continuing to hire, train, and develop local Albanian staff which is expected to create greater efficiencies and profitability.

PHX Energy would like to leverage its infrastructure in Albania by expanding its Eastern European operations into other

countries if the opportunity arises.

PHX Energy Services Corp. | 2011 Annual Report

-20-

Despite challenges with relatively low industry activity in 2011, the Corporation’s Peruvian operations, Phoenix TSP, realized

an increase in operating days as compared to 2010. In the fourth quarter, Phoenix TSP was successful in securing a contract

for both offshore and land drilling applications. The Corporation is also continuing to work with a number of operators, and

currently, the Corporation has a job capacity of 4 full service jobs in Peru. To date, PHX Energy has had an excellent

performance record with existing clients due to the reliability of PHX Energy’s technology deployed.

Even though Russian job activity in 2011 more than doubled that of the 2010-year, it did not reach the annual targets that the

Corporation had set for its Russian operations, Phoenix TSR, primarily due to equipment issues encountered with the

Corporation’s RWD tool. However, with design improvements deployed, PHX Energy is optimistic towards 2012 growth

potential for Russia. Phoenix TSR has developed the much needed visibility among key operators in the Nizhnevartovsk

region and has secured work from a large exploration and development company within Russia. Presently there is a

concurrent job capacity of 8 in Russia but with upcoming forecasted activity it is expected that additional job capacity could

be added in 2012.

In Colombia PHX Energy spent the majority of 2011 building up its infrastructure in the country. The Corporation’s first

Colombian job, a down hole performance drilling motor rental, was completed in the first part of 2012, and it is expected with

the recent business development initiatives undertaken, full service drilling activity will commence mid-2012. The Corporation

will use its resources from Peru to assist with the Colombian operations where viable. PHX Energy’s operations in Colombia

currently have a 4 job capacity.

For the three-month period ended December 31, 2011, reportable segment profit before tax is $0.9 million, which is the same

level as in the corresponding 2010-period. Reportable segment profit for the year ended December 31, 2011 was $3.7

million as compared to $3.8 million in 2010; a 4 percent decrease. Despite the large pick-up in activity led by Albania, the

increase in international profit was lower than expected as a result of the start-up of Colombia and the lower than expected

activity levels in Peru and Russia.

Liquid (Stated in t

Cash flow f

Funds from

Working ca

Cash flow

million in

$23.2 mill

primarily a

quarter.

For the 2

2010-qua

The incre

profitabilit

As at Dec

$34.2 mill

credit faci

Cash

As a divid

continually

performan

by Manag

with their

dividends

meet its b

seasonal,

level of div

dity

thousands of dolla

from operating act

m operations

apital as at Decem

w from operating

2011. For the y

ion in the corres

a result of the co

011 three-month

rter. Funds from

eases in funds f

y in the 2011 pe

cember 31, 201

ion reported at

lities as at Dece

Flow and

dend paying cor

y reviews its d

nce, forecasted a

gement and is su

review of qua

to its sharehold

budgeted cash f

and as a result,

vidends through

ars)

tivities

mber 31,

activities increa

year ended Dece

sponding 2010-p

ollection of accou

h period, funds

m operations for

from operations

eriod as compare

1, the Corporat

December 31, 2

ember 31, 2011.

Dividend

rporation, PHX

dividend rates,

activity levels an

ubject to the app

rterly financial a

ders is dependen

low from operat

, cash flow will fl

out the year.

Three-mont

ased from $7.4 m

ember 31, 2011

period. The incr

unts receivable t

from operations

the year ended

s in the 2011-qu

ed to 2010.

tion had working

2010. In additio

ds

Energy typically

including on a

nd the industry o

proval of the Boa

and operating r

nt upon the reali

tions, dividends

uctuate. Despite

-21-

th periods ended D

2011

19,376

12,918

million in the thre

, cash flow from

rease in cash flo

that had built up

s increased to $

December 31,

uarter were ma

g capital of $44

on, the Corporat

y declares month

quarterly basis

outlook. The act

ard of Directors.

results. The Co

zation of cash fl

to shareholders

e these fluctuatio

December 31,

2010

7,393

6,633

ee-month period

m operating activ

ow from operatin

from the record

$12.9 million fro

2011 increased

ainly due to high

4.9 million, which

tion had $34.0 m

hly dividends to

s, and takes in

tual amount of f

. The Board rev

orporation's abil

low from operati

s may be reduce

ons, PHX Energ

Management’s

Year

201

23,22

42,97

44,86

ended Decemb

vities increased

ng activities in th

d level of activity

om $6.6 million i

d to $43.0 millio

her activity leve

h was $10.7 mi

million available

o its shareholde

nto consideratio

future monthly d

views future divi

ity to maintain

ions, and if the C

ed. Activity level

y’s policy is to tr

s Discussion & An

rs ended Decembe

11 2

24 12

72 27

68 34

ber 31, 2010 to $

from $12.8 milli

he 2011-quarter

achieved in the

in the correspon

n from $27.2 m

els and increase

illion higher than

to be drawn fro

rs. The Corpor

on its own fina

ividends is prop

dends in conjun

the current lev

Corporation doe

ls in the industry

ry to pay a consi

alysis

er 31,

2010

2,755

7,246

4,240

$19.4

on to

r was

prior

nding

illion.

es in

n the

om its

ration

ancial

posed

nction

vel of

es not

y are

istent

PHX Energ

For the th

million (20

and worki

Inves

Net cash

2010. The

These 20

The capita

term debt

The Corpo

compared

year ende

acquisition

gy Services Corp.

hree-month perio

010 – $12.2 milli

ng capital.

ting Activ

used in investing

e Corporation a

11 expenditures

$24.0 millio

$15.1 millio

$7.0 million

$0.9 million

$2.3 million

al expenditure p

and working ca

oration realized

d to $8.7 million

ed December 31

n of capital asse

| 2011 Annual Re

od and year end

ion), respectively

vities

g activities for th

dded a record $

included:

on in down hole

on in MWD syste

n in non-magnet

n in machinery a

n in other assets

rogram undertak

pital.

proceeds from t

in 2010. The ch

1, 2011 relates t

ets. This compar

port

ded December 3

y, were financed

he year ended De

$49.3 million in

performance dri

ems and spare c

tic drill collars an

and equipment fo

s, including defer

ken in the year w

the involuntary d

hange in non-ca

to the net chang

es to $6.7 millio

-22-

31, 2011, divide

d from a combin

ecember 31, 20

capital equipme

illing motors;

components;

nd jars;

or global service

rred developmen

was financed fro

disposal of drillin

ash working capi

ge in the Corpo

n (source of cas

ends of $3.2 mil

nation of the Cor

11 was $35.4 m

ent in 2011 as

e centres; and

nt costs of $1.1

om a combinatio

ng equipment in w

ital balances of

ration’s trade pa

sh) for the year e

lion (2010 – $3

rporation’s cash

million as compar

compared to $4

million.

n of cash flow fr

well bores of $9

$4.4 million (so

ayables that are

ended Decembe

.1 million) and $

flow from opera

red to $33.0 milli

48.4 million in 2

rom operations,

9.4 million in 201

ource of cash) fo

e associated wit

er 31, 2010.

$12.5

ations

ion in

2010.

long-

1, as

or the

h the

Capita(In millions

PHX Ene

increases

Finan

The Corpo

In the 201

$1

20

al Expends of dollars)

rgy has underta

in its activity lev

ncing Acti

oration reported

1-year:

the Corpor

through its

acquire 46

the Corpor

2.7

006

ditures

aken significant

vels. The drop in

vities

cash flows from

ration paid divide

s option program

2,570 common s

ration drew on its

$14.6

2007

annual capital

n the 2009-year

m financing activ

ends of $12.5 mi

m the Corporatio

shares of the Co

s extendible deb

$33.9

2008

-23-

asset expansio

related to poor i

vities of $11.9 m

illion to shareho

n received cash

orporation; and

bt facility for $20.

$15.1

2009

on programs in

industry conditio

million in 2011 as

lders, or $0.48 p

h proceeds of $4

.0 million to finan

$48

201

Management’s

2008, 2010, an

ons and activity i

s compared to $

per share;

4.4 million from

nce its capital ex

8.4

10

s Discussion & An

nd 2011 in line

in that year.

$26.4 million in 2

exercised optio

xpenditure progr

$49.3

2011

alysis

with

2010.

ns to

ram.

PHX Energ

Capita As at Dec

facility be

acceptanc

As at Dec

As at Dec

bank. Thi

acceptanc

Should th

the amoun

$56.0 mill

The dema

assets of

As at Dec

Cash

Historicall

activities,

Directors.

flow from

market un

credit may

opportunit

gy Services Corp.

al Resou

cember 31, 201

ears interest at

ce rate plus a sta

cember 31, 2011

cember 31, 2011

s bears interest

ce rate plus a sta

is facility not be

nt outstanding fo

ion (2010 - $36.

and revolving loa

the Corporation

cember 31, 2011

Requirem

y, the Corporat

debt and equity

These planned

operations, the

ncertainty and fin

y be negatively

ties present them

| 2011 Annual Re

rces

1, the Corporati

the Corporatio

amping fee of 1.

, the Corporatio

1, the Corporatio

t at the Corpor

amping fee of 2

e extended, outs

or seven quarter

0 million) was dr

an facility and th

.

, the Corporatio

ments for

tion has finance

y. The 2012 cap

d expenditures a

e Corporation’s

nancial market v

impacted, and

mselves, the Cor

port

on had access

n’s option at th

875 percent.

n had nil drawn

on also had acce

ation’s option a

.25 percent. The

standing amount

rs with the rema

rawn on this fac

he extendible rev

n was in complia

r Capital

ed its capital e

ital budget has b

re expected to b

unused credit f

volatility persists

the expenditure

rporation would

-24-

to a demand ov

he bank’s prime

on this facility.

ess to an $80.0

at the bank’s pr

e facility is renew

ts will be transfe

aining balance pa

ility.

volving facility a

ance with all of it

Expendit

expenditures an

been set at $38

be financed from

acilities or equit

s in 2012, the Co

e level would be

look at expandin

verdraft revolvin

e rate plus 0.6

million, 364-day

rime rate plus 0

wable at the opti

erred to a two-ye

aid on the eighth

re secured by a

ts bank debt cov

ures

nd acquisitions

.9 million subjec

m a combination

ty, if necessary

orporation's activ

e reduced accor

ng this planned c

ng facility of up t

625 percent or

y extendible rev

0.75 percent or

ion of the lender

ear term facility

h quarter. As at

a general securit

venants.

through cash f

ct to quarterly re

of one or more o

y. However, if a

vity levels, cash

rdingly. Convers

capital expendit

to $10.0 million.

the bank’s ban

volving facility wi

the bank’s ban

r by November 2

repayable at 1/

December 31, 2

ty agreement ov

lows from oper

eview of the Boa

of the following,

sustained perio

flows and acce

sely, if future gr

ure amount.

. The

nkers’

ith its

nkers’

2012.

10 of

2011,

ver all

rating

ard of

cash

od of

ess to

rowth

Off-Ba

The Corpo

Propo

The Corpo

Corporatio

Critica The cons

significant

Decembe

that affect

upon assu

and judgm

Corporatio

goodwill a

determina

estimation

alance S

oration had no o

osed Tran

oration currently

on has budgeted

al Accoun

solidated financi

t accounting po

r 31, 2011. Ma

t the reported a

umptions that ar

ments by a mat

on’s results of o

and intangibles,

ation of valuatio

n of effective inco

heet Arra

off-balance shee

nsactions

y has no plans to

d to spend $38.9

nting Esti

ial statements o

olicies are descr

anagement, in p

amounts of asse

re considered re

terial amount.

operations, cash

, determination

on allowances a

ome tax rates us

angement

t arrangements

s

o make any mat

9 million in capita

imates

of the Corporat

ribed in its ann

reparing these f

ets, liabilities, re

easonable under

The estimates

h flow, and finan

of the useful l

against deferre

sed, and the calc

-25-

ts

as at December

erial business a

al equipment acq

tion are prepar

ual audited con

financial statem

venue and expe

r the circumstanc

and judgments

ncial position co

ives and residu

d income tax a

culation of share

r 31, 2011 and 2

acquisitions or ca

quisitions.

red in accordan

nsolidated finan

ents, is required

enses. These e

ces. Actual res

used that are

ontinue to be: th

ual values of th

assets and exp

e-based paymen

Management’s

2010.

apital asset dive

nce with IFRS.

cial statements

d to make estim

estimates and ju

ults could differ

most critical to

he valuation of

he Corporation’s

pected realizatio

nts.

s Discussion & An

estitures. In 2012

The Corporat

for the year e

mates and judgm

udgments are b

from such estim

the reporting o

accounts receiv

s capital equipm

on of those as

alysis

2, the

tion’s

ended

ments

based

mates

of the

vable,

ment,

ssets,

PHX Energ

Future

A number

January 1

expected

Instrumen

classificat

extent of t

Finan

CreditThe Corp

developm

economic

ended De

outstandin

Decembe

Decembe

The Corpo

other asse

risk on an

gy Services Corp.

e Change

r of new standa

, 2012, and hav

to have a signifi

nts, which becom

tion and measu

the impact has n

ncial Instr

t Risk oration is expos

ent industry. Th

conditions, whic

ecember 31, 20

ng over 120 day

r 31, 2011. Ma

r 31, 2011.

oration has a cre

essments to esta

ongoing basis.

| 2011 Annual Re

es in Acc

rds, amendmen

ve not been app

icant effect on th

mes mandatory f

rement of financ

not been determ

uments

sed to normal cr

e Corporation’s

ch would impair

011, one custom

ys represent 5 p

anagement has

edit managemen

ablish and moni

port

counting P

ts to standards

plied in preparin

he consolidated

for the Corporat

cial assets. Th

ined.

redit risks of its

credit risk assoc

the customers’

mer comprised

percent or appro

provided an allo

nt program to as

tor a customer’s

-26-

Policies

and interpretatio

g the consolidat

financial statem

tion’s 2013 cons

he Corporation d

customers that

ciated with these

ability to satisfy

7 percent of th

oximately $2.9

owance of $0.2

sist in managing

s creditworthines

ons are effective

ted annual finan

ments of the Corp

solidated financi

does not plan to

exist within the

e customers can

their obligations

he total revenue

million of total r

million for all am

g this risk, which

ss. The Corpora

e for annual pe

ncial statements

poration, except

al statements a

o adopt this sta

e oil and natural

n be directly imp

s to the Corpora

e. All accounts

receivables on t

mounts it consid

h consists of con

tion monitors an

riods beginning

s. None of these

t for IFRS 9 Fina

nd could chang

andard early and

gas exploration

pacted by a decli

ation. During the

receivable bala

the balance she

ders uncollectab

nducting financia

nd manages its c

after

e are

ancial

e the

d the

n and

ine in

year

ances

eet at

ble at

al and

credit

Management’s Discussion & Analysis

-27-

Liquidity Risk Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they fall due. The Corporation

has financial liabilities, thus, is exposed to liquidity risk. The Corporation’s approach to managing liquidity risk is to ensure

that it always has sufficient cash and credit facilities to meet its obligations when due. Management typically forecasts cash

flows for a period of twelve-months to identify financing requirements. These requirements are then addressed through a

combination of demand credit facilities and access to capital markets. The Corporation believes that future cash flows

generated by the operations and access to additional liquidity through capital and banking markets will be adequate to meet

its financial obligations.

The following table reflects the Corporation’s anticipated payment of contractual obligations related to continuing operations

as at December 31, 2011:

(Stated in thousands of dollars)

2012 2013 2014 2015 2016

Loans and borrowings - 22,400 33,600 - -

Operating leases 2,740 2,483 1,882 1,750 1,514

Trade and other payables 44,539 - - - -

Dividends payable 1,065 - - - -

Total 48,344 24,883 35,482 1,750 1,514

As at December 31, 2011, the Corporation had purchase commitments for $24.7 million in drilling and other equipment.

Fair Values of Financial Instruments The Corporation has designated its accounts payable and dividends payable as other financial liabilities carried at amortized

cost. Accounts receivable are designated as loans and receivables, measured at amortized cost. The Corporation’s carrying

values of these items approximate their fair value due to the relatively short periods to maturity of the instruments. Loans and

borrowings have been designated as an other financial liability, and it is measured at amortized cost. The fair value of loans

and borrowings included in the consolidated balance sheet approximates fair values as the indebtedness is subject to

floating rates of interest.

PHX Energ

IntereInterest ra

The Corpo

A one per

ForeigForeign e

exchange

Corporatio

soles, Alb

exchange

and earni

exchange

The follow

As at Dec

Cash and

Trade an

Trade an

Current ta

Statemen

The follow

USD

A 10 perc

Corporatio

variables

gy Services Corp.

est Rate Rate risk is created

oration has varia

rcent change in i

gn Exchanexchange risk is

e rates. Due to o

on has an expos

banian lek, and

e risk. The expo

ings is currently

e risk in the even

wing chart repres

cember 31,

d cash equivalents

d other receivable

d other payables

ax assets

nt of financial posit

wing exchange ra

cent weakening

on’s equity by $2

remain constant

| 2011 Annual Re

Risk d by fluctuations

ble interest long-

nterest rates wo

nge Risk s created by flu

operations of th

sure to foreign c

Colombian peso

osure to foreign

y not significant

t that the exposu

sents the Corpor

s

es

tion exposure

ates applied dur

of the Canadia

226,000 and dec

t at December 3

port

in the fair values

-term debt which

ould have increa

uctuations in th

he Corporation’s

urrency exchang

o denominated

exchange risk in

t. The Corpora

ure becomes sig

ration’s exposure

ing the year end

an dollar agains

creased net earn

1, 2011.

-28-

s of financial ins

h exposes it to flu

sed or decrease

he fair values o

s subsidiaries in

ge rates. The ca

monetary asset

n Peru, Russia,

ation will exam

gnificant.

e to foreign curre

ded December 3

t the US dollar

nings by $227,00

struments due to

uctuations in cash

ed the Corporatio

of financial instr

the US, Russia

arrying values of

ts and liabilities

Albania and Co

ine options with

ency risk in the

$ 3

17

(8

$ 12

31:

Avera

2011

0.9893

at December 3

00 respectively.

changes in the

h interest payme

on’s profit by $4

ruments due to

a, Peru, Albania

f US dollar, Russ

and earnings a

olombia’s monet

h respect to m

US:

USD

2011

3,926,658

,048,631

8,875,253)

262,500

,362,536

age Rate De

2010

1.0299 1

31, 2011 would

This analysis as

market interest r

ent amounts.

58,000.

changes in fo

a and Colombia

sian rouble, Peru

are subject to fo

tary assets, liab

anaging this fo

U

2

$ 1,997,

17,292,

(8,762

618,

$ 11,144,

ecember 31 Close

2011

1.0170 0

have decreased

ssumes that all

rates.

oreign

a, the

uvian

oreign

bilities

oreign

USD

2010

,344

,034

,761)

,363

,980

e Rate

2010

.9946

d the

other

Busin

The Corp

Corporatio

Corporatio

associated

CapitaThe Corp

planned c

economy

cash gene

corporate

inability o

Corporatio

CreditThe Corp

developm

economic

EnviroAll phases

regulation

require si

material.

fines and

ratified th

levels. Th

strategy

ness Risk

poration’s opera

on’s operating c

on’s services o

d with PHX Ene

al Requireporation’s revenu

capital expenditu

exposes the Co

erated by opera

purposes, or if

of the Corporati

on's business fin

t Risk oration is expos

ent industry. Th

conditions, whic

onmental s of the oil and

n pursuant to a v

gnificant expend

Environmental le

liability, and po

e Kyoto Protoco

here has been m

or alternative s

k Factors

ations are subje

costs are variabl

n its financial r

rgy’s business th

ements ues may decline

ures. In addition

orporation to ad

ations will be av

debt or equity

on to access s

nancial condition

sed to normal cr

e Corporation’s

ch would impair

Risks natural gas bus

variety of federa

ditures and a br

egislation is evo

otentially increas

ol (the “Protoco

much public deb

strategies with

ect to certain f

le in nature, and

results is lesse

hat could impact

e because of a

n, uncertain leve

dditional capital

vailable, or suffi

financing is ava

sufficient capital

n, results of oper

redit risks of its

credit risk assoc

the customer’s a

siness present e

al, provincial and

reach may resu

olving in a mann

sed capital expe

ol”), which calls

bate with respec

respect to clim

-29-

factors that are

d as a result, th

ned. Manageme

t financial results

decrease in ac

els of near-term

risk. There can

cient, to meet t

ailable, that it wi

l for its operati

rations and prosp

customers that

ciated with these

ability to satisfy t

environmental r

d local laws and

ult in the imposit

ner expected to

enditures and op

for Canada to

ct to Canada’s a

mate change a

e beyond its co

he impact of a s

ent has identifi

s. They include,

ctivity levels, an

m industry activit

n be no assuran

these capital ex

ill be on terms a

ons could have

pects.

exist within the

e customers can

their obligations

risks and hazard

d regulations. C

tion of fines an

result in stricter

perating costs. I

reduce its gree

ability to meet t

and the contro

Management’s

ontrol. A signif

significant declin

ed the key risk

but are not limit

nd it may be re

ty coupled with

nce that debt or

xpenditure requi

acceptable to th

e a material ad

e oil and natural

n be directly imp

s to the Corporat

ds and are subj

Compliance with

d penalties, som

r standards and

n 2002, the Gov

enhouse gas em

these targets an

l of greenhous

s Discussion & An

ficant portion of

ne in demand fo

ks and uncertai

ted to:

equired to reduc

the uncertain g

r equity financin

rements or for

he Corporation.

dverse effect on

gas exploration

pacted by a decli

tion.

ect to environm

such legislation

me of which ma

d enforcement, la

vernment of Ca

missions to spec

nd the governm

se gases. Rece

alysis

f the

or the

inties

ce its

global

ng, or

other

The

n the

n and

ine in

mental

n can

ay be

arger

anada

cified

ment’s

ently,

PHX Energy Services Corp. | 2011 Annual Report

-30-

representatives from approximately 170 countries met in Copenhagen, Denmark to attempt to negotiate a successor to the

Protocol. The result of such meeting was the Copenhagen Accord, a nonbinding political consensus rather than a binding

international treaty such as the Protocol. Implementation of strategies for reducing greenhouse gases, whether to meet the

limits required by the Protocol, the Copenhagen Accord or as otherwise determined, could have a material impact on the

nature of oil and natural gas operations, including those of the Corporation and the Corporation’s customers. Given the

evolving nature of the debate related to climate change and the control of greenhouse gases and the possible resulting

requirements, it is not possible to predict either the nature of those requirements or the impact on the Corporation and its

operations and financial condition.

Employees The success of the Corporation will be dependent upon key personnel. Loss of the services from such persons could have a

material adverse effect on the business and operations of the Corporation. The ability of the Corporation to expand its

services is dependent upon its ability to attract additional qualified employees.

Access to Equipment and Development of New Technology The ability of the Corporation to compete and expand is dependent upon it having access to certain drilling equipment and

components at a reasonable cost, and upon its ability to develop or acquire new competitive technology. The Corporation

purchases equipment from various suppliers in the oil and natural gas drilling service industry. There can be no assurance

that these sources for equipment will be maintained. If such equipment is not available, and is not available from any other

source, the Corporation’s ability to compete may be impaired.

Competition The Corporation’s major competitors are principally large multinational companies with significantly greater resources

available for marketing and R&D programs. The Corporation also competes with a number of other small and medium sized

companies. Like the Corporation, these companies have certain competitive advantages, such as low overhead costs and

specialized regional strengths. The Corporation’s ability to generate revenue depends on its ability to obtain contracts and to

perform services within projected times and costs.

Management’s Discussion & Analysis

-31-

Oil and Natural Gas Industry Risk There are risks associated with the provision of drilling services to the oil and natural gas industry. The Corporation may

become liable for risks against which it may choose not to insure due to high premium costs, or which may exceed the limits of

policy coverage. Interruptions and delays caused by adverse weather conditions, equipment failures or other events can

significantly adversely affect revenue. While the Corporation will maintain liability insurance, the insurance is subject to

coverage limits. There can be no assurance that insurance will continue to be available to the Corporation on commercially

reasonable terms, that the possible types of liabilities that may be incurred by the Corporation will be covered by its insurance,

or that the dollar amount of such liabilities will not exceed policy limits. Even a partially uninsured claim, if successful and of

sufficient magnitude, could have a material adverse effect on business, results of operations and prospects.

Seasonality In general, the level of activity of the Canadian oilfield service industry is influenced by seasonable weather patterns. Wet

weather and the spring thaw may make the ground unstable. Consequently, municipalities and provincial transportation

departments enforce road bans that restrict the movement of rigs and other heavy equipment, thereby reducing activity

levels. Additionally, certain oil and natural gas producing areas are located in areas that are inaccessible, except during

winter months, because the ground surrounding or containing the drilling sites in these areas consists of swampy terrain

known as muskeg.

Foreign Operations The Corporation will conduct a certain portion of its business in the US, Albania, Peru, Russia, and Colombia. Any change in

government policies could have a significant impact on business. Risks of foreign operations include, but are not necessarily

limited to changes of laws affecting foreign ownership, government participation, taxation, royalties, duties, rates of

exchange, inflation, exchange control, and repatriation of earnings. There are no assurances that the economic and political

conditions in the countries in which the Corporation operates will continue as they are at the present time. The effect of these

factors cannot be accurately predicted.

See also the risk factors described in the Corporation’s Annual Information Form.

PHX Energ

Corpo

This MD&

Committe

Governan

meeting o

Disclo

The Corp

supervisio

supervisio

concluded

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and interim

interim fili

reported w

Intern

The Corp

supervisio

officers h

internal co

controls o

regarding

financial in

gy Services Corp.

orate Gov

&A has been pre

e and the Boar

nce can be foun

of Shareholders,

osure Co

oration’s Chief E

on, disclosure c

on, the effectiven

d that the Corp

on, to provide re

on’s Chief Execu

m filings are be

ngs or other rep

within the time pe

nal Contro

oration's Chief E

on, internal contr

ave also evalua

ontrols over fina

over financial rep

the reliability o

nformation for ex

| 2011 Annual Re

vernance

epared by the M

rd of Directors o

nd in the Corpor

each of which a

ntrols and

Executive Office

controls and pro

ness of the disclo

poration’s disclo

easonable assur

utive Officer and

ing prepared; a

ports filed or su

eriod specified in

ols Over

Executive Office

rols over financi

ated, or caused

ancial reporting a

porting are effec

f the Corporatio

xternal purposes

port

Management of

of the Corporat

ration’s Annual

are annually filed

d Proced

er and Chief Fina

ocedures. Such

osure controls a

osure controls

rance that: (i) m

d Chief Financia

nd (ii) informatio

ubmitted by it un

n securities legis

Financial

er and Chief Fina

al reporting rela

d to be evaluate

at the financial y

ctive, at the finan

on’s financial rep

s in accordance

-32-

PHX Energy an

ion. Additional i

Information For

d on SEDAR at w

ures

ancial Officer ha

h officers have

and procedures a

and procedures

aterial informatio

l Officer by othe

on required to b

nder securities le

slation.

Reportin

ancial Officer ha

ted to the Corpo

ed under their s

year end of the

ncial year end o

porting and prep

with IFRS.

nd it has been r

information rela

rm and Informat

www.sedar.com.

ave designed, o

evaluated, or c

at the financial y

s are effective,

on relating to th

ers, particularly d

be disclosed by

egislation is rec

ng

ave designed, o

oration, including

supervision, the

Corporation, an

of the Corporatio

paration of finan

reviewed and ap

ating to the Cor

tion Circular in r

.

r caused to be

caused to be ev

year end of the C

, at the financi

e Corporation is

during the period

the Corporation

corded, processe

r caused to be

g its consolidate

e effectiveness

nd have conclud

on, to provide re

ncial statements

pproved by the A

poration’s Corp

respect of its an

designed under

valuated under

Corporation and

ial year end of

s made known t

d in which the an

n in its annual fil

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designed under

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of the Corporat

ed that such int

easonable assur

s together with

Audit

orate

nnual

their

their

have

f the

o the

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lings,

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their

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tion’s

ternal

rance

other

The Corpo

occurred d

is reasona

the Corpo

are reaso

It should

matter ho

system w

errors or f

Outst

(In thousa

Common

Dilutive s

Option

Corporati

Selec

The follow

prepared

(Stated in t

Years en

Revenue

Net earni

Earnings

Earnings

Long-term

Total ass(1) Presented

oration is requir

during the perio

ably likely to ma

oration’s internal

nably likely to m

be noted that a

ow well conceive

ill be met and it

fraud.

anding C

ands of shares)

shares outstandin

ecurities:

s

ion shares – dilute

cted Annu

wing selected a

in accordance w

thousands of dolla

ded December 31

ngs

per share – basic

per share – dilute

m debt

ets

d under Canadian GA

ed to disclose h

d beginning on

aterially affect, th

controls over fi

aterially affect, t

a control system

ed, can provide

t should not be

Corporatio

ng

ed

ual Financ

annual financia

with IFRS.

ars except per sha

,

c

ed

AAP

herein any chang

October 1, 2011

he Corporation’s

nancial reporting

the Corporation’s

m, including the

e only reasonab

expected that t

on Share

cial Inform

l information w

are amounts)

-33-

ge in the Corpor

1 and ending on

s internal contro

g were identified

s internal contro

Corporation’s d

ble, but not abs

the disclosure a

Data

mation

was obtained fro

ration’s internal

December 31,

ols over financia

d during such pe

ols over financial

disclosure and in

solute, assuranc

and internal cont

om the audited

2011

260,063

18,328

0.66

0.65

56,000

220,201

Management’s

controls over fin

2011 that has m

al reporting. No

eriod that has m

l reporting.

nternal controls

ce that the obje

trols and proced

As

d consolidated

201

197,27

14,16

0.5

0.5

36,00

176,56

s Discussion & An

nancial reporting

materially affecte

material chang

materially affecte

and procedures

ctives of the co

dures will preve

s at February 28,

2

3

financial statem

0 2

77 11

62 1

53

52

00

69 11

alysis

g that

ed, or

es in

ed, or

s, no

ontrol

ent all

2012

8,115

2,480

0,595

ments

009(1)

4,692

1,407

0.46

0.46

-

4,785

PHX Energ

In 2011, P

increased

oil prices e

For the ye

and 24 pe

The increa

PHX Ener

activity, pr

Summ (Stated in t

Revenue

Net earni

Earnings

Earnings

Activity le

calendar

levels in t

equipmen

spring, the

heavy eq

Corporatio

operating

regions ar

gy Services Corp.

PHX Energy rea

by 32 percent o

experienced in 2

ear ended Dece

ercent from 2009

ase in long-term

rgy’s total assets

rofitable operatio

mary of Q

thousands of dolla

ngs

per share – basic

per share – dilute

vels in western

year is the mos

he latter part of

nt in the Canadia

e winter’s frost

uipment until th

on’s activity leve

results of the C

re not impacted

| 2011 Annual Re

alized record act

over that of 2010

2010.

mber 31, 2011,

9 to 2010 due to

m debt in the 201

s have increased

ons and capital e

Quarterly R

ars except per sha

Dec-11

73,606

5,284

c 0.19

ed 0.19

Canada vary co

st active for serv

the past two ye

an oil and natur

comes out of th

ey have thorou

els. As a result,

Corporation vary

at the same leve

port

tivity levels in a

0. Revenue also

PHX Energy’s n

the higher activ

1-year was used

d steadily up to

expenditure expa

Results

are amounts)

Sept-11

77,973

8,737

0.31

0.31

onsiderably due

vice companies

ears the third and

ral gas fields is

he ground rende

ghly dried out.

late March throu

y on a quarterly

el during this Ca

-34-

ll of its operatin

o increased by 7

net earnings incr

ity levels and pro

d to finance capi

December 31, 2

ansion.

Jun-11 M

45,336 6

424

0.01

0.01

to seasonal we

due to cold we

d fourth quarters

dependent on w

ering many seco

The duration of

ugh May is tradi

basis. The Corp

anadian spring br

ng areas, and as

72 percent from

reased by 29 pe

ofitability.

ital expenditures

2011 reaching $2

Mar-11 Dec-

63,147 57,5

3,883 2,6

0.14 0.

0.14 0.

eather patterns.

eather, however

s have been ver

weather conditio

ondary roads in

f this “spring br

tionally the Corp

poration’s activit

reak-up period.

s a result the C

2009 to the 201

ercent as compa

s made in that ye

220.2 million as

-10 Sept-10

519 59,959

658 6,392

.10 0.24

.10 0.24

Traditionally, th

r, due to favora

ry active. The a

ons. As warm w

capable of supp

reak-up” has a

poration’s slowe

ty levels in the

orporation’s rev

0-year due to st

ared to the 2010

ear; $49.3 million

a result of incre

Jun-10

36,585

2,339

0.09

0.09

he first quarter o

able commodity

ability to move h

eather returns i

porting the weig

direct impact on

est time, as such

US and internat

venue

trong

-year

n.

eased

Mar-10

43,214

2,773

0.10

0.10

of the

price

heavy

n the

ght of

n the

h, the

tional

Outlo

Through it

the 2011-y

The indus

healthy o

capitalize

is this per

areas, wh

Improved

undertook

profitabilit

requireme

locations,

greater pe

PHX Ener

operationa

improve in

revenue.

Bakken o

Corporatio

Utica shal

PHX Ener

2012 whic

in certain

horizontal

progresse

promising

the right d

ok

ts history, PHX

year generated

stry in 2011 was

il commodity pr

on these factors

rformance, and t

ich are focused

profitability and

k in the year star

y is growing and

ents. In 2012, P

and on increas

ercent of revenu

rgy’s US operat

al personnel bro

n the future, esp

Additionally, PH

oil play. In con

on expects to re

le.

rgy’s four Interna

ch have suggeste

areas of South A

drilling activity,

es PHX Energy

and scrutinizing

direction and in fu

Energy has stay

results and profi

favorable to PH

rices allowing p

s results from PH

the resulting rep

on oil and liquid

d cost reduction

rted to create the

d past and curre

PHX Energy wil

sing operating m

e.

ions are already

ought on board

pecially with the f

HX Energy’s Ro

ntrast, the Nort

emain active in t

ational operation

ed that growth in

America to bene

and the Corpor

will continue to

g areas that are u

uture anticipates

yed focused on o

itability that are n

HX Energy’s grow

roducers to acc

HX Energy’s driv

utation, that has

ds rich natural ga

n were central

e desired results

ent capital asset

ll continue to fo

margins in all are

y gaining mome

are delivering t

facility expansio

cky Mountain re

theast region’s

the Marcellus sh

ns are maturing.

n this area will b

efit from the tech

ration believes it

examine its inte

underperforming

s that they will rep

-35-

operational grow

new milestones

wth with improve

cess capital and

ve to provide the

s allowed the Co

as drilling, and a

themes in 201

s and will continu

expansion has b

ocus on capturin

eas, with the ult

entum, notably th

he desired resu

on in the Permian

egion is capitaliz

activity has slo

hale, albeit at lo

In Russia, there

e obtainable. Th

hnologies that ha

t is positioned to

ernational opera

g. The Corporatio

present 20 perce

wth and superior

for the Corporat

ed horizontal dril

d expand drillin

e most reliable a

orporation to dev

large client bas

1, and the stra

ue to produce be

begun, and will

ng greater mark

timate goal of ge

he Gulf Coast re

ults. PHX Energ

n Basin and Mid

zing on the incre

owed with lowe

ower activity leve

e have been rea

here is also optim

ave helped crea

o be at the foref

ations; expandin

on believes its in

ent of consolidat

Management’s

r performance, a

tion.

lling and comple

g projects. Ho

and efficient serv

velop a diverse u

se in six countrie

ategies and init

enefits into 2012

continue, to red

ket share in its U

enerating EBITD

egion where the

y expects this r

d-Continent area

easing rig count

er natural gas p

els than in past

ffirming indicato

mism towards the

ate the momentu

front of this trend

ng where marke

nternational oper

ted revenue.

s Discussion & An

and with this focu

etion techniques

owever, the abil

vices to its clien

universe of oper

es.

tiatives PHX En

2. Overall activity

uce third party r

US and internat

DA that represe

e new marketing

region to continu

as already gener

t in the North Da

prices, however

years, and ente

rs in the early p

e ability for oper

m in North Ame

d. As the 2012

ets and revenues

rations are headi

alysis

us, in

, and

ity to

ts. It

rating

nergy

y and

rental

tional

nts a

g and

ue to

rating

akota

r, the

er the

art of

rators

erican

-year

s are

ing in

PHX Energ

Even thou

operations

establishe

As a direc

continued

Corporatio

per share

strong bal

John HooChairman oPresident aFebruary 2

gy Services Corp.

ugh the US and

s will also cont

ed with diverse o

ct result of 2011

commitment to

on’s monthly div

e on an annualiz

lance sheet for f

ks of the Board, and Chief Executiv28, 2012

| 2011 Annual Re

international div

inue to thrive. T

operations in key

financial perfor

o rewarding sha

vidends to $0.06

zed basis) effect

future growth.

ve Officer

port

visions have mo

Through a stron

y oil and liquids r

rmance, current

areholders, the

6 per share ($0.

tive for the Marc

-36-

ore room for gro

ng marketing an

rich natural gas

strong operation

Board of Direc

72 per share on

ch 2012 dividen

owth, PHX Energ

nd operations te

plays.

nal levels and a

ctors has appro

n an annualized

nd. PHX Energy

gy believes that

eam, a large c

positive outlook

oved a 50 perc

basis) from $0

y remains focus

t its robust Cana

lient base has

k, and PHX Ene

cent increase to

.04 per share ($

sed on maintain

adian

been

ergy’s

o the

$0.48

ing a

Non-G

1) EBI

EBITDA,

recognize

that is use

Investors

determine

organizati

The follow

(Stated in t

Net earni

Add (ded

Depreciat

Provision

Finance e

EBITDA a

EBITDA p

share opt

dilutive ba

GAAP Me

ITDA

defined as ear

ed under GAAP.

eful in evaluating

should be cauti

ed in accordanc

ons and, accord

wing is a reconci

thousands of dolla

ngs

uct):

tion and amortizat

n for (Recovery of)

expense

as reported

per share - dilute

ions are used to

asis does not inc

easures

rnings before in

However, Man

g the Corporatio

ioned, however,

ce with GAAP.

dingly, its EBITD

liation of net ear

ars)

tion

income taxes

ed is calculated

o reacquire com

clude anti-dilutive

nterest, taxes, d

agement believe

n’s operations b

, that EBITDA s

PHX Energy

A may not be co

rnings to EBITDA

Three-m

using the treasu

mmon shares at

e options.

-37-

depreciation and

es that EBITDA

before considerin

should not be co

’s method of c

omparable to tha

A:

onth periods ende

2011

5,284

4,447

3,189

646

13,566

ury stock method

an average sha

d amortization,

A provides suppl

ng how it was fin

onstrued as an

calculating EBIT

at of other comp

ed December 31,

2010

2,658

3,402

(2,685)

321

3,696

d whereby deem

are price. The ca

Management’s

is not a financ

lemental informa

nanced or taxed

alternative mea

TDA may differ

anies.

Ye

18

16

8

2

45

med proceeds o

alculation of EB

s Discussion & An

cial measure th

ation to net earn

in various coun

asure to net earn

r from that of

ars ended Decem

2011 20

8,328 14,

6,171 11,5

8,411 (1,2

2,097 7

5,007 25,2

n the exercise o

ITDA per share

alysis

hat is

nings

ntries.

nings

other

mber 31,

010

162

565

228)

713

212

of the

on a

PHX Energy Services Corp. | 2011 Annual Report

-38-

2) Funds from Operations

Funds from operations is defined as cash flows generated from operating activities before changes in non-cash working

capital. This is not a measure recognized under GAAP. Management uses funds from operations as an indication of the

Corporation’s ability to generate funds from its operations before considering changes in working capital balances. Investors

should be cautioned, however, that this financial measure should not be construed as an alternative measure to cash flows

from operating activities determined in accordance with GAAP. PHX Energy’s method of calculating funds from Operations

may differ from that of other organizations and, accordingly, it may not be comparable to that of other companies.

The following is a reconciliation of cash flows from operating activities to funds from operations:

(Stated in thousands of dollars)

Three-month periods ended December 31, Years ended December 31,

2011 2010 2011 2010

Cash flows from operating activities 19,376 7,393 23,224 12,755

Add (deduct):

Changes in non-cash working capital (7,197) (1,110) 17,176 13,468

Interest paid 687 303 1,884 550

Income taxes paid 52 47 688 473

Funds from operations 12,918 6,633 42,972 27,246

Funds from operations per share - diluted is calculated using the treasury stock method whereby deemed proceeds on the

exercise of the share options are used to reacquire common shares at an average share price. The calculation of funds from

operations per share on a dilutive basis does not include anti-dilutive options.

Man The acco

Managem

by Manag

Managem

date of the

acceptabl

in the circ

with that i

Managem

financial r

ended De

Managem

assurance

records pr

KPMG LL

accordanc

The Boar

internal co

Directors

consolidat

financial s

John HooChairmanPresident February

nageme

ompanying cons

ment and have be

gement in acco

ment has made i

e statement of fi

e limits of mate

cumstances. The

n the consolidate

ment has prepare

results prepared

ecember 31, 201

ment maintains a

e that transactio

roperly maintain

LP, an independ

ce with generally

rd of Directors i

ontrols. It exerci

of PHX Energy

ted financial sta

statements have

ks of the Board, and Chief Exec

28, 2012

ent’s R

olidated financia

een approved by

ordance with th

informed judgme

inancial position

riality and are in

e financial inform

ed financial state

ed Management

in accordance w

1 to December 3

appropriate syste

ons are properly

ed to provide re

ent firm of Cha

y accepted audit

s responsible fo

ises its respons

Services Corp.,

atements, includ

been approved

utive Officer

Report

al statements a

y the Board of D

he accounting

ents and estima

. In the opinion o

n accordance wi

mation elsewhe

ements.

t’s Discussion an

with IFRS. The

31, 2010.

ems of internal

y authorized, ass

liable informatio

rtered Accounta

ting standards in

or ensuring that

ibilities mainly th

is comprised of

ding the notes th

by the Board of

-39-

to the

and all informat

Directors. The co

policies in the

ates in accountin

of Management,

ith International

re in the Annua

nd Analysis (“M

MD&A compare

control. Policies

sets are safegu

n for the prepara

ants, was engag

n Canada and pr

t Management f

hrough the Aud

f three independ

hereto, with Ma

f Directors on the

Cameron RitcSenior Vice PChief Financia

Co

e Share

tion in the Annu

onsolidated finan

notes to finan

ng for transactio

, the financial sta

Financial Repo

al Report has be

D&A”). The MD

es the audited fin

s and procedure

uarded from loss

ation of financial

ged to audit the

rovide an indepe

fulfills its respon

it Committee. T

dent Directors, a

nagement and

e recommendati

chie, CA President Financal Officer

nsolidated Financ

eholde

ual Report are

ncial statements

ncial statements

ons which were

atements have b

rting Standards

een reviewed to

D&A is based up

nancial results fo

es are designed

s or unauthorize

l statements.

consolidated fin

endent professio

nsibilities for fin

The Audit Comm

and has reviewe

external Auditor

ion of the Audit C

ce

cial Statements & N

rs

the responsibili

have been prep

s. When neces

not complete a

been prepared w

(“IFRS”) approp

o ensure consist

pon the Corporat

or the twelve-mo

d to give reason

ed use, and fina

nancial statemen

onal opinion.

nancial reporting

mittee of the Boa

ed and discusse

rs. The consolid

Committee.

Notes

ity of

pared

ssary,

at the

within

priate

tency

tion’s

onths

nable

ancial

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ard of

d the

dated

PHX Energ

Aud We have a

statements

comprehen

comprising

Manageme

Manageme

Internation

preparation

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accordance

plan and p

misstateme

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statements

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the entity’s

appropriate

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manageme

We believe

Opinion

In our opin

Energy Ser

its consolid

Reporting S

Yours very

Chartered A

Calgary, C

March 1, 2

gy Services Corp.

ditors’ audited the accom

s of financial posi

nsive income, cha

a summary of sig

ent’s responsibil

ent is responsible

al Financial Rep

n of consolidated f

responsibility

nsibility is to expre

e with Canadian g

perform the audit

ent.

nvolves performin

s. The procedures

ed financial statem

s preparation and

e in the circumsta

includes evaluatin

ent, as well as eva

e that the audit evi

nion, the consolid

rvices Corp. as at

dated cash flows

Standards.

y truly,

Accountants

anada

012

| 2011 Annual Re

Reportmpanying consolid

tion as at Decem

anges in equity an

gnificant accountin

ity for the conso

e for the prepara

orting Standards,

financial statemen

ess an opinion on

generally accepted

to obtain reasona

ng procedures to

s selected depend

ments, whether du

d fair presentatio

nces, but not for t

ng the appropriate

aluating the overal

dence we have ob

dated financial sta

December 31, 20

for the years end

port

t to thedated financial sta

mber 31, 2011, D

nd cash flows for

ng policies and oth

olidated financial

tion and fair pres

, and for such in

nts that are free fro

n these consolida

d auditing standar

able assurance ab

obtain audit evi

d on our judgmen

e to fraud or error

n of the consolid

the purpose of ex

eness of accountin

l presentation of th

btained in our aud

atements present

011, December 31

ded December 31

-40-

e Shareatements of PHX

ecember 31, 201

the years ended

her explanatory inf

statements

sentation of thes

nternal control as

om material missta

ted financial state

rds. Those standa

bout whether the

dence about the

nt, including the a

r. In making those

dated financial st

xpressing an opini

ng policies used a

he consolidated fi

dits is sufficient and

fairly, in all mate

, 2010 and Janua

, 2011 and Decem

eholdeEnergy Services

10 and January 1

December 31, 20

formation.

se consolidated fi

s management d

atement, whether

ements based on

ards require that w

consolidated fina

amounts and di

assessment of th

risk assessments

tatements in orde

ion on the effectiv

and the reasonabl

nancial statement

d appropriate to p

erial respects, the

ary 1, 2010, and its

mber 31, 2010 in

ers Corp., which com

1, 2010, the cons

011 and Decembe

inancial statemen

determines is nec

due to fraud or er

our audits. We c

we comply with et

ancial statements

isclosures in the

he risks of materi

s, we consider inte

er to design aud

veness of the entit

leness of account

ts.

provide a basis for

e consolidated fin

s consolidated fina

accordance with

mprise the consoli

solidated statemen

er 31, 2010, and n

nts in accordance

cessary to enabl

rror.

conducted our aud

thical requirement

are free from ma

consolidated fina

al misstatement o

ernal control relev

it procedures tha

ty’s internal contro

ting estimates ma

r our audit opinion

ancial position of

ancial performanc

International Fina

dated

nts of

notes,

e with

e the

dits in

ts and

aterial

ancial

of the

ant to

at are

ol. An

de by

.

f PHX

ce and

ancial

Cons

ASSETS

Current ass Cash a

Trade a

Invento

Prepaid

Curren

Total c

Non-currenPropertGoodwDeferre

IntangiTotal n

Total asset

LIABILITIE

Current liabBank oTrade aDividen

Curren Total c

Non-currenLoans a

Deferre Total n

Equity: Share cContribRetaineAccum

Total e Corp

Non-coTotal e

Total liabilit

See accomApproved b

John Hoo

Chairman

solidated

sets: and cash equivalenand other receivabories d expenses t tax assets urrent assets

nt assets: ty, plant and equip

will ed tax assets ble assets on-current assets

ts

ES AND SHAREHO

bilities: verdraft and other payablends payable t tax liabilities urrent liabilities

nt liabilities: and borrowings ed tax liabilities on-current liabilitie

capital buted surplus ed earnings ulated other compquity attributable t

poration

ontrolling interests quity

ties and equity

mpanying notes to by PHX Energy Se

oks

n of the Board

d Stateme

nts bles

pment

OLDERS' EQUITY

es

es

prehensive incometo equity holders o

consolidated finanervices Corp:

C

D

ents of FNote

5

6

7

8

9

Y

10

12(d

11

8

12(a

e

of the

ncial statements.

Cameron Bailey

Director

-41-

Financial e December 3

$

8,

63,

15,

3,

90,

120,

8,

129,

$

220,

$

44,

d)

1,

45,

56,

4, 60,

a)

97,

5,

11,

( 114,

( 113,

$

220,2

Co

Position31, 2011 Dec

,376,344 $ ,209,860 ,445,543 ,720,607

- ,752,354

,452,022 ,876,351

- 120,208

,448,581

,200,935 $

- $

,538,854 ,064,592 280,981

,884,427

,000,000 ,448,999 ,448,999

,583,055 ,827,955 ,461,288 (803,517) ,068,781

(201,272) ,867,509

200,935 $

nsolidated Financ

n cember 31, 2010

8,625,532 50,314,306

9,895,473 4,046,408

298,064 73,179,783

91,864,042

8,876,351 2,368,706

280,486 103,389,585

176,569,368

-

37,886,506 1,053,645

- 38,940,151

36,000,000

- 36,000,000

90,876,458

5,156,078 6,515,269

(733,736) 101,814,069

(184,852) 101,629,217

176,569,368

cial Statements & N

January 1,

$ 2,48

28,66

7,02

2,08

2,84

43,10

60,97

8,87

69,85

$ 112,95

$ 4,24

16,84

1,00

22,08

71 71

82,43

2,70

5,01

90,15

90,15

$ 112,955

Notes

2010

8,970 0,353 2,053 5,643 5,643 2,662

6,088 6,351

- -

2,439

5,101

1,058 6,978 1,384

- 9,420

-

4,872 4,872

3,639 1,048 6,122

- 0,809

- 0,809

5,101

PHX Energ

Cons Years ende

Revenue Direct costGross profi

Expenses: SellingReseaFinancOther iOther e

Earnings b

Provision foCurrenDeferre

Net earning

Other compForeig

Total comp

Earnings aEquity Non-co

Net earning

ComprehenEquity Non-co

Total comp

Earnings pEarnings p

See accom

gy Services Corp.

solidated

ed December 31,

s it

, general and admrch and developm

ce expense ncome expense

efore income taxe

or (Recovery of) innt ed

gs

prehensive incomn currency transla

prehensive income

ttributable to: holders of the Coontrolling interestsgs

nsive income attrib holders of the Coontrolling interestsprehensive income

er share – basic er share – diluted

mpanying notes to

| 2011 Annual Re

d Stateme

ministrative ment expenses

es

ncome taxes

e ation e for the year

rporation s

butable to: rporation

s e for the year

consolidated finan

port

ents of C

Note

14

15

18

19

19

12(c)

12(c)

ncial statements.

-42-

Compreh

ensive In

$ 2 2

$

$ $

$ $

$ $

ncome

2011

60,063,371 01,250,946 58,812,425

31,618,058

2,123,544 2,096,702

(5,588,728) 1,823,333

32,072,909

26,739,516

1,260,940 7,150,330 8,411,270

18,328,246

(93,020)

18,235,226

18,413,357

(85,111) 18,328,246

18,297,167

(61,941) 18,235,226

0.66 0.65

2010

$ 197,276,938 156,024,661 41,252,277

27,044,772 1,809,090 712,831 (3,574,520

2,326,227 28,318,400 12,933,877

708,645 (1,937,016 (1,228,371

14,162,248

(665,186

$ 13,497,062

$ 14,415,653

(253,405$ 14,162,248

$ 13,681,914

(184,852$ 13,497,062

$ 0.53$ 0.52

0

8 1 7

2 0 1 0) 7 0

7

5 6) 1)

8

6) 2

3 5) 8

4 2) 2

3 2

Cons

Year Ended December 31

Balance, Dec

Issuance of s

Share-based

Fair value of o

Net earnings

Foreign curre

Dividends

Acquisition o non-contro

Balance, Dec

Year Ended December 31,

Balance, Dece

Issuance of sh

Share-based p

Fair value of o

Net earnings

Foreign curren

Dividends

Balance, Dece

See accom

solidated

, 2011

ember 31, 2010 27,

share capital

payments

option exercised

ency adjustment

of olling interests

ember 31, 2011 28,

, 2010

ember 31, 2009 26,

hare capital 1,

payments

options exercised

ncy adjustment

ember 31, 2010 27,

mpanying notes to

d Stateme

Share Capital

Number Amoun

539,373 $ 90,876

551,689 4,407

-

- 2,298

-

-

-

-

091,062 $ 97,583

Share Capital

Number Amou

505,110 $ 82,433

034,263 6,824

-

- 1,617

-

-

-

539,373 $ 90,876

consolidated finan

ents of C

Attributable

ContributSurpnt ($)

6,458 $ 5,156,0

7,921

- 2,970,5

8,676 (2,298,6

-

-

-

-

3,055 $ 5,827,9

Attributable

ContributeSurplunt ($)

3,639 $ 2,701,04

4,833 -

- 4,073,01

7,986 (1,617,98

-

-

-

6,458 $ 5,156,07

ncial statements.

-43-

Changes

to Equity Holders of t

ted lus

AccumulatedOthe

ComprehensivIncom

078 $ (733,736

- -

553 -

676) -

- -

- 1,926

- -

- (71,707

955 $ (803,517

to Equity Holders of th

ed us

Accumulated Other

Comprehensive Income

8 $ -

-- -

6 -

6) -

- -

- (733,736)

- -

8 $ (733,736)

Co

in Equity

the Corporation

d er ve

e Retained Earnings

A

6) $ 6,515,269 $

- -

- -

- -

- 18,413,357

6 -

- (13,375,408)

7) (91,930)

7) $ 11,461,288 $

he Corporation

Retained Earnings

At

Eq

$ 5,016,122 $

-

-

-

14,415,653

-

(12,916,506) (

$ 6,515,269 $ 1

nsolidated Financ

y

Total Equity Attributable to

Equity Holders

ConIn

101,814,069 $ (1

4,407,921

2,970,553

-

18,413,357 (

1,926 (

(13,375,408)

(163,637) 1

114,068,781 $ (2

Total Equity ttributable to

quity Holders Co

In

90,150,809 $

6,824,833

4,073,016

-

14,415,653 (2

(733,736)

(12,916,506)

101,814,069 $ (1

cial Statements & N

Non-trolling

nterests Total E

184,852) $ 101,62

- 4,40

- 2,97

-

(85,111) 18,32

(94,946) (9

- (13,37

63,637

201,272) $ 113,86

Non-ntrolling nterests Total

- $ 90,15

- 6,82

- 4,07

-

253,405) 14,16

68,553 (66

- (12,91

184,852) $ 101,62

Notes

Equity

9,217

7,921

0,553

-

8,246

93,020)

5,408)

-

7,509

Equity

0,809

4,833

3,016

-

2,248

5,183)

6,506)

9,217

PHX Energ

Cons

Years ende

Cash flows

Net earningAdjustmentDepreciatioDeferred inUnrealizedGain on disShare-baseFinance exProvision foChange in Cash gene

Interest paIncome taxNet cash fr

Cash flowsProceeds oAcquisitionChange in Net cash u

Cash flowsProceeds fDividends pProceeds oRepaymenNet cash fr

Net (decreaCash and cCash and c

See accom

gy Services Corp.

solidated

ed December 31,

s from operating ac

gs ts for: on and amortizationcome tax expens foreign exchangesposition of drillinged payments xpense or bad debts non-cash working

erated from operat

id xes paid rom operating activ

s from investing acon disposition of d of drilling and othnon-cash workingsed in investing a

s from financing acfrom issuance of spaid to shareholdeon loans and borrot of bank overdraf

rom financing activ

ase) increase in ccash equivalents, cash equivalents,

mpanying notes to

| 2011 Annual Re

d Stateme

ctivities:

on e (recovery)

e loss g equipment

g capital ing activities

vities

ctivities: rilling equipment

her equipment g capital ctivities

ctivities: share capital ers owings ft facility vities

ash and cash equbeginning of year end of year

consolidated finan

port

ents of C

No

6

19

13

18

12

11

10

uivalents

ncial statements.

-44-

Cash Flow

ote

9

3(a)

8

(d)

0

ws

$

$

2011

18,328,246

16,171,041 7,150,330 1,396,940

(5,588,728) 2,970,553 2,096,702

446,521 (17,176,147) 25,795,458

(1,883,712) (687,729)

23,224,017

9,445,520

(49,279,614) 4,426,676

(35,407,418)

4,407,921

(12,473,708) 20,000,000

- 11,934,213

(249,188) 8,625,532 8,376,344

2010

$ 14,162,248 11,564,931 (1,937,016 2,006,317 (3,574,52 4,073,016 712,831 238,011 (13,468,45 13,777,36

(549,56 (472,82 12,754,97

8,652,491 (48,353,814 6,668,373

(33,032,95

6,824,833 (12,169,234 36,000,000 (4,241,05 26,414,541

6,136,562 2,488,970

$ 8,625,532

0

8

1 6) 7 0) 6 1 1 7) 1

2) 8) 1

1 4) 3 0)

3 4) 0 8) 1

2 0 2

NoteFor thIn Canadi

1. Re PHX

opera

Busin

Com

Phoe

amon

the s

PHX

The

explo

Corp

The c

2. Ba

a)

es to thhe years e

an dollars

eporting E

Energy Services

ations on Decem

ness Corporatio

mercial Trust, P

enix Technology

ng other things, a

subsidiaries and

Energy is a pub

Corporation, thr

oration and dev

poration also ma

consolidated fina

asis of Pre

StatemenThe consolidate

Standards (“IFR

with IFRS and IF

An explanation

cash flows of

comprehensive

Canadian GAAP

The consolidate

he Conended Dec

Entity:

s Corp. (“PHX E

mber 31, 2010 a

ns Act (Alberta)

Phoenix Techno

Services L.P., a

all of the issued

operating busin

licly-traded Corp

rough its subsid

velopment comp

nufactures techn

ancial statement

eparation

nt of Comped financial state

S”). These are th

FRS 1 First-time A

of how the trans

the Corporation

income for com

P to those report

ed financial state

nsolidacember 31

Energy”) or (the “

as a result of the

) involving PHX

logy Services In

and Phoenix Tec

and outstanding

nesses of the Fu

poration listed on

diaries, provides

panies in Cana

nology for intern

ts include the ac

n:

pliance ements have be

he Corporation’s

Adoption of Intern

sition to IFRS ha

n is provided in

mparative period

ted under IFRS.

ements were aut

-45-

ated Fi1, 2011 an

“Corporation”) wa

e completion of

Energy, Phoen

nc., Phoenix Te

chnology Manag

g units of the Fun

und became sub

the Toronto Stoc

s horizontal and

ada, United Sta

al use.

ccounts of the Co

een prepared in

first annual cons

national Financial

as affected the re

n note 26. This

ds and of equity

thorized by the B

Co

inanciand 2010

as incorporated

the Arrangemen

nix Technology

echnology Mana

gement Services

nd became comm

bsidiaries and op

ck Exchange und

d directional dril

ates, Albania, P

orporation and it

n accordance w

solidated financia

l Reporting Stand

eported financia

s note includes

y at the date of

Board of Director

nsolidated Financ

al State

on October 8, 2

nt on December

Income Fund (t

agement Ltd., 1

s L.P. Pursuant

mon shares of P

perating busines

der the symbol “

ling services to

Peru, Russia, a

ts subsidiaries.

with International

al statements pre

dards has been a

al position, financ

reconciliations

transition previo

rs on February 2

cial Statements & N

ement

010 and comme

r 31, 2010 unde

the “Fund”), Pho

108287 Alberta

t to the Arrangem

PHX Energy and

sses of PHX En

PHX”.

o oil and natura

and Colombia.

l Financial Repo

epared in accord

applied.

cial performance

of equity and

ously reported u

28, 2012.

Notes

ts

enced

er the

oenix

Ltd.,

ment,

all of

nergy.

l gas

The

orting

dance

e and

total

under

PHX Energ

b)

c)

d)

e)

gy Services Corp.

Basis of MThe consolidate

basis except fo

and included in

FunctionaThese consolida

currency.

Use of EsThe preparation

estimates and a

liabilities, incom

Estimates and u

recognized in th

Accounts wher

adjustment with

income taxes, m

Critical JuInformation abo

amounts recogn

operates in fore

| 2011 Annual Re

Measuremed financial state

r liabilities for c

trade and other

al and Preated financial st

stimates n of the consolid

assumptions tha

me and expenses

underlying assu

he period in whic

re assumptions

hin the next finan

measurement of

udgmentsout critical judgm

nized in the con

eign jurisdictions

port

ment ements have be

ash-settled shar

payables in the

esentationtatements are p

dated financial s

at affect the app

s. Actual results

mptions are rev

ch the estimates

and estimation

ncial year are va

equity-settled sh

s ments in applyin

nsolidated financ

where regulatio

-46-

en prepared on

re-based payme

statement of fin

n Currencresented in Can

statements in co

plication of accou

may differ from

viewed on an on

are revised and

n uncertainties

aluation of accou

hare based trans

ng accounting p

cial statements

ons are complex

a going concer

ent arrangemen

nancial position.

cy nadian dollars, w

onformity with IF

unting policies a

these estimates

ngoing basis. Re

d in any future pe

have a signific

unts receivable,

sactions, and de

policies that hav

is deferred inco

and different fro

rn basis and usin

ts which are me

which is the Cor

FRS requires M

and the reported

s.

evisions to acco

eriods affected.

cant risk of res

goodwill, intang

epreciation.

ve the most sign

ome taxes beca

om Canada.

ng the historical

easured at fair v

rporation’s funct

Management to m

d amounts of as

ounting estimates

sulting in a ma

gible assets, defe

nificant effect on

ause the Corpor

l cost

value

tional

make

ssets,

s are

aterial

erred

n the

ration

3. Sig

The

finan

purpo

a)

i.

gnificant A

accounting polic

ncial statements

oses of the trans

Basis of CThe consolidate

which are entiti

indirectly, to gov

results of subs

comprehensive

appropriate. To

controlling intere

are identified se

Intra-group bal

transactions, ar

interests are tre

interests, the dif

is recorded in eq

Business Co

Acquisitions on

For acquisitions

consideration tr

net recognized

measured as o

immediately in p

Accountin

cies set out bel

and in prepari

sition to IFRS, u

Consolidaed financial state

es controlled by

vern the financia

idiaries acquire

income from

otal comprehens

ests having a de

eparately in shar

ances and tran

re eliminated in

eated as transa

fference betwee

quity.

ombinations

or after January

s on or after J

ransferred includ

amount (gene

of the acquisitio

profit or loss.

ng Policie

ow have been a

ng the opening

nless otherwise

ation ements include

y the Corporatio

al and operating

d or disposed o

the effective da

sive income is a

eficit balance. No

reholders’ equity

nsactions, and

preparing the co

ctions with equ

en the considera

y 1, 2010

January 1, 201

ding the recogniz

erally fair value)

on date. When

-47-

es:

applied consiste

g IFRS statemen

indicated.

the accounts of

on. Control exis

g policies of an e

of during the ye

ate of acquisitio

attributed to non

on-controlling int

y.

any unrealized

onsolidated fina

ity owners of th

ation paid and th

0, the Corpora

zed amount of a

) of the identifi

the excess is

Co

ently to all perio

nt of financial p

f the Corporatio

sts when the Co

entity so as to o

year are include

on and up to

n-controlling inte

terests in the eq

d income and

ncial statements

he Corporation.

he share of the c

ation measures

any non-controll

fiable assets ac

negative, a ba

nsolidated Financ

ods presented in

position at Janu

on and its conso

orporation has th

obtain benefit fro

ed in the conso

the effective d

erests even if thi

uity of the Corpo

expenses arisi

s. Transactions

For purchases

carrying value of

goodwill as th

ing interest in th

cquired and liab

argain purchase

cial Statements & N

n these consolid

uary 1, 2010 fo

olidated subsidia

he power, direc

om its activities.

olidated stateme

date of disposa

is results in the

oration’s subsidi

ng from intra-g

s with non-contro

from non-contro

f net assets acq

he fair value of

he acquiree, les

bilities assumed

e gain is recogn

Notes

dated

or the

aries,

tly or

The

ent of

al, as

non-

iaries

group

olling

olling

uired

f the

s the

d, all

nized

PHX Energy Services Corp. | 2011 Annual Report

-48-

Transaction costs, other than those associated with the issue of debt or equity securities, that the Corporation

incurs in connection with a business combination are expensed as incurred.

Acquisitions prior to January 1, 2010

As part of its transition to IFRS, the Corporation elected to restate only those business combinations that occurred

on or after January 1, 2010. In respect of acquisitions prior to January 1, 2010, goodwill represents the amount

recognized under Canadian generally accepted accounting principles (the Corporation’s previous accounting

framework). All assets and liabilities qualified for recognition under IFRS.

ii. Foreign Currency

Transactions in foreign currencies are translated to the respective functional currencies of the Corporation’s entities

at exchange rates at the dates of the transactions. The methods used to account for assets and liabilities relating

to foreign currency transactions entered into by the Corporation, and to measure the foreign exchange risk arising

on such transactions, depend upon whether the asset or liability in question is classified as a monetary or non-

monetary item.

Receivables, liabilities and other monetary assets denominated in foreign currencies at the reporting date are

retranslated at the functional currency spot exchange rate at the balance sheet date. Exchange differences that

arise between the rate at the transaction date and the one in effect at the payment date or the rate at the balance

sheet date are recognized in the income statement as other expense.

Property, plant and equipment, intangible assets, inventories and other non-monetary items purchased in foreign

currencies and that are measured on the basis of historical cost are translated using the exchange rates as at the

dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated

using the exchange rates at the date when the fair value is determined.

iii. Foreign Operations

When entities, which prepare their financial statements in a functional currency other than Canadian dollars, are

recognized in the consolidated financial statements, the income and expenses are translated at the monthly

average exchange rates. The assets and liabilities of foreign operations are translated to Canadian dollars at the

rate of exchange prevailing at the balance sheet date.

Consolidated Financial Statements & Notes

-49-

Foreign currency differences are recognized in other comprehensive income in the cumulative translation account.

The exchange differences arising on the translation to the Corporation’s presentation currency are recognized

directly in the cumulative translation reserve as a separate component of equity. On disposal of a foreign

operation, in part or in full, the relevant amount in the foreign currency translation reserve relating to that particular

foreign operation is recognized in the income statement as part of the profit or loss on disposal.

When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor

likely in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are

considered to form part of a net investment in a foreign operation and are recognized in other comprehensive

income, and are presented within equity in the foreign currency translation reserve.

In accordance with IFRS 1, the Corporation has elected to deem all foreign currency translation differences that

arose prior to the date of transition in respect of all foreign operations to be nil at the date of transition.

b) Financial Instruments

i. Non-Derivative Financial Instruments

The Corporation initially recognizes trade and other receivables on the date that they originate. All other financial

assets (including assets designated at fair value through profit or loss) are recognized initially on the trade date at

which the Corporation becomes a party to the contractual provisions of the instrument.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when,

and only when, the Corporation has a legal right to offset the amounts and intends either to settle on a net basis or

to realize the asset and settle the liability simultaneously.

The Corporation has the following non-derivative financial assets: financial assets at fair value through profit or

loss, and trade and other receivables.

Financial assets at fair value through profit or loss

A financial asset is classified at fair value through profit or loss if it is classified as held-for-trading or is designated

as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the

Corporation manages such investments and makes purchase and sale decisions based on their fair value in

accordance with the Corporation’s documented risk management or investment strategy. Upon initial recognition,

PHX Energy Services Corp. | 2011 Annual Report

-50-

attributable transaction costs are recognized in profit or loss as incurred. Financial assets at fair value through

profit or loss are measured at fair value, and changes therein are recognized in profit or loss.

Trade and other receivables

Trade and other receivables are financial assets with fixed or determinable payments that are not quoted in an

active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs.

Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest

method, less any impairment losses. Loans and receivables comprise trade and other receivables.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances and deposits with original maturities of three-months or less.

Bank overdrafts that are repayable on demand, and form an integral part of the Corporation’s cash management,

are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

The Corporation initially recognizes debt securities issued and subordinated liabilities on the date that they are

originated. All other financial liabilities are recognized initially on the trade date at which the Corporation becomes a

party to the contractual provisions of the instrument.

The Corporation derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.

The Corporation has the following non-derivative financial liabilities: loans and borrowings, bank overdrafts, and

trade and other payables.

Such financial liabilities are recognized initially at fair value plus any directly attributable transaction costs.

Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective

interest method.

ii. Share Capital

Common shares

Common shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and

share options are recognized as a deduction from equity, net of any tax effects.

Consolidated Financial Statements & Notes

-51-

c) Property, Plant and Equipment

i. Recognition and Measurement

Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated

impairment losses.

Cost is comprised of the acquisition price, costs directly attributable to the acquisition and preparation costs of the

asset until the time when it is ready to be put into operation. Where material, borrowing costs directly attributable

to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to

ready for use) are included in capitalized cost. Borrowing costs have not been material to the cost of assets for

any period presented. The cost of self-constructed assets includes the cost of materials and direct labour and any

other costs directly attributable to bringing the assets to a working condition for their intended use.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as

separate items (major components) of property, plant and equipment.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the

proceeds from disposal with the carrying amount of property, plant and equipment, and are recognized net within

other income in the Corporation’s profit or loss.

ii. Subsequent Costs

The cost of replacing a part of an item of property, plant and equipment is recognized in the carrying amount of the

item if it is probable that the future economic benefits embodied within the part will flow to the Corporation, and its

cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-

day servicing of property, plant and equipment (repair and maintenance) are recognized in the Corporation’s profit

or loss as incurred.

PHX Energy Services Corp. | 2011 Annual Report

-52-

iii. Depreciation

Depreciation expense is recognized in profit or loss on a straight-line basis over the estimated useful lives of

property, plant and equipment and is calculated using the depreciable amount, which is the cost of an asset, or

other amount substituted for cost, less its residual value.

Significant components of individual assets are assessed, and if a component has a useful life that is different from

the remainder of that asset, then that component is depreciated separately.

The estimated useful lives for the current and comparative periods are as follows:

Directional drilling equipment 4 to 8 years straight-line, 0 to 20 percent residual value

Office and computer equipment 3 to 5 years straight-line

Machinery and equipment 5 years straight-line

Vehicles 5 years straight-line

Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if

appropriate.

d) Intangible Assets

i. Goodwill

Goodwill that arises upon the acquisition of subsidiaries is included in intangible assets.

In respect of acquisitions prior to January 1, 2010, goodwill is included on the basis of its deemed cost, which

represents the amount recorded under previous Canadian GAAP.

Subsequent measurement

Goodwill is measured at cost less accumulated impairment losses.

ii. Other Intangible Assets

Intangible assets are measured at cost less accumulated amortization and any accumulated impairment losses.

Consolidated Financial Statements & Notes

-53-

iii. Research and Development Costs

Expenditure on research activities undertaken with the prospect of gaining new scientific or technical knowledge

and understanding is recognized in profit or loss as incurred.

Development activities involve a plan or design for the production of new or substantially improved product and

process. Development expenditure is capitalized only if development costs can be measured reliably, the product

or process is technically and commercially feasible, future economic benefits are probable, and the Corporation

intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure

capitalized includes the cost of materials, direct labour, overhead costs that are directly attributable to preparing the

asset for its intended use, and borrowing costs on qualifying assets for which the commencement date for

capitalization is on or after January 1, 2010. Other development expenditures are recognized in profit or loss as

incurred.

Capitalized development expenditure is measured at cost less accumulated amortization and accumulated

impairment losses.

Subsequent expenditures

Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific

asset to which is relates. All other expenditures are recognized in profit or loss as incurred.

iv. Amortization

Amortization is calculated over the cost of the asset, or other amount substituted for cost, less its residual value.

Amortization is recognized in the Corporation’s profit or loss on a straight-line basis over the estimated useful lives

of intangible assets, other than goodwill, from the date that they are available for use, since this most closely

reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated

useful life for intangibles is 2-years.

Amortization methods, useful lives and residual values are reviewed at each financial year-end and adjusted if

appropriate.

PHX Energy Services Corp. | 2011 Annual Report

-54-

e) Leased Assets The Corporation has both vehicle and premise leases that have been determined to be operating leases and are

recognized in the income statement.

f) Inventories Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the

first-in first-out method, and includes expenditures incurred in acquiring the inventories, production or conversion

costs and other costs incurred in bringing them to their existing location and condition. In the case of

manufactured inventories and work in progress, cost includes an appropriate share of production overhead based

on normal operating capacity.

Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of

completion and selling expenses.

g) Impairment

i. Financial Assets (Including Receivables)

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine

whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates

that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect

on the estimated future cash flows of that asset that can be estimated reliably.

Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring

of an amount due to the Corporation on terms that the Corporation would not consider otherwise, and indications

that a debtor or issuer will enter bankruptcy.

The Corporation considers evidence of impairment for receivables at a specific asset level. All individually

significant receivables are assessed for specific impairment.

Consolidated Financial Statements & Notes

-55-

An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference

between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s

original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against

receivables. Interest on the impaired asset continues to be recognized through the unwinding of the discount.

When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is

reversed through profit or loss.

ii. Non-Financial Assets

The carrying amounts of the Corporation’s non-financial assets, other than inventories and deferred tax assets, are

reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication

exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite

useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time.

The recoverable amount of an asset or cash-generating unit (“CGU”) is the greater of its value in use and its fair

value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present

value using a pre-tax discount rate that reflects current market assessments of the time value of money and the

risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are

grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely

independent of the cash inflows of other assets or groups of assets (“CGU”). For the purposes of goodwill

impairment testing, goodwill acquired in a business combination is allocated to the group of CGUs that is expected

to benefit from the synergies of the combination. This allocation is subject to an operating segment ceiling test and

reflects the lowest level at which that goodwill is monitored for internal reporting purposes. Goodwill was allocated

to the Canadian CGU.

The Corporation’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate

asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset

belongs.

An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable

amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are

allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying

amounts of the other assets in the unit (group of units) on a pro rata basis.

PHX Energy Services Corp. | 2011 Annual Report

-56-

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized

in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer

exists. An impairment loss is reversed if there has been a change in the estimates used to determine the

recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not

exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment

loss had been recognized.

iii. Employee Benefits

Short-term employee benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related

service is provided.

A liability is recognized for the amount expected to be paid under short-term cash bonus plans if the Corporation

has a present legal or constructive obligation to pay this amount as a result of past service provided by the

employee, and the obligation can be estimated reliably.

Share-based payment transactions

The grant date fair value of share-based payment awards granted to employees is recognized as an employee

expense, with a corresponding increase in equity, over the period that the employees unconditionally become

entitled to the awards (vesting period). The amount recognized as an expense is adjusted to reflect the number of

awards for which the related service and non-market vesting conditions are expected to be met, such that the

amount ultimately recognized as an expense is based on the number of awards that do meet the related service

and non-market performance conditions at the vesting date.

The fair value of the amount payable to employees in respect of share retention awards, which are settled in cash,

is recognized as an expense with a corresponding increase in liabilities, over the period that the employees

unconditionally become entitled to payment. The liability is remeasured at each reporting date and at settlement

date. Any changes in the fair value of the liability are recognized as personnel expense in profit or loss.

Consolidated Financial Statements & Notes

-57-

h) Provisions A provision is recognized if, as a result of a past event, the Corporation has a present legal or constructive

obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to

settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that

reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding

of the discount is recognized as finance cost.

i) Revenue Revenue from services rendered is recognized in profit and loss as services are provided based on the proportion

of total services delivered at the balance sheet date. The Corporation’s services are sold based upon bid

acceptance or contracts with customers that include fixed or determinable prices based upon daily, hourly or job

rates. The criteria for recognition of rendering services are:

probable that the economic benefits associated with the transaction will flow to the entity,

stage of completion of the transaction at the balance sheet date can be measured reliably,

amount of revenue can be measured reliably, and

costs incurred and costs to complete the transaction can be measured reliably.

Based on these criteria, sales of horizontal and directional drilling services are recognized in the period in which

services are rendered. Revenue is measured at the fair value of the consideration received and is recorded net of

sales tax, duties, customer discounts and similar charges. Where the contract outcome cannot be measured

reliably, revenue is recognized only to the extent that the expenses incurred are eligible to be recovered.

Revenue is reported net of supplier costs when the Corporation is acting as an agent between the client and the

supplier. Factors generally considered to determine whether the Corporation is a principal or an agent are most

notably whether it is the primary obligor to the client, it assumes credit and delivery risks, or it adds meaningful

value to the supplier’s product or service.

Income from recharges of freight and other activities which are incidental to the normal revenue generating

activities is included in drilling service revenue.

PHX Energy Services Corp. | 2011 Annual Report

-58-

j) Lease Payments Payments made under operating leases are recognized in profit and loss on a straight-line basis over the term of

the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of

the lease.

k) Finance Income and Finance Expense Finance income comprises interest income on funds invested. Interest income is recognized as it accrues in the

Corporation’s profit or loss, using the effective interest method.

Finance expense comprises interest expense on borrowings. Borrowing costs that are not directly attributable to

the acquisition, construction or production of a qualifying asset are recognized in the Corporation’s profit or loss

using the effective interest method.

Foreign currency gains and losses are reported on a net basis.

l) Income Tax Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or

loss except to the extent that it relates to a business combination or items recognized directly in equity or in other

comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted

or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and

liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not

recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that

is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating

to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse

in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the

initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to

temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by

the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current

m)

n)

tax liabilities an

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assets and liabi

A deferred tax a

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Earnings The Corporatio

amounts are ca

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Corporation’s C

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the total cost in

n goodwill.

-59-

come taxes levi

d to settle curren

usly.

tax losses, tax c

fits will be availa

nd are reduced

earnings per sh

s or loss attribut

ares outstanding

adjusting the ea

shares outstand

prise share optio

orporation that e

enues and expe

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to make decisio

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nclude items dir

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ses, and income

ncurred during th

Co

ied by the same

nt tax liabilities a

credits and ded

able against whi

to the extent th

are data for its

table to ordinary

g during the pe

arnings or loss a

ding, adjusted fo

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engages in busin

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operating resu

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formation is avai

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s comprise mai

e tax assets and

he period to acq

nsolidated Financ

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and assets on a

uctible tempora

ich they can be

hat it is no long

s ordinary share

y shareholders o

riod, adjusted fo

attributable to o

or own shares h

employees.

ness activities fro

ate to transactio

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e to a segment

inly corporate a

d liabilities.

quire property, p

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on the same tax

net basis or the

ry differences, t

utilized. Deferre

ger probable tha

es. Basic per s

of the Corporatio

for own shares

rdinary shareho

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om which it may

ons with any o

ed regularly by

cated to the seg

as well as those

assets (primarily

plant and equipm

Notes

xable

eir tax

o the

ed tax

at the

share

on by

held.

olders

cts of

earn

of the

y the

ment

e that

y the

ment,

PHX Energ

4. Ne

A nu

after

are e

Finan

could

stand

5. Inv

Inven

6. Dri

(State

CosBala Ja

Add

Disp

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AccuBala Ja

Dep th

Disp

Effe in

Bala D

Carr D

gy Services Corp.

ew Standa

mber of new st

January 1. 201

expected to have

ncial Instrument

d change the cl

dard early and th

ventories:

ntories are main

illing and

ed in thousands of

st ance at anuary 1, 2011

ditions

posals

ect of movement n exchange rate

ance at ecember 31, 2011

umulated Depreance at anuary 1, 2011

preciation for he year

posals

ect of movement n exchange rate

ance at ecember 31, 2011

rying Amounts at ecember 31, 2011

| 2011 Annual Re

ards and

andards, amend

2, and have not

e a significant ef

ts, which becom

assification and

he extent of the

:

ly comprised of

Other Eq

f dollars)

Directional Drilling

Equipment

120,690

46,061

(7,382)

(1,528)

157,841

eciation

36,585

13,852

(3,189)

(296)

46,952

110,889

port

Interpret

dments to stand

t been applied in

ffect on the cons

mes mandatory

d measurement

impact has not b

drilling and othe

quipment

Machinery and

Equipment Deve

5,125

948

193

583

6,849

1,711

1,334

(169)

42

2,918

3,931

-60-

ations No

dards and interp

n preparing thes

solidated financ

for the Corpora

of financial ass

been determined

er equipment rep

t:

elopment Costs

OfficeComp

Equipm

1,964 2

1,109

-

-

3,073 3

52 1

327

-

-

379 1

2,694 1

ot Yet Ad

pretations are eff

se consolidated

ial statements o

ation’s 2013 co

sets. The Corp

d.

pair parts.

e and puter ment Building

2,478 1,012

992 80

(82) -

41 -

3,429 1,092

1,316 21

551 51

(77) -

18 2

1,808 74

1,621 1,018

opted:

ffective for annu

financial statem

of the Corporatio

nsolidated finan

poration does no

Vehicles

471

90

(38)

3

526

321

56

(17)

-

360

166

ual periods begin

ments. None of t

on, except for IF

ncial statements

ot plan to adopt

Land T

130 131

- 49

- (7

3

133 172

- 40

- 16

- (3

-

- 52

133 120

nning

these

RS 9

s and

t this

Total

1,870

9,280

7,309)

(898)

2,943

0,006

6,171

3,452)

(234)

2,491

0,452

(State

CosBala Ja

Add

Disp

Effe in

Bala D

AccBala Ja

Dep th

Disp

Effe in

Bala D

Carr Ja

Carr D

CaDurin

equip

7. Go

Durin

Good

circu

ed in thousands of

st ance at anuary 1, 2010

itions

posals

ct of movement n exchange rate

ance at ecember 31, 2010

umulated Depreance at anuary 1, 2010

preciation for he year

posals

ct of movement n exchange rate

ance at ecember 31, 2010

rying Amounts at anuary 1, 2010

rying Amounts at ecember 31, 2010

pital Comng the year ende

pment for $24.7

oodwill:

ng the year, the

dwill is not amor

mstances indica

f dollars)

Directional Drilling

Equipment

91,545

42,843

(12,859)

(839)

120,690

eciation

34,485

10,384

(7,665)

(619)

36,585

57,060

84,105

mmitmentsed December 3

million; delivery

Corporation had

rtized but is teste

ate that the asse

Machinery and

Equipment Deve

2,827

2,837

-

(539)

5,125

1,155

694

(123)

(15)

1,711

1,672

3,414

s 1, 2011 the Cor

is expected to o

d goodwill with a

ed for impairmen

et might be impai

-61-

elopment Costs

OfficeComp

Equip

1,259 2

705

-

-

1,964 2

- 1

52

-

-

52 1

1,259

1,912 1

rporation entered

occur within the

carrying amoun

nt at the end of e

ired.

Co

e and puter ment Building

2,019

636 1,081

(138)

(39) (69

2,478 1,012

1,117

369 21

(131)

(39)

1,316 21

902

1,162 991

d into commitme

next two quarter

nt of $8,876,351

each year, or mo

nsolidated Financ

g Vehicles

- 362

1 113

- -

9) (4)

2 471

- 279

1 45

- -

- (3)

1 321

- 83

1 150

ents to purchase

rs.

.

ore frequently if

cial Statements & N

Land T

- 98

139 48

- (12

(9) (1

130 131

- 37

- 11

- (7

-

- 40

- 60

130 91

e property, plant

events or chang

Notes

Total

8,012

8,354

2,997)

1,499)

1,870

7,036

1,565

7,919)

(676)

0,006

0,976

1,864

t and

ges in

PHX Energ

For t

the l

equiv

The a

The

value

deter

The

indus

8. De

a)

gy Services Corp.

the purpose of i

owest level wit

valent to the Cor

aggregate carry

recoverable amo

e of projected fut

rmined similarly

Cash flows

both 2010

Cash flows

rate applie

A pre-tax d

and risks s

values assigne

stry and are bas

eferred Ta

UnrecognThe Corporation

tax losses that

Deferred tax as

profits elsewhe

demonstrating i

tax losses expir

There are no ot

| 2011 Annual Re

mpairment testi

hin the Corpora

rporation’s opera

ing amount of go

ount of the Cana

ture cash flows b

as in 2010. The

s were projected

and 2011.

s for a further 5-y

d is consistent w

discount rate of

specific to the Ca

d to the key as

ed on both exter

ax Assets

nized Defen has unrecogniz

can be carried

ssets have not b

re in the Corpo

t is more likely t

re starting in 201

her deductible te

port

ng, goodwill is a

ation at which

ating segments a

oodwill was alloc

adian CGU was

based on the fiv

following key as

d based on past

year period were

with historical pe

4.25 percent th

anadian CGU.

ssumptions repr

rnal sources and

s and Liab

erred Tax zed deferred tax

forward agains

been recognized

oration, and they

than not that futu

3.

emporary differe

-62-

allocated to the

goodwill is mon

as reported in no

cated to the Can

determined usi

e-year budget a

ssumptions were

experience, actu

e extrapolated u

rformance and l

at reflects curre

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bilities:

Assets ax assets of $2.3

st future taxable

in respect of th

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ure profits will b

ences that have n

Corporation’s o

nitored for inter

ote 20.

nadian CGU.

ng calculations

approved by Man

e used in the dis

ual operating res

using a growth ra

ong-term indust

ent market asses

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es (historical dat

and Liabili million (2010 - $

e income of the

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n subsidiaries t

be available to ut

not been recogn

operating segme

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of value in use,

nagement. Valu

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sults and the 5-y

ate of 15 percen

try averages.

ssments of the

ment of future tr

a).

ities $0.8 million) in re

entities in whic

ey may not be u

that have not e

tilize those loss

nized at the repo

ents which repre

ent purposes, an

which is the pre

ue in use in 2011

ow projections:

year business pl

nt to 20 percent.

time value of m

rends in the se

elation to non-ca

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sed to offset tax

stablished indic

carry-forwards.

orting date.

esent

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esent

1 was

lan in

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money

ervice

apital

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xable

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b)

9. Inta

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accu

Recogniz

Deferred tax as

Years ended De

Deferred income

Partnership inco

Drilling and othe

Investment tax c

Other

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Non-capital inco

Other (including

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angible A

ng the year, th

mulated amortiz

zed Deferr

sets and liabilitie

ecember 31,

e tax liabilities:

ome

er equipment

credits

e tax assets:

ome tax losses

g foreign and other

come tax liability (a

Assets:

he Corporation

zation in the amo

red Tax A

es are attributab

r tax credits)

asset)

had intangible

ount of $200,347

-63-

ssets and

le to the followin

assets amoun

7. The intangible

Co

d Liabilitie

ng:

$

$

nting to $320,5

e assets pertain

nsolidated Financ

es

2011

9,829,000

15,551,987

500,000

12,000

25,892,987

(15,893,033)

(5,550,955)

(21,443,988)

4,448,999

555 and recogn

to customer con

cial Statements & N

$ 5,45

7,28

574

13,31

(8,43

(7,24

(15,68

$ (2,36

nized correspon

ntracts.

Notes

2010

1,977

5,065

4,653

-

1,695

7,214)

3,187)

0,401)

8,706)

nding

PHX Energ

10. Ba

PHX

the C

stam

nil dr

11. Loa

The

bears

plus

facilit

outst

millio

of its

The

agree

gy Services Corp.

ank Overd

Energy currentl

Corporation’s op

mping fee of 1.87

rawn on this faci

ans and B

Corporation cur

s interest at the

a stamping fee o

ty not be extend

tanding for seve

on was drawn on

bank debt cove

demand revolvi

ement over all a

| 2011 Annual Re

draft Faci

y has access to

ption at the ban

75 percent and is

lity.

Borrowin

rently has acces

e Corporation’s o

of 2.25 percent.

ed, outstanding

n quarters with t

n this facility and

enants.

ng loan facility

ssets of the Cor

port

lity:

a demand revo

nk’s prime rate p

s secured as dis

gs:

ss to an $80.0 m

option at the ba

The facility is re

amounts will be

the remaining ba

d was classified

(note 10) and t

rporation.

-64-

lving loan facility

plus 0.625 perc

scussed in note

million, 364-day

ank’s prime rate

enewable at the

e transferred to a

alance paid on t

as loans and bo

the extendible r

y of up to $10.0

cent or the bank

11. As at Dece

extendible revo

plus 0.75 perce

option of the len

a 2-year term fac

the eighth quarte

orrowings. The

revolving facility

million. This fac

k’s bankers’ acc

ember 31, 2011,

olving facility with

ent or the bank

nder by Novemb

cility repayable a

er. As at Decem

Corporation is in

y are secured b

cility bears intere

ceptance rate p

the Corporation

h its bank. The

kers’ acceptance

ber 2012. Should

at 1/10 of the am

mber 31, 2011, $

n compliance wi

by a general sec

est at

lus a

n had

loan

e rate

d this

mount

$56.0

ith all

curity

12. Sh

a)

b)

c)

are Capit

Authorize

The Corporation

Balance as at Ja

Issued shares p

Issued shares p

Balance as at D

Issued shares p

Issued shares p

Balance as at D

Weighted

Issued shares a

Effect of share o

Effect of shares

Weighted avera

Basic and

2011

Basic earnings p

Diluted earnings

Dilutive effect of

Income availabl

tal:

ed and Iss

n is authorized to

anuary 1, 2010

pursuant to share o

pursuant to DRIP

December 31, 2010

pursuant to share o

pursuant to DRIP

December 31, 201

d Average

at January 1,

options exercised

issued pursuant t

age number of sha

d Diluted

per share:

s per share:

f share option con

e to shareholders

sued Shar

o issue an unlim

option plan

0

option plan

1

e Number

to DRIP

ares

Earnings

nversions

-65-

res

mited number of s

of Shares

per Share

I(num

$ 18,3

$ 18,3

Co

shares.

2

2

2

s

2

2

e

Income merator) (den

328,246 2

-

328,246 2

nsolidated Financ

Number

26,505,110

957,241

77,022

27,539,373

462,570

89,119

28,091,062

2011

27,539,373

289,602

38,800

27,867,775

Shares nominator)

27,867,775

412,026

28,279,801

cial Statements & N

Am

$ 82,43

7,74

69

$ 90,87

$ 5,75

95

$ 97,58

26,50

31

4

26,85

Per Am

$

$

Notes

mount

3,639

7,848

4,971

6,458

0,117

6,480

3,055

2010

5,110

2,439

0,675

8,224

share mount

0.66

0.65

PHX Energ

d)

13. Sh

a)

gy Services Corp.

2010

Basic earnings p

Diluted earnings

Dilutive effect of

Income availabl

The calculation

exercised becau

those options w

585,130 in 2011

DividendsThe Corporation

the Corporation

Energy declare

dividends of $13

are Base

Share OpThe Corporation

to purchase sha

one-third 18 mo

options are exe

the date of gran

the date of gran

| 2011 Annual Re

per share:

s per share:

f share option con

e to shareholders

of diluted earni

use their exercis

would cause the

1 (2010 – 25,000

s n makes monthl

n paid monthly d

ed a dividend o

3,375,408 (2010

ed Payme

ption Progn has a share op

ares in the Corp

onths from grant

rcisable using th

nt, or in the case

nt. The options h

port

nversions

ings per share e

se price is higher

diluted earnings

0).

ly cash dividend

dividends totaling

of $0.04 per sh

0 - $12,916,506)

ents:

gram (Equption program th

poration. Grants

date and one-th

he five-day weig

e of a US option

have a term of fiv

-66-

I(num

$ 14,1

$ 14,1

excluded anti-di

r than the avera

s per share to b

ds to its shareho

g $12,473,708 (

are or $1,064,5

were declared f

uity-Settlehat entitles key m

under the plan

hird 30 months f

hted-average tra

n holder, the trad

ve-years.

Income merator) (den

62,248 2

-

62,248 2

lutive options. T

ge market value

be overstated. T

olders. During t

(2010 - $12,169

592, payable on

for the year ende

d) management pe

vest as to one-

from grant date.

ading price of th

ding price of the

Shares nominator)

26,858,224

132,731

26,990,955

These are option

e of the shares fo

The number of e

the year ended

,234). On Dece

n January 13,

ed December 31

ersonnel and sen

-third 6 months

In accordance w

e shares ending

e shares ending

Per Am

$

$

ns that would no

or the year. Inclu

excluded options

December 31, 2

mber 30, 2011,

2011. In aggre

1, 2011.

nior/other emplo

from the grant

with these progr

g immediately pr

immediately pr

share mount

0.53

0.52

ot be

uding

s was

2011,

PHX

egate,

oyees

date,

rams,

rior to

ior to

Consolidated Financial Statements & Notes

-67-

Summary of option grants in 2011

Number Exercise Price Expiration Date Fair

Value

11,630 $ 13.80 March 8, 2016 $ 3.96

392,000 12.09 May 27, 2016 3.12

183,500 12.18 May 27, 2016 3.15

25,000 10.00 August 11, 2016 2.34

507,250 10.04 December 1, 2016 2.27

185,000 10.63 December 1, 2016 2.48

1,304,380

During the year ended December 31, 2011, a total of 462,570 (2010 - 957,241) options were exercised at exercise

prices between $4.20 and $10.24 (2010 - $4.24 to $10.24), a total of 116,842 (2010 - 35,835) options were

forfeited, and 69,005 (2010 - 13,834) options were cancelled. As at December 31, 2011, the Corporation had a

total of 2,493,321 (2010 - 1,837,359) options outstanding which expire over a period of 2 to 5 years.

The fair value of options that were exercised for the year ended December 31, 2011 in the amount of $2,298,676

(2010 - $1,617,986) has been added to share capital.

The Corporation values all of its share options using the Black-Scholes model. The Corporation’s determination of

fair value of options on the date of grant is affected by the Corporation’s share price as well as assumptions

regarding a number of variables. These variables include, but are not limited to, the Corporation’s expected share

price volatility over the term of the options of 41 percent, annual dividends of $0.48, and a risk free interest rate of 2

percent. The amounts computed according to the Black-Scholes model method may not be indicative of the actual

values realized upon the exercise of these options by the holders. During 2011, the Corporation recognized a total

compensation expense of $2,970,553 (2010 - $4,073,016) for share options granted between 2008 and 2011.

PHX Energy Services Corp. | 2011 Annual Report

-68-

A summary of the status of the plan as at December 31, 2011, is presented below:

2011 2010

Options

Weighted-Average Exercise Price Options

Weighted-Average Exercise Price

Outstanding, beginning of year 1,837,359 $ 8.45 2,106,769 $ 7.55

Granted 1,304,380 11.07 738,500 9.40

Exercised (462,571) 7.46 (957,241) 6.40

Forfeited / cancelled (185,847) 9.34 (49,669) 8.74

Expired - - (1,000) 7.03

Outstanding, end of year 2,493,321 $ 9.94 1,837,359 $ 8.45

Options exercisable, end of year 982,485 $ 9.21 798,145 $ 7.88

The range of exercise prices for options outstanding at December 31, 2011 are as follows:

Options Outstanding Options Exercisable

Original Exercise Price Number

Weighted-Average Remaining Contractual Life

Weighted-Average Exercise Price Number

Weighted-Average Exercise Price

$ 8.50 432,431 2.4 yrs $ 7.79 432,431 $ 7.79

9.40 610,510 3.6 yrs 9.25 190,446 9.25

10.00 25,000 4.6 yrs 10.00 - -

10.04 507,250 4.9 yrs 10.04 - -

10.24 148,000 1.2 yrs 8.65 148,000 8.65

10.63 185,000 4.9 yrs 10.63 - -

12.09 372,000 4.4 yrs 12.09 123,940 12.09

12.18 176,500 4.4 yrs 12.18 58,792 12.18

13.80 11,630 4.2 yrs 13.80 3,876 13.80

15.42 15,000 1.6 yrs 14.23 15,000 14.23

15.55 10,000 1.4 yrs 15.55 10,000 15.55

2,493,321 3.5 yrs $ 9.94 982,485 $ 9.21

b) Retention Award Plan The Retention Award Plan results in eligible participants receiving cash compensation in relation to the value of a

specified number of underlying notional Retention Awards (“RA”). Retention Awards vest evenly over a period of

three-years. Upon vesting and subsequent exercise, the holder is entitled to receive a cash payment based on the

fair value of the underlying shares determined using the five-day weighted-average trading price of the shares

ending immediately prior to the exercise date plus accrued reinvested dividends.

c)

14. Se

Sellin

and o

15. Oth

Othe

The Corporation

the year ended

has a correspo

December 31, 2

DistributiDuring the year

between $8.47

elling Gen

ng, general and

office expenses,

her Incom

er income relates

n recorded a tot

December 31,

nding liability in

2011 (2010 - 120

ion Reinver ended Decemb

and $14.58.

neral & Ad

administrative

, and other admi

me:

s to gains on dis

tal of $847,626 (

2011. The expe

ncluded in trade

0,266).

estment Pber 31, 2011, the

dministra

expenses includ

nistrative charge

position of drillin

-69-

(2010 - $974,79

ense is included

and other paya

Plan (“DRe Corporation is

tive Expe

de salaries and

es.

ng equipment.

Co

96) in compensa

d in selling, gene

ables. There we

RIP”) ssued 89,119 sh

enses:

employee bene

nsolidated Financ

ation expense re

eral and adminis

ere 214,691 RA

hares pursuant t

efits, share-base

cial Statements & N

elating to this pla

strative expense

A’s outstanding a

to the DRIP at p

ed payments, fa

Notes

an for

e and

as at

prices

acility

PHX Energ

16. Ex

(State

Yea

Per

Equ

Con

Dep

Fiel

Fac

Trav

Insu

Oth

17. Pe

Yea

Sala

Sha

18. Oth

Yea

Fore

Prov

gy Services Corp.

penses b

ed in thousands of

ars ended Decemb

sonnel expenses

uipment expenses

ntract labour

preciation and amo

d and freight expe

cility and office exp

vel and entertainm

urance and busine

er

ersonnel E

ars ended Decemb

aries and employe

are-based paymen

her Expe

ars ended Decemb

eign exchange los

vision for bad deb

| 2011 Annual Re

by Nature

f dollars)

ber 31,

ortization

enses

penses

ment

ess and sales taxe

Expenses

ber 31,

ee benefits

nts

nses:

ber 31,

sses

bt

port

e:

es

s:

-70-

$ 80,2

3,8

$ 84,0

$ 1,3

4

$ 1,8

2011

84,092

58,489

41,866

16,171

15,552

8,051

3,591

3,421

3,759

2011

273,526

818,179

091,705

2011

376,812

446,521

823,333

2

62

49

33

11

12

6

3

2

3

2

$ 57,304

5,047

$ 62,352

2

$ 2,088

238

$ 2,326

2010

,352

,614

,212

,565

,953

,333

,242

,240

,367

2010

,205

,815

,020

2010

,216

,011

,227

19. Inc

Yea

Cur

Cur

Adju

Def

Orig

Tota

Reco

Yea

Net

Tota

Ear

Inco

Effe

Non

Non e

Cur d

Amo

Oth

come Tax

ars ended Decemb

rrent tax expense:

rrent period

ustment for prior p

erred tax expense

gination and rever

al income tax expe

onciliation of effe

ars ended Decemb

earnings

al income tax expe

nings before incom

ome tax using the

ect of tax rates in f

n-taxable portion o

n-deductible shareexpenses

rrent year losses indeferred tax asset

ounts included in

er

xes:

ber 31,

periods

e:

sal of temporary d

ense (recovery)

ective tax rate

ber 31,

ense (recovery)

me taxes

Corporation’s dom

foreign jurisdiction

of gains on disposa

e-based payments

n foreign jurisdictiot was recognized

Fund income

differences

mestic tax rate

s

al of assets

s and other

ons for which no

-71-

26.5%

(4.9%)

(1.8%)

3.6%

4.8%

-

3.3%

31.5%

Co

$ 1,1

1

1,2

7,1

7,1

$ 8,4

20

$ 18,328,2

8,411,2

26,739,5

7,085,9

(1,312,9

(493,9

959,9

1,294,8

877,4

$ 8,411,2

nsolidated Financ

2011

113,035

147,905

260,940

150,330

150,330

411,270

011

246

270

516

972 28.0%

977) (6.3%)

982) (2.8%)

910 14.4%

851 7.1%

- (42.6%)

496 (7.3%)

270 (9.5%)

cial Statements & N

2

$ 682

25

708

(1,937,0

(1,937,0

$ (1,228,3

2

$ 14,162

(1,228

12,933

3,621

(818

(361

1,871

915

(5,509

(946

$ (1,228

Notes

2010

,940

,705

,645

016)

016)

371)

2010

,248

,371)

,877

,486

,966)

,435)

,666

,468

,917)

,673)

,371)

PHX Energ

20. Op

The

segm

Inform

(State

Yea

Rev

Rep in

(State

 

As a

Pro

Goo

Reco

(State

Yea

Rep

Cor

Se

R

Fi

O

O

Ear

gy Services Corp.

perating S

Corporation pro

ments have been

mation about rep

ed in thousands of

ars ended Decemb

venue

portable segment pncome taxes

ed in thousands of

at December 31,

perty, plant and eq

odwill

onciliation of rep

ed in thousands of

ars ended Decemb

portable segment p

rporate:

elling, general and

esearch and deve

nance expense

ther expenses

ther income

nings before incom

| 2011 Annual Re

Segments

ovides directiona

n aligned geogra

portable segmen

f dollars)

ber 31,

profit before

f dollars)

quipment

ortable segment

f dollars)

ber 31,

profit before incom

d administrative

elopment expense

me taxes

port

s:

al and horizontal

aphically as follow

nts

C

2011

144,416 9

28,952 1

2011

80,756

8,876

t profit and other

me taxes

s

-72-

l oil and natural

ws:

Canada U

2010 2011

98,580 93,483

13,859 3,489

Canada

2010 20

63,503 24,78

8,876

r material items

gas well drilling

United States

1 2010

3 85,158 2

9 5,267

United States

11 2010

88 17,138

- -

g services. PHX

Internationa

2011 2010

22,164 13,539

3,666 3,833

Internationa

2011 2010

14,908 11,223

-

201

36,107

8,912

2,124

2,097

1,823

(5,589

26,740

X Energy’s repor

al

0 2011

9 260,063 19

3 36,107 2

al

0 2011

3 120,452 9

- 8,876

1

7 2

2

4

7

3

9) (

0 1

rtable

Total

2010

7,277

2,959

Total

2010

91,864

8,876

2010

2,959

8,752

1,809

713

2,326

3,575)

2,934

21. Fin

a)

b)

nancial In

Credit RisThe Corporatio

exploration and

directly impacte

obligations to th

the total reven

approximately $

provided an allo

The Corporation

financial and oth

and manages its

Liquidity Liquidity risk is

Corporation has

liquidity risk is t

Management ty

requirements ar

The Corporatio

through capital a

strument

sk on is exposed t

d development

ed by a decline

he Corporation.

nue. All accou

$2.9 million of t

owance of $0.2 m

n has a credit m

her assessment

s credit risk on a

Risk the risk that the

s financial liabil

to ensure that it

ypically forecasts

re then addresse

n believes that

and banking ma

ts

o normal credit

industry. The C

in economic co

During the year

nts receivable

otal receivables

million for all amo

management pro

ts to establish an

an ongoing basis

e Corporation w

ities, thus, is e

t always has su

s cash flows for

ed through a co

future cash flow

arkets will be ade

-73-

t risks of its cu

Corporation’s cre

onditions, which

r ended Decemb

balances outs

s on the balance

ounts it consider

ogram to assist

nd monitor a cus

s.

ill not be able to

xposed to liquid

ufficient cash an

a period of twelv

mbination of de

ws generated b

equate to meet it

Co

ustomers that e

edit risk associ

would impair th

ber 31, 2011, on

standing over 1

e sheet at Dece

rs uncollectable

in managing thi

stomer’s creditw

o meet its financ

dity risk. The C

nd credit facilitie

ve-months to ide

mand credit fac

by the operation

ts financial oblig

nsolidated Financ

exist within the

ated with these

he customers’ a

ne customer com

120 days repre

ember 31, 2011

at December 31

is risk, which co

worthiness. The C

cial obligations a

Corporation’s ap

es to meet its ob

entify financing

cilities and acces

ns and access t

gations.

cial Statements & N

oil and natural

e customers ca

ability to satisfy

mprised 7 perce

esent 5 percen

1. Management

1, 2011.

onsists of condu

Corporation mon

as they fall due.

proach to mana

bligations when

requirements. T

ss to capital mar

to additional liqu

Notes

l gas

an be

their

ent of

nt or

t has

ucting

nitors

. The

aging

due.

These

rkets.

uidity

PHX Energy Services Corp. | 2011 Annual Report

-74-

The following table reflects the Corporation’s anticipated payment of contractual obligations related to continuing

operations as at December 31, 2011:

(Stated in thousands of dollars)

2012 2013 2014 2015 2016

Loans and borrowings - 22,400 33,600 - -

Operating leases 2,740 2,483 1,882 1,750 1,514

Trade and other payables 44,539 - - - -

Dividends payable 1,065 - - - -

Total 48,344 24,883 35,482 1,750 1,514

c) Fair Values of Financial Instruments The Corporation has designated its accounts payable and dividends payable as other financial liabilities carried at

amortized cost. Accounts receivable are designated as loans and receivables, measured at amortized cost. The

Corporation’s carrying values of these items approximate their fair value due to the relatively short periods to

maturity of the instruments. Loans and borrowings have been designated as an other financial liability, and it is

measured at amortized cost. The fair value of loans and borrowings included in the consolidated balance sheet

approximates fair values as the indebtedness is subject to floating rates of interest.

d) Interest Rate Risk Interest rate risk is created by fluctuations in the fair values of financial instruments due to changes in the market

interest rates. The Corporation has variable interest long-term debt which exposes it to fluctuations in cash

interest payment amounts.

A one percent change in interest rates would have increased or decreased the Corporation’s profit by $458,000.

e)

Foreign EForeign exchan

exchange rates

Colombia, the C

Russian rouble

and earnings ar

and Colombia’s

options with res

The following ch

As at December

Cash and cash

Trade and other

Trade and other

Current tax asse

Statement of fin

The following ex

USD

A 10 percent we

the Corporation

assumes that al

Exchangege risk is create

s. Due to oper

Corporation has

, Peruvian soles

re subject to fore

s monetary asse

spect to managin

hart represents t

r 31,

equivalents

r receivables

r payables

ets

nancial position ex

xchange rates a

eakening of the

n’s equity by $

ll other variables

Risk ed by fluctuations

ations of the C

an exposure to

s, Albanian lek,

eign exchange ri

ts, liabilities and

ng this foreign ex

the Corporation’s

posure

pplied during the

Canadian dollar

$226,000 and d

s remain constan

-75-

s in the fair value

Corporation’s su

foreign currenc

and Colombian

isk. The exposu

d earnings is cur

xchange risk in t

s exposure to fo

e year ended De

against the US

decreased net e

nt at December 3

Co

es of financial in

ubsidiaries in th

cy exchange rate

n peso denomin

ure to foreign ex

rrently not signif

the event that th

oreign currency r

$ 3

17

(8

$ 12

ecember 31:

Avera

2011

0.9893

dollar at Decem

earnings by $2

31, 2011.

nsolidated Financ

nstruments due t

he US, Russia,

es. The carrying

nated monetary

xchange risk in P

ficant. The Corp

e exposure beco

risk in the US:

USD

2011

3,926,658

,048,631

8,875,253)

262,500

,362,536

age Rate Dec

2010

1.0299 1

mber 31, 2011 wo

227,000 respect

cial Statements & N

to changes in fo

, Peru, Albania

g values of US d

assets and liab

Peru, Russia, Alb

poration will exa

omes significant

U

2

$ 1,997,

17,292,

(8,762

618,

$ 11,144,

cember 31 Close R

2011 2

1.0170 0.9

ould have decre

tively. This ana

Notes

oreign

and

dollar,

bilities

bania

amine

t.

USD

2010

,344

,034

,761)

,363

,980

Rate

2010

9946

eased

alysis

PHX Energ

22. Ca

The

cons

deve

poss

The C

of lon

borro

0.49

The C

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Corporation prep

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| 2011 Annual Re

nagemen

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3.9 million in sh

r 31, 2011.

pares annual and

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subject to capita

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-76-

nagement is to

ain investor, cre

eeks to maintain

vantages and se

al structure to co

December 31, 2

uity. The Corpo

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s to maintain a f

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relating to deb

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maintain a stron

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2011, the Corpor

oration’s resulting

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ng capital base

et confidence, a

etween higher re

by a strong equit

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structure and it m

tions.

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rage. As at Dec

the year ended D

, in conjunction

and to sustain f

eturns that migh

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bt to equity ratio

asts to assist wit

may alter its divi

held. These ca

cember 31, 2011

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with

future

ht be

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mises:

2

3

4

5

6

elated Par

ansaction

management pe

management pe

activities of the C

mbers of the Boa

f Executive Offic

ddition to their

uses and comm

cutives of other p

cutive officers als

Corporation, e

ements with ce

finitely until term

ual review.

Leases:

committed to the

rties:

s with Ke

ersonnel compen

ersonnel are thos

Corporation as a

ard, the Chief Ex

cer.

salaries, the Co

missions, which

publicly traded oi

so participate in

either directly o

ertain executive

minated in accord

e following minim

y Manage

nsation

se persons havi

a whole. The C

xecutive Officer,

orporation also

h the compensa

il and gas servic

the Corporation

or indirectly thr

e officers that p

dance with the t

-77-

mum payments u

ement Per

ng authority and

Corporation dete

, Senior Vice Pr

provides annua

ation committee

ce companies.

’s share option p

rough its subsi

provide for term

terms thereof an

Co

under operating

$

rsonnel

d responsibility f

ermined that key

residents and Vi

al incentives to

e considers co

program and ret

idiaries, has e

mination payme

nd the base sala

nsolidated Financ

leases for equi

2011

2,740

2,483

1,882

1,750

1,514

for planning, dire

y management p

ice Presidents r

executive office

omparable to b

tention award pla

ntered into exe

ents. These a

ary payable the

cial Statements & N

pment, vehicles

2

$ 2

2

1

1

ecting and contro

personnel consis

reporting directly

ers which consi

benefits provide

an (see note 13)

ecutive employ

agreements con

reunder is subje

Notes

, and

2010

,625

,365

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,686

502

olling

sts of

y to a

ist of

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).

yment

ntinue

ect to

PHX Energy Services Corp. | 2011 Annual Report

-78-

Key management personnel compensation comprised:

Years ended December 31, 2011 2010

Base salaries $ 1,377,983 $ 1,560,488

Bonuses and commissions 3,516,652 2,317,417

Share-based payments 1,438,392 1,334,000

$ 6,333,027 $ 5,211,905

Key management personnel and director transactions

Directors of the Corporation control 21 percent of the shares of the Corporation.

Directors are entitled to receive an annual retainer as well as a fee for each meeting of the Board or Committee of the

Board attended. The Chairman of the Board and the Lead Director receive an additional annual retainer, as does the

Chairs of the Audit Committee, Compensation Committee, Nomination and Corporate Governance Committees.

Independent Directors are also entitled to participate in the retention award plan (see note 13) and can elect to receive

certain percentages of these fees as retention awards under the Retention Award plan. As at December 31, 2011, the

directors have 77,878 of retention awards outstanding (2010 - 41,094).

From time-to-time, Directors of the Corporation, or their related entities, may purchase goods or services from the

Corporation. These purchases are on the same terms and conditions as those entered into by other Corporation

employees or customers. For the year ended December 31, 2011, the Corporation provided drilling services to

Cequence Energy Ltd., a related entity of one of the Directors of the Corporation. The transaction value of the service

amounted to $1.2 million (2010 - $4,000), of which $0.9 million (2010 - $4,000) is outstanding as a receivable as of

December 31, 2011.

25. Sig

Pho

Pho

Pho

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26. Ex

As stwith

The Dece31, 2date

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the C

gnificant S

oenix Technology

oenix Technology

oenix Technology

oenix TSP SAC

oenix Technology

oenix Technology

oenix TSR LLC

planation

tated in note 2(aIFRS.

accounting policember 31, 2011,2010 and in the p of transition).

eparing its open

ancial statemen

ious Canadian G

e following table

Corporation’s cas

Subsidiar

Services Inc.

Services LP

Services USA Inc

Services Internatio

Holdings Russia L

n of Trans

a), these are the

cies set out in n the comparativpreparation of an

ning IFRS statem

ts prepared in a

GAAP to IFRS h

es and the notes

sh flows.

ries:

.

onal Ltd.

Ltd.

sition to IF

Corporation’s fir

note 3 have beee information prn opening IFRS

ment of financial

ccordance with

as affected the

s that accompan

-79-

Country of Incorp

C

C

C

C

FRS:

rst annual conso

en applied in preresented in thesestatement of fina

position, the Co

previous Canad

Corporation’s fin

ny the tables. Th

Co

poration 20

Canada 10

Canada 10

USA 10

Peru 9

Cyprus 10

Cyprus 10

Russia 10

olidated financia

eparing the finae financial stateancial position a

orporation has a

ian GAAP. An e

nancial position

he transition did

nsolidated Financ

Ownership

011 2010

00% 100%

00% 100%

00% 100%

90% 90%

00% 100%

00% 90%

00% 90%

l statements pre

ncial statementsments for the ye

at January 1, 201

djusted amounts

explanation of ho

and financial pe

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p Interest

0 January 1,

%

%

%

%

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epared in accord

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s reported previo

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erformance is se

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2010

100%

100%

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90%

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PHX Energy Services Corp. | 2011 Annual Report

-80-

Reconciliation of Equity

Assets

January 1, 2010 December 31, 2010

Note Previous

CDN GAAP

Effect of Transition

to IFRS IFRS Previous

CDN GAAP

Effect of Transition

to IFRS IFRS

ASSETS

Current assets:

Cash and cash equivalents $ 2,488,970 $ - $ 2,488,970 $ 8,625,532 $ - $ 8,625,532

Trade and other receivables 28,660,353 - 28,660,353 50,314,306 - 50,314,306

Inventories 7,022,053 - 7,022,053 9,895,473 - 9,895,473

Prepaid expenses 2,085,643 - 2,085,643 4,046,408 - 4,046,408

Current tax assets 2,845,643 - 2,845,643 298,064 - 298,064

Total current assets 43,102,662 - 43,102,662 73,179,783 - 73,179,783

Non-current assets:

Property, plant and equipment (iii) 62,805,570 (1,829,482) 60,976,088 93,038,754 (1,174,712) 91,864,042

Goodwill 8,876,351 - 8,876,351 8,876,351 - 8,876,351

Deferred tax assets (iv) - - - 2,008,256 360,450 2,368,706

Intangible assets - - - 280,486 - 280,486

Total non-current assets 71,681,921 (1,829,482) 69,852,439 104,203,847 (814,262) 103,389,585

Total assets $114,784,583 $(1,829,482) $112,955,101 $177,383,630 $ (814,262) $ 176,569,368

Consolidated Financial Statements & Notes

-81-

Liabilities and Shareholders’ Equity

January 1, 2010 December 31, 2010

Note Previous

CDN GAAP

Effect of Transition

to IFRS IFRS Previous

CDN GAAP

Effect of Transition

to IFRS IFRS LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Bank overdraft $ 4,241,058 $ - $ 4,241,058 $ - $ - $ -

Trade and other payables 16,846,978 - 16,846,978 37,886,506 - 37,886,506

Dividends payable 1,001,384 - 1,001,384 1,053,645 - 1,053,645

Loans and borrowings - - - - - -

Total current liabilities 22,089,420 - 22,089,420 38,940,151 - 38,940,151

Non-current liabilities:

Loans and borrowings - - - 36,000,000 - 36,000,000

Deferred tax liabilities (iv) 1,243,105 (528,233) 714,872 - - - Total non-current liabilities 1,243,105 (528,233) 714,872 36,000,000 - 36,000,000

Equity: Share capital (ii) 82,433,639 - 82,433,639 91,845,758 (969,300) 90,876,458 Contributed surplus (ii) 3,872,850 (1,171,802) 2,701,048 2,712,727 2,443,351 5,156,078 Retained earnings (v) 8,605,559 (3,589,437) 5,016,122 12,949,107 (6,433,838) 6,515,269

Accumulated other comprehensive income (i) (3,459,990) 3,459,990 - (4,810,708) 4,076,972 (733,736)

Total equity attributable to equity holders of the Corporation

91,452,058 (1,301,249) 90,150,809 102,696,884 (882,815) 101,814,069

Non-controlling interest (i) - - - (253,405) 68,553 (184,852) Total Equity 91,452,058 (1,301,249) 90,150,809 102,443,479 (814,262) 101,629,217

Total liabilities and equity $114,784,583 $(1,829,482) $112,955,101 $177,383,630 $(814,262) $176,569,368

PHX Energy Services Corp. | 2011 Annual Report

-82-

Reconciliation of comprehensive income for the year ended December 31, 2010:

December 31, 2010 Note Previous CDN GAAP Effect of Transition to IFRS IFRS

Revenue $ 197,276,938 $ - $ 197,276,938

Direct costs (iii) 156,579,235 (554,574) 156,024,661

Gross profit 40,697,703 554,574 41,252,277

Expenses:

Selling, general and administrative (ii) 24,398,916 2,645,856 27,044,772

Research and development expenses 1,809,090 - 1,809,090

Finance expense 712,831 - 712,831

Other income (iii) (3,474,325) (100,195) (3,574,520)

Other expense (i) 1,640,695 685,532 2,326,227

25,087,207 3,231,193 28,318,400

Earnings before income taxes 15,610,496 (2,676,619) 12,933,877

Provision for / (Recovery of) income taxes

Current 708,645 - 708,645

Deferred (iv) (2,104,798) 167,782 (1,937,016)

(1,396,153) 167,782 (1,228,371)

Net earnings 17,006,649 (2,844,401) 14,162,248

Other comprehensive income

Foreign currency translation (i) (1,350,718) 685,532 (665,186)

Total comprehensive income for the year $ 15,655,931 $ (2,158,869) $ 13,497,062

Earnings attributable to:

Equity holders of the Corporation $ 17,260,054 $ (2,844,401) $ 14,415,653

Non-controlling interest (253,405) - (253,405)

Net earnings $ 17,006,649 $ (2,844,401) $ 14,162,248

Comprehensive income attributable to:

Equity holders of the Corporation $ 15,909,336 $ (2,227,422) $ 13,681,914

Non-controlling interests (i) (253,405) 68,553 (184,852)

Total comprehensive income for the year $ 15,655,931 $ (2,158,869) $ 13,497,062

Consolidated Financial Statements & Notes

-83-

December 31, 2010 Note Previous CDN GAAP Effect of Transition to IFRS IFRS

Earnings per share - basic $ 0.63 $ (0.10) $ 0.53

Earnings per share - diluted $ 0.63 $ (0.11) $ 0.52

Notes to the Reconciliations

i. Cumulative Translation Adjustment

In accordance with IFRS 1, the Corporation had elected to deem all foreign currency translation differences that

arose prior to the date of transition in respect of all foreign operations to be nil at the date of transition.

Under previous Canadian GAAP, the Corporation has accounted for its Peruvian and Russian subsidiaries as fully-

integrated operations and exchange differences upon translation to Canadian dollars were recognized in the

statement of earnings under the temporal method. In addition, in accordance with IFRS and the Corporation’s

accounting policy, from the date of transition, the exchange differences arising on the translation from the US dollar

functional currency to Canadian dollars are recognized directly in the cumulative translation reserve as a separate

component of equity.

January 1, 2010 December 31, 2010

Condensed consolidated statement of financial position:

Increase in translation reserve at transition $ 3,459,990 $ 3,459,990

Foreign exchange differences on translation of Peruvian and Russian operations

- 685,532

Non-controlling interest portion (68,550)

Increase in accumulated other comprehensive income $ 3,459,990 $ 4,076,972

ii. Share-Based Payments

The Corporation is required to apply IFRS 2 share-based payments to equity instruments that were granted after

November 7, 2001, and that vest after January 1, 2010.

Recognition of expense

Under Canadian GAAP, for grants of share-based awards with graded vesting, the total fair value of the award was

recognized on a straight-line basis over the employment period necessary to vest the award. Under IFRS, each

tranche in an award with graded vesting is considered a separate grant with a different vesting date and fair value.

PHX Energy Services Corp. | 2011 Annual Report

-84-

Each grant must be accounted for on that basis, and as a result the Corporation adjusted its expense for share-

based awards to reflect this difference in recognition.

Forfeitures

Under Canadian GAAP, forfeitures of awards were recognized as they occur. Under IFRS, an estimate is required

of the number of awards expected to vest, which is revised if subsequent information indicates that actual

forfeitures are likely to differ from the estimate. As a result the Corporation adjusted its expense for share-based

awards to reflect this difference.

Cash-settled share-based payments

Under Canadian GAAP, a liability for share options was accrued based upon the intrinsic value of the award with

changes recognized in the income statement each period. Under IFRS, an entity must measure the liability incurred

at fair value by applying an option pricing model. Until the liability is settled, the fair value of the liability is remeasured

at each reporting date, with changes in fair value recognized as the awards vest. Changes in fair value of vested

awards are recognized immediately in earnings. As a result, the Corporation adjusted expenses associated with

options expected to be settled in a cash payment to reflect the changes of the fair values of these awards.

January 1, 2010 December 31, 2010

Consolidated statement of financial position:

Change in the fair value of share options $ (1,171,802) $ 2,443,351

(Decrease) Increase in contributed surplus $ (1,171,802) $ 2,443,351

From transition date onwards, the Corporation also adjusted the amounts recognized in share capital upon option

exercise to reflect the changes of the fair values of these awards.

January 1, 2010 December 31, 2010

Consolidated statement of financial position:

Change in the fair value of share options $ - $ (969,300)

Decrease in share capital $ - $ (969,300)

iii. Property, Plant & Equipment

The Corporation did not take the exemption under IFRS 1 to use fair value as deemed cost but rather applied IAS 16,

the “componentization approach” and identified parts of assets on an item-by-item basis using historical cost. In

rebuilding the historical cost of property, plant and equipment in compliance with IFRS componentization, adjustments

have been made to the Corporation’s opening statement of financial position at the January 1, 2010 transition date. As

a result, even though depreciation is calculated in the same manner, the amount of depreciation differs.

Consolidated Financial Statements & Notes

-85-

The impact arising from the componentization in property, plant and equipment is summarized as follows:

January 1, 2010 December 31, 2010

Consolidated statement of financial position:

Componentization of property, plant and equipment $ (1,829,482) $ (1,174,712)

Decrease in property, plant and equipment $ (1,829,482) $ (1,174,712)

iv. Deferred Tax Liability

The above changes decreased (increased) the deferred tax liability as follows based on a tax rate of 25 percent -

Canada and 37.5 percent - US:

January 1, 2010 December 31, 2010

Consolidated statement of financial position:

Property, plant and equipment $ 528,233 $ 360,450 Decrease in deferred tax liabilities / Increase in deferred tax assets $ 528,233 $ 360,450

The effect on the statement of comprehensive income for the year ended December 31, 2010 was to increase the

previously reported tax charge for the period by $167,782.

v. Retained Earnings

The above changes increased (decreased) retained earnings (each net of related tax) as follows:

 

January 1, 2010 December 31, 2010

Consolidated statement of financial position:

Cumulative translation adjustment $ (3,459,990) $ (4,145,522)

Share-based payments 1,171,802 (1,474,054)

Property, plant and equipment (1,301,249) (814,262)

Decrease in retained earnings $ (3,589,437) $ (6,433,838)

PHX Energ

Board of

John Hooks

James K. Gr

Randolph (“R

J. Cameron

Myron Tétrea

Judith Athaid

Lawrence Hi

gy Services Corp.

Directors

ray, O.C.

Randy”) M. Charron

Bailey

ault

de

bbard

| 2011 Annual Re

Co

port

rporate

Officers John Hooks

President and C

Cameron Ritchi

Sr. Vice Preside

Corporate Secre

Michael Buker

Sr. Vice Preside

Daniel Blanchar

Vice President E

Jeffery Shafer

Vice President S

Craig Brown

Vice President I

-86-

e Infor

CEO

e

ent Finance and CFO

etary

ent Business Develop

rd

Executive Sales

Sales and Marketing

International Operatio

rmation

O

pment

ons

n

Legal CounseBurnet, Duckworth

Calgary, Alberta

Auditors KPMG LLP

Calgary, Alberta

Bankers HSBC Bank Canad

Calgary, Alberta

Transfer AgenComputershare Tr

Calgary, Alberta

el h & Palmer LLP

da

nt rust Company of Can

nada

Corporate Office1400, 250 – 2nd Street S.W.Calgary, Alberta T2P 0C1Telephone: (403) 543-4466Facsimile: (403) 543-4485E-mail: investor@phxtech.com

R&D and Operations Centre11400 – 27th Street S.E.Calgary, Alberta T2Z 3R6Telephone: (403) 236-1394Facsimile: (403) 236-1624

Estevan Operations Centre5 Devonian Street EastEstevan, Saskatchewan S4A 2L7Telephone: (306) 634-7454Facsimile: (306) 634-7436

Gulf Coast Operations Centre1805 Brittmoore Rd.Houston, Texas 77043Telephone: (713) 337-0600Facsimile: (713) 337-0599

Fort Worth Sales OfficeSuite 600, 201 Main StreetFort Worth, Texas 76102Telephone: (817) 945-3287Facsimile: (817) 945-3288

Midland Operations Centre3610 Elkins RoadMidland, TX 79705

Oklahoma City Operations Centre9633 N.W. 6th StreetOklahoma City, OK 73127Telephone: (405) 470-0022

Rocky Mountain Operations Centre2136 Oil DriveCasper, Wyoming 82604Telephone: (307) 472-5135Facsimile: (307) 472-5346

Denver Sales OfficeSuite 2700, 999-18th StreetDenver, Colorado 80202Telephone: (303) 357-4617Facsimile: (303) 446-9111

Northeast Operations327-A Welch CourtTraverse City, Michigan 49686Telephone: (231) 995-0100Facsimile: (231) 995-0200

Peru Sales & Administration OfficeCalle Tulipanes 147, Of. 1104, Urb. El Polo Hunt, Santiago de Surco, Lima 33, Perú.Telephone: + (511) 402-4795

Peru Operations CentreZona Industrial Mz. A, Lote 68Talara Alta, TalaraDistrito Pariñas, Piura, Peru

Colombia Operations CentreAutopista Medellin Km.2.5 Via Parcelas Bodega A-11, Etapa 1 CIEMTelephone: +57-1-877-3828

Russia Operations Centre628600 Russian Federation,Tyumen region, KhMAO-YugraNizhnevartovsk city, 5 Kuzovatkina St.Building 8 West Industrial Area, Panel 20Telephone: +7 (3466) 29-34-32Facsimile: +7 (3466) 29-34-35