May 12, 2006

Saxon Energy Services, like many companies in the oil and gas industry, has declined from highs reached in the December to January time period. The pullback was triggered by plummeting natural gas prices during an unseasonably warm winter. In turn, the falling gas prices led to reduced capital spending forecasts from some of the major, intermediate and junior E&Ps.

Despite fears of reduced activity, Saxon Energy Services reported an 86% rig utilization rate for the first quarter, ended March 31. The financial results, reported in US dollars, offer a glimpse of Saxon’s future potential. In the quarter, the drill fleet generated average revenue per operating day of $14,700 compared to $9,800 in the first quarter of 2005. Revenue increased 322% to $31.0 million, operating earnings increased 357% to $5.7 million and net earnings increased 236% to $2.9 million. Saxon generated funds from operations of $0.09 per share and earnings of $0.04 per share in the quarter.

Dale Tremblay is making solid progress with his plan to expand the drill fleet in North America. In the United States, two of seven drill rigs have begun operations with the balance to come online during the second quarter. An eighth rig was relocated from South America and is also expected to begin operations in the United States shortly. On April 12, 2006 Saxon announced a contract to construct and operate seven more rigs on a three year term with a major US gas producer by the first quarter of 2007. All told, Saxon will eventually have 27 net rigs operating in North America and 29 rigs operating in South America. By mid-2007 Saxon expects to have a balanced asset and revenue base with 60% of EBITDA coming from the lower risk North American operations. We look forward to seeing the Company’s revenue and earning power as Saxon deploys its full fleet over the coming years.

May 11, 2007

Over the past year, Canadian oil and gas services was perhaps the most hated market sector other than junior oil and gas producers. The combination of the trust debacle, falling commodity prices and poor weather led to a dramatic decline in drilling and associated services. In Canada, the spring breakup period was even weaker than normal, with drill rig utilization falling earlier and more dramatically than last year. At the bottom, during the week of May 1, 2007, only 10.5% of all drill rigs were in operation.

However, Saxon Energy Services with its international fleet of drill rigs will be one of the few companies listed in Canada that can show year over year earnings growth in 2007. In first quarter of 2007, Saxon reported revenue of $54.9 million compared to $31.0 million last year, an increase of 77%. Over the same period, funds from operations increased 120% to $15.3 million from $6.9 million and doubled on a per share basis to $0.18 from $0.09. At the bottom line, net earnings increased 178% to $8.0 million from $2.9 million. Earnings per share increased 150% to $0.10 in the first quarter of 2007 from $0.04 in the first quarter of 2006.

This impressive performance was driven by several factors. The Company’s rig fleet was simply bigger this year, with 8 rigs in Canada compared to 2 rigs last year and 10 rigs in the United States compared to 4 rigs in 2006. Saxon now has a total active fleet of 51 rigs, with 5 more rigs to be deployed into the United States shortly. Additionally, the Company’s operating metrics improved quite nicely. Saxon reported 3,074 operating days in the first quarter of 2007, compared to 2,956 in 2006. In the first quarter of 2007, average revenue per day reached $17,900 compared to $10,500 in 2006 due to “significantly higher contract day rates”. The utilization rate was 75% during the first quarter of 2007, well above the Canadian industry’s utilization of 58%.

Although we were disappointed in Saxon’s share price performance over the past year, we never lost faith in the story. We believe that commodity prices should remain firm and that oil and gas drilling activity will only increase over time. We also believe that international markets offer greater potential growth than the Western Canadian Sedimentary Basin. Finally we hold management in high regard and are willing to give them time to build this Company. Although Saxon’s share price has recovered almost 40% since the beginning of April, we think that the stock still trades below its replacement value. Over the next few years as the rig fleet is fully deployed and new rigs are added, we think that the Company’s financial performance will continue to outperform its peers.

November 23, 2007

Saxon Energy Services has appreciated approximately 17% over the course of 2007 but has declined 25% since peaking at $6.50 in July. This share price action is actually one of the better performances for a Canadian listed oil and gas services company. However, we believe that investors have unfairly punished the stock based on weakness in the Canadian market and temporary cost increases in South America. It is our view that the market is ignoring Saxon’s tremendous relative and absolute growth prospects.

Without a doubt, the oil and gas services industry in Canada is under pressure. Sliding natural gas prices, the Halloween trust taxation surprise and the recently announced change in the Albertan royalty regime have resulted in lower drilling activity, reduced well licenses and curtailed capital spending. The most obvious statistic to track the health of the sector is drill rig utilization. Just last week, the Canadian drilling utilization rate was 37% compared to 56% last year, as reported by the Canadian Association of Oilwell Drilling Contractors.

We highly recommend that investors examine Saxon’s financial reports before getting too disheartened by the industry statistics. Over the first nine months of the year, revenue has grown 47% to $174.2 million from $118.3 million over the first nine months of 2006. Net earnings grew 78% to $19.5 million or $0.23 per share compared to $10.9 million or $0.14 per share in the comparable period last year. Funds from operations grew 45% to $37.6 million or $0.45 per share compared to $25.9 million or $0.32 per share. Despite the aforementioned weakness in Canada, over the first nine months of 2007, the Company’s overall drill rig utilization was still an impressive 72% compared to 87% last year. These financial and operating results are excellent compared to almost every other company in the sector.

The first issue weighing on investor’s sentiment seems to be the Company’s exposure to Canada through its North American segment, so let’s examine the results. On a year to date basis, North American operations, which include Canada, the United States and Mexico, generated $86.4 million in revenue (50% of total revenue) and $20.4 million in operating earnings and an increase of 78% and 133% respectively. The growth stems primarily from rig fleet expansion and the related economies of scale in the United States and better day rates in Mexico. From our perspective, the industry weakness in Canada is more than offset by growth in the United States and Mexico.

The second issue affecting the stock was a dip in operating earnings from South America. On a year to date basis, the South American operations generated $86.4 million in revenue and $18.4 million in operating earnings an increase of 24% and a decline of 8% respectively. The Company’s South American operating earnings were negatively impacted by the appreciation of the Colombian peso relative to the US dollar, importation duties and relocation costs related to a rig in Venezuela and initial mobilization and start-up costs of three rigs in Colombia and Venezuela. These temporary or one-time cost increases in South America are likely to reverse over time. In fact, in the third quarter of 2007, South American operating earnings improved on a year over year basis.

Given the Company’s industry-leading revenue and earnings growth, we believe that the stock’s decline from its highs is overdone. The shares have found support around the Company’s net asset value based on the replacement value of the drilling rig fleet in the $4.50 to $5.50 per share range. From today’s prices we look forward to solid investment returns over the next 12 to 18 months as this growth story continues to unfold.

February 22, 2008

After facing serious headwinds in 2007, the oil and gas services sector has rebounded sharply in early 2008.  Last year, reduced drilling activity stemming from both weak natural gas prices and a change in the Alberta oil and gas royalty regime led investors to punish the stocks.  However, with fewer new producing wells, reduced LNG (liquid natural gas) imports and decent demand excess inventories have been drawn down.  Specifically, the Energy Information Administration reported that working gas in storage as of Friday, February 15th was 1.77 trillion cubic feet, 6.7% below last year’s storage level and only 5.8% above the trailing five year average.  Not surprisingly, natural gas has strengthened in recent weeks and currently trades just below $9 per mcf (thousand cubic feet) after bottoming below $6 per mcf last fall.

As we have discussed in the past, we believe that investors who have lumped Saxon in with the Canadian oil and gas services sector are ignoring the Company’s outstanding relative and absolute growth prospects.  On February 14, Saxon reported its financial results for 2007 that supported our investment thesis.  For the year, revenue totaled $242.3 million, an increase of 42% from 2006.  EBITDA (earnings before interest, taxes, depreciation and amortization) amounted to $68.6 million or $0.81 per share, an increase of 50% and 45% respectively.  Net earnings in 2007 were $26.8 million, or $0.32 per share, up 71% and 68% from $15.7 million, or $0.19 per share, in 2006.  Obviously, diversification away from North America to South America has proven to be an extremely prescient decision.

Operationally, we were pleased with the Company’s results.  Revenue per operating day increased 42% to $19,000 from $13,400 in 2006.  Perhaps the only weakness in Saxon’s results was a dip in the utilization rate from 84% in 2006 to 72% in 2007.  However, considering that the Canadian industry reported an average utilization rate of 38% in 2007, Saxon outperformed the sector quite nicely.  With an 89% utilization rate and a 53% increase in revenue per operating day in South America and no signs of a slowdown, we expect another successful year in 2008.

April 25, 2008

Sometimes timing is everything.  In our most recent quarterly newsletter, the ABC Perspective, we discussed Saxon Energy Services.  We highlighted several factors that supported the 2008 rally in the oil and gas services sector.  We pointed to the drawdown in natural gas inventories, reduced LNG imports, and strengthening natural gas prices.  We also discussed several company-specific factors that were bullish for the Saxon story.  Financial results for 2007 indicated 42% revenue growth, 50% EBITDA growth and 71% net earnings growth.  Finally, Saxon vastly outperformed its peers with a 72% drilling rig utilization rate compared to the 38% industry average.

The last paragraph in our write-up on the Company was as follows:

“Despite the solid financial and operating performance and ensuing share price rally, we believe that shares of Saxon Energy are inexpensive.  Based on consensus estimates, the stock is currently trading just over 7 times 2008 EBITDA and under 15 times earnings.  Although the stock trades at 1.8 times tangible book value, which is relatively inexpensive for an oil and gas services stock, we believe that the replacement value of the Company’s rig fleet and equipment is above the current share price.  Should this discount persist, Saxon could become an attractive takeover target for anyone looking for exposure to international growth markets.”

Obviously, we had no advance knowledge that anything was imminent.  We simply believed that we owned a cheap stock, with excellent prospects that traded roughly at replacement value.  However, on Friday April 18, 2008 shares of Saxon Energy exhibited some unusual trading behaviour.  Very late in the day, the stock price jumped from approximately $6.60 to a high of $7.39 before closing at $6.99.  On Monday morning, Saxon was forced to confirm that it was in exclusive discussions with Schlumberger and First Reserve Corporation for the sale of the Company at a price of $7.00 per share.

May 9, 2008

As one of the largest, independent shareholders of Saxon Energy our opinion has been much sought after with regard to our views on the Schlumberger takeover offer.  ABC Funds’ unitholders, individual investors, members of the press and even hedge funds have inquired about our analysis and fundamental valuation of the Company.  We have gone on record clearly stating that we believe the current takeover offer for the Company, at $7.00 per share, is below fair value.  Here is our rationale.

The current bid offers essentially no premium to the market price.

On April 18, 2008, the day before the discussions with Schlumberger and First Reserve were made public, the shares closed at $6.99.  Admittedly, the shares had spiked higher in the last hours of trading to reach a high of $7.39 before settling back.  However, based on the April 17th close, the current bid represents only a 4% premium.  Note that the share price performance of Saxon (up 38% for the year) is not out of line with the Company’s peers, including Savanna (up 32% for the year), Ensign (up 48% for the year) and Precision Drilling (up 73% for the year).  In consequence, it is clear that Saxon’s share price has not been artificially inflated by takeover speculation in advance of the deal.

The current bid offers no premium to account for superior operating and financial results.

The $7.00 price implies a forward EBITDA multiple of approximately 8 times, which was in line with the Company’s Canadian peers at the time of the offer.  However, as we pointed out in our previous comments, Saxon reported vastly better operating and financial results than its competitors for 2007.  Operationally, Saxon outperformed the sector quite nicely with an average utilization rate of 72% in 2007 compared to the Canadian industry average utilization rate of 38%.  Financially, revenue totaled $242.3 million in 2007, an increase of 42% from 2006.  EBITDA (earnings before interest, taxes, depreciation and amortization) amounted to $68.6 million or $0.81 per share, an increase of 50% and 45% respectively.  Net earnings in 2007 were $26.8 million, or $0.32 per share, up 71% and 68% from $15.7 million, or $0.19 per share, in 2006.  Over the comparable period, the Canadian sector reported, on average, flat or negative revenue, EBITDA and net income growth rates.

The current bid offers no premium to account for superior growth prospects.

Going forward, there are several avenues of growth that warrant a more competitive bid.  First, Saxon has exposure to US shale resource plays, one of the hottest areas for exploration and development spending.  Just as an example, EOG and Southwestern Energy are looking to increase the number of wells drilled and the number of rigs they employ in 2008.  Second, one of Saxon’s major customers, PEMEX (Mexico’s state owned petroleum Company) recently announced a major increase in capital expenditures in an effort to boost production.  PEMEX raised its 2008 exploration and production budget 28% to US$20 billion.  Saxon could potentially drill hundreds of wells for PEMEX in 2008.  Third, Saxon has its foot in the door in several higher risk but higher growth locations such as Columbia, Peru, Venezuela and Russia.  The $7.00 takeover offer does not adequately compensate shareholders for this potential upside.

The current bid is now actually below-market given the strong recent performance of the peer group.

Since the takeover offer became public, the share price has been capped at approximately $7.00.  However, rising commodity prices have triggered a huge run in the oil and gas services stocks and the $7.00 takeover offer now actually values the Company at a discount to its peers.  Based on consensus estimates, the current offer implies a forward EBITDA multiple of 8 times without including any takeover premium.  Again based on consensus forecasts, the peer group of Canadian oil and gas services companies is trading at 8.5 times forward EBITDA.  The group includes such stocks as Precision Drilling, currently trading at 8.6 times forward EBITDA, and Savanna Energy, trading just over 10 times forward EBITDA.

In summation, we are confident in our analysis.  Moreover, in light of the fact that Saxon Energy is now trading above the current $7.00 takeover offer, we are not alone in our view.