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Initiating Coverage on CanElson Drilling Inc

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Initiating Coverage on CanElson Drilling Inc Powered By Docstoc
					Initiating
Coverage on
CanElson
Drilling Inc.

RESEARCH ANALYST:
Kevin Lo, P.Eng.
403-262-0626 • klo@firstenergy.com


RESEARCH ASSOCIATE:
Ian B. Gillies
403-444-0886 • ibgillies@firstenergy.com


TSX-V Listed: CDI
Price: $4.60

Opinion: Outperform
12 Month Target Price: $6.50
August 3, 2011


Calgary Office: 403.262.0600
REGULATORY DISCLOSURES - PAGE 2
www.firstenergy.com
                                                                                              Initiating Coverage of
                                                                                              CanElson Drilling Inc. - CDI
                                                                                              August 3, 2011

Table of Contents
CanElson - Continuing History of Growth

Overview ............................................................................3

Introduction ....................................................................... 4

History of the Company ..................................................4

Operations ..........................................................................5

Management Team ........................................................... 7

Balance Sheet Flexibility and 2011e Capex Program ... 8

Avenues for Value Creation ............................................ 8

Estimates ............................................................................ 9

How Does It Compare to Its Peers?................................9

Investment Thesis ...........................................................10

Risks .................................................................................. 11

Target and Rating............................................................11

Appendix .......................................................................... 14




                                                         For Regulatory Disclosures, Please Go to Our Website:
                                             http://firstenergy.com/research/regulatory.php or fax us at (403) 262-0666
                             Our policy on the dissemination of research can be found at http://firstenergy.com/research/regulatory.php
               Sources for tabular data and charts are FirstEnergy Capital Corp. and Company Reports unless otherwise noted.
This report has not been approved by FirstEnergy Capital LLP for the purposes of section 21 of the Financial Services and Markets Act
2000 as it is being distributed only to persons who are investment professionals within the meaning of article 19 of the Financial Services
and Markets Act 2000 (Financial Promotion) Order 2005 and is not intended to, and should not be relied upon, by any other person.
                                                                                                                                   3




CanElson – Continuing History of                            YEAR END DEC 31,                     2010a        2011e        2012e


Growth                                                      CAPITALIZATION
                                                            Net Debt                 $mm           ($4)         ($3)       ($46)
                                                            Net Debt/CF              Years         -0.3         -0.1        -0.7
                                                            Net Debt/Equity          x              0.0          0.0        -0.2

Overview
                                                            Shares O/S               Basic        38.6          68.9        72.8
                                                                                     Diluted      39.2          70.4        73.9
                                                            Share price              $            4.30          4.60        4.60
                                                            Market Cap               $mm          $180         $324        $340
CanElson Drilling Inc. (“CanElson”) is a Calgary based      Enterprise Value         $mm          $177         $320        $294
                                                            Insider holdings         %                         10.4%
drilling services provider. It operates contract drilling
rigs in Canada, Mexico and the U.S., as well as service     FINANCIAL PERFORMANCE
rigs in Mexico. Currently, the fleet is comprised of 32     Revenue           $mm                 $73          $188        $251
                                                            Revenue Growth    %                 1005.1%       156.9%       33.1%
rigs, but will grow to 36 rigs by Q1’12.
                                                            Gross Margin             $mm          $19           $60         $81
CanElson has a seasoned management team that has             % of sales              %           26.5%         31.7%       32.4%

built and sold contract drilling companies in the past.     EBITDAS                  $mm          $14           $50         $73
Moreover, Elson McDougald, Chairman, started and            EBITDAS/share            $           $0.35         $0.71       $0.98
sold Western Lakota, Tetonka Drilling and Laredo             % of sales              %           19.0%         26.6%       29.0%
                                                            EV/EBITDAS                            12.7           6.4         4.0
Drilling. Western Lakota’s stock price had a CAGR of
70% over its life, while Tetonka generated a CAGR of        Net Earnings             $mm           $6           $25         $39
27%.                                                         % of sales              %           7.8%         13.5%        15.6%
                                                            EPS                      Basic       $0.15         $0.38       $0.55
                                                                                     Diluted     $0.15         $0.36       $0.53
CanElson has 58% of its fleet focused on the Canadian       EPS Growth               %             NA         149.2%       46.6%
and North Dakota Bakken, making it one of the most          P/E                      Diluted      31.7          12.7         8.7
oil levered drillers in our coverage universe. Due to       Cash Flow                $mm          $13           $45         $63
management’s history in this region, we suspect addi-       CFPS                     Basic       $0.34         $0.66       $0.86
tional rig build opportunities will present themselves.                              Diluted     $0.33         $0.64       $0.85
                                                            P/CF                     Diluted      13.8           7.2         5.4

CanElson can be expected to achieve above average           Yield                    %           0.0%          0.0%        0.0%
utilization with its exposure to oil in the Bakken on       DPS                      Basic       $0.00         $0.00       $0.00
                                                            Payout (% of CF)         %           0.0%          0.0%        0.0%
both sides of the border and in West Texas, providing a     Payout (Distributable)   %           0.0%          0.0%        0.0%
complement to its fleet of double rigs. Furthermore, the
                                                            Net Cap. Exp.            $mm          $28          $54         $20
Company should also receive strong pricing as these         Maintenance Capex        $mm          $1.5         $3.6        $4.5
rigs are in high demand.
                                                            Free Cash Flow           $mm          $12           $42         $59
                                                            FCF/P                                 6.4%         12.9%       17.2%
We have forecast 2011e revenue of $188 mm, then
growing 33% to $251 mm in 2012e. Note that we have          ROE                      %            7.4%         14.5%       15.0%
not built in a 2012e program for CanElson. Our 2011e        ROCE                     %            7.7%         14.9%       16.6%

EBITDAS forecast (margin) is $50 mm (26.6%) and in          VALUATION
2012e is $73 mm (29.6%) as the Company gains ad-            P/Book                   x            1.5           1.3         1.2
                                                            NTA/share                Diluted     $2.69         $3.11       $3.49
ditional economies of scale. EPS in 2011e is forecast       P/NTA                    Diluted      1.6           1.5         1.3
at $0.36 and $0.53 in 2012e. Based on these estimates,
CanElson is trading at 4.0x EV/EBITDAS and 8.7x             DCF NAVPS                Diluted                  $11.62
earnings, much lower than the contract driller average      P/NAVPS                  Diluted                    0.4

of 4.8x EV/EBITDAS and 10.4x earnings.
                                                            Price Forecast:          2011 - WTI US$100.00, NYMEX Natural Gas US$4.40
                                                                                     2012 - WTI US$106.00, NYMEX Natural Gas US$5.25
We are initiating coverage on CanElson with a $6.50
target price, which equates to 2012e target multiples of    Source: FirstEnergy Capital Corp. and Company Reports
5.9x EV/EBITDAS and 12.4x earnings. In comparison,
our contract driller average target multiples are 6.3x
EV/EBITDAS and 11.9x earnings. With implied upside
of 41%, we rank CanElson as Outperform.
 4    FirstFocus • CanElson Drilling Inc. - CDI • August 3, 2011




Introduction                                                CanElson also signed a multi-well contract in the
                                                            Permian Basin in November 2009. The first rig began
                                                            working in December 2009, while the second began in
CanElson Drilling Inc. (“CanElson”) is a Calgary based      January 2010. To further help expand its fleet, CanElson
drilling services provider. It operates contract drilling   purchased a telescopic double, a single rig and related
rigs in Canada, Mexico and the U.S., as well as service     equipment from Bronco Drilling Services Ltd. for $6.5
rigs in Mexico. The Company was founded by Elson            mm in November 2009. It subsequently sold the single
McDougald and Randy Hawkings in mid-2008. The               rig for $0.65 mm. Next, in December 2009, the Com-
Company’s initial operations were focused in Western        pany purchased a telescopic double equipped with a
Canada and have been expanded by the way of ac-             top drive and a service rig for $6.0 mm. The service rig
quisitions, JVs and rig build programs. The Company         was redeployed to Mexico while the double was put to
trades on the TSX Venture exchange under the ticker         work in the Cardium. In conjunction with its purchases,
CDI. It has approximately 73 mm shares outstanding          the Company entered into a debt facility totaling $15
for a market cap of $352 mm.                                mm.

History of the Company                                      In January 2010, the Company announced a third
                                                            multi-well contract for a third rig in the Permian Basin.
                                                            In addition, the Company started service rig operations
CanElson was originated as a Capital Pool Company
                                                            in Mexico. On May 25, 2010, CanElson announced it
(CPC) on June 30, 2008 when it issued 2.6 mm shares
                                                            was acquiring Totem Drilling, a Saskatchewan based
for proceeds of $260,000 (see financing history). On
                                                            contract driller, for a mixture of cash and shares (total
August 8, 2008 the Company raised another $0.1 mm
                                                            consideration: $41.3 mm). Totem operated five heavy
through a private placement, and in September 2008
                                                            duty telescopic doubles and had a sixth rig partially
completed its IPO.
                                                            constructed. On June 9, 2010, CanElson announced the
                                                            closing of the Totem acquisition in unison with a $29.7
CanElson announced its intended amalgamation with
                                                            mm bought deal financing at $2.70 per share. A second
EMR Drilling Inc., with trading resuming on Septem-
                                                            service rig was deployed to Mexico in July 2010.
ber 30, 2008. On December 10, 2008 CanElson com-
pleted its amalgamation with EMR and was no longer
                                                            Acquisition metrics for Totem were approximately 4.0x
considered a CPC later in December.
                                                            forward 12-month EBITDAS or $8.0 mm EV per rig.
                                                            As such, the transaction was less expensive on an EV/
Further to EMR, it also commenced operations on June
                                                            EBITDAS basis and slightly less expensive on an EV per
30, 2008 and was involved in the building and opera-
                                                            rig basis compared to the industry transaction average.
tion of drilling rigs in Western Canada. During July
and August 2008, EMR raised approximately $44 mm.
                                                            In September 2010, CanElson signed a JV agreement
The funds were raised through an issuance of common
                                                            with privately owned Fasken to construct two heavy
shares and a private placement, both done at $2.00 per
                                                            double rigs for work in the Permian Basin. The joint
share. These funds were used for a rig build program
                                                            venture is 50% owned by each party. The rigs will be
with the first rig being completed in December 2008;
                                                            going to work on a five-year term contract. The first rig
This rig build program consisted of four rigs (see more
                                                            began working in late 2010 and the second began work
on the rigs in the Operations section of this document).
                                                            in March 2011. For this JV, CanElson built the rigs and
                                                            they were then sold into the JV. As a result, the Com-
From year-end 2008 until October 2009, the Company
                                                            pany recognized construction revenue for roughly half
focused solely on running its rigs in the WCSB. In
                                                            of each rig’s sale price in Q4’10 and Q1’11.
October 2009, CanElson formed a 50/50 JV (Diavaz
CanElson de Mexico S.A. de C.V.) with a subsidiary
                                                            In January 2011, CanElson acquired Eagle Drilling
of Grupo Diavaz S.A. de C.V. In November 2009, the
                                                            Services Inc. in a cash and common share transaction.
JV entered into a subcontract for two drilling rigs to
                                                            Total consideration was $78.0 mm, which included
perform work for a drilling services contract in the
                                                            $19.7 mm of cash and the issuance of ~9.9 mm CanEl-
Misantla-Tampico Basin in Mexico.
                                                            son shares. At the close of the transaction, 5% were free
                                                            to be traded, 33.33% were in escrow for four months,
                                                            and 33.33% in eight-month escrow, with the remainder
                                                                                                                                                                                5




                                                                        Canadian Contract Driller Transactions
                                                                                                Number of      Enterprise Upgrade Costs      Estimated 12-Month               EV Per
    Date      Purchaser                  Company Acquired               Operating Area         Rigs Acquired       Value   (if applicable) Forward EBITDAS ($mm) EV/EBITDAS     Rig
 10/1/2009    Calmena Energy Services    Mexico Drilling Rigs           Mexico                      6             $67.5          $0.00                   $19.3     3.5x       $11.3
  1/1/2010    Ensign Energy Services     Foxxe                          Mexico                      6             $52.6          $0.00                   $17.5     3.0x        $8.8
 2/25/2010    Western Energy Services    Horizon Drilling               Western Canada              8             $66.0          $0.00                   $14.0     4.7x        $8.3
 2/25/2010    Western Energy Services    Cedar Creek Drilling           Western Canada              3             $17.1          $0.00                    $5.3     3.2x        $5.7
  3/4/2010    Calmena Energy Services    Libyan Rigs                    Libya                       2             $23.5          $0.00                    $5.0     4.7x       $11.8
 5/14/2010    Estrella Energy Services   Trinidad's Chile Based Rig     Chile                       1             $31.0          $0.00                    $7.0     4.4x       $31.0
 5/25/2010    CanElson Drilling          Totem Drilling                 Western Canada              5             $40.0          $0.00                   $10.0     4.0x        $8.0
 7/21/2010    Western Energy Services    Impact Drilling                Western Canada              4             $19.4          $3.00                    $6.0     3.7x        $5.6
 10/19/2010   Western Energy Services    Pantera Drilling Income Fund   Western Canada              7             $56.2          $0.00                   $12.0     4.7x        $8.0
  1/14/2011   CanElson Drilling          Eagle Drilling Services        Western Canada              8             $78.0          $0.00                   $20.0     3.9x        $9.8
  3/28/2011   Tuscany Drilling           Brazil Private Co              Brazil                      9             $53.1         $10.00                   $12.0     5.3x        $7.0
  4/7/2011    Western Energy Services    Stoneham Drilling Trust        Western Canada              19           $245.0          $0.00                   $49.0     5.0x       $11.9
  5/19/2011   CanElson Drilling          Red Hawk Drilling              United States                4            $21.0          $2.20                    $8.8     2.6x        $5.8
  6/21/2011   Tuscany Drilling           Caroil SAS                     Latin America/Africa        13           $202.0          $0.00                   $48.0     4.2x       $15.5
 7/20/2001    Ensign Energy Services     Rowan Land Rigs                United States               30           $540.0          $0.00                   $71.0     7.6x       $18.0
              Average                                                                                                                                              4.0x       $10.9

              North America Avg.                                                                                                                                   4.4x        $9.0
              International Avg.                                                                                                                                   4.2x       $14.2
Source: FCC Estimates, Company Reports

going into escrow for a year. The assets acquired were                                           On June 2, 2011, CanElson acquired a private driller in
eight telescopic doubles that operate in the Cana-                                               North Dakota for US$21.0 mm after working capital
dian Bakken. Transaction metrics were 3.9x forward                                               adjustments. The assets acquired include one mechanical
12-month EBITDAS or $9.8 mm on an EV per rig basis,                                              triple, one electric triple, one ultra heavy-duty telescopic
which is less expensive on an EV/EBITDAS basis and                                               double, a cantilever double rig and ancillary equipment.
more expensive on an EV per Rig basis.                                                           The purchase price consisted of $2.9 mm in cash, the
                                                                                                 issuance of 3.3 mm CanElson shares and the assumption
In February 2011, CanElson entered into a two-year                                               of US$4.7 mm in debt. Management from the acquired
multi-well contract agreement to provide a drilling rig                                          Company will be retained. These rigs are now undergo-
in the Permian Basin, which is part of the Company’s                                             ing certain upgrades to add pumps and other items for
five-rig build program in 2011 (see next paragraph).                                             $2.25 mm.
Moreover, the rig commenced operations in June 2011.
The sale price of this rig to the JV was roughly $7.8                                            Overall, we believe that the management team has a
mm.                                                                                              history of value creation by adding accretive assets, at
                                                                                                 progressively higher priced equity financings.
On March 16, 2011, CanElson issued ~9.3 mm shares at
$4.35 per share to fund the Company’s 2011 rig build
program and reduce debt. Total funds received were
                                                                                                 Operations
$40.5 mm. Subsequently, the Company is constructing
five telescopic double rigs for $40 mm, with the expeca-                                         Domestic
tion that three will head to Canada and two to the U.S.
(one of these is for the aforementioned February 2011                                       CanElson’s Canadian operations currently consist of 18
contract in Texas).                                                                         telescopic double drilling rigs. These rigs have an aver-
                                               Equity Issuance History                                                age depth rating of 3,511 metres,
Date Issued
                   Shares Issued         Share      Amount
                                                                                         Purpose                      an average hookload capacity of
                       (mm)              Value    Raised ($mm)
30-Jun-08                     2.6           $0.10           $0.3 Seed capital                                         ~394,000 pounds and hydraulic cat-
8-Aug-08                      0.5           $0.20           $0.1 Additional seed capital                              walks. All these rigs are mechanical,
19-Sep-08                     1.0           $0.20           $0.1 Initial Public Offering
                                                                                                                      which tend to be cheapter to build,
25-May-10                    11.8           $2.80          $33.0 Acquisition of Totem Drilling
9-Jun-10                     11.0           $2.70          $29.7 Rig build program(4) and debt reduction              but do not possess the latest AC
31-Jan-11                     9.9           $4.15          $41.0 Acquisition of Eagle Drilling Services Inc.          electrical package sought by some
16-Mar-11                     9.3           $4.35          $40.5 Rig build program (5) and debt reduction             customers. We expect the Com-
19-May-11                      3.3          $4.97          $16.4 Purchase of Private North Dakota Driller (4)
                              49.4                        $144.7
                                                                                                                      pany to add three more rigs with
                                                                                                                      similar capabilities over the course
30-Jun-08                     22.0           $2.0          $44.0 EMR capital raise for rig builds and initial capital
                                                                                                                      of 2011. The Company also operates
Various                        1.4                               Shares issued through options and warrants
                                                                                                                      three top drives (four total), which
Total                        72.82                        $188.7
                                                                                                                      are currently on rigs one, seven and
Source: Company Reports
  6         FirstFocus • CanElson Drilling Inc. - CDI • August 3, 2011




                                                                    Canadian Rig Fleet                                                                United States and
                                                                                                                                  Self
Rig Name                 Type
                                            Rig Depth
                                             Rating
                                                      Top Drive
                                                                  Mud
                                                                Pump HP
                                                                        Hook Load
                                                                                  SCR vs. AC vs.
                                                                                   Mechanical
                                                                                                                      Walking
                                                                                                                      System
                                                                                                                                Erecting   Location   International
                                                                                                                                Derrick
1               Telescopic Double        3600m         Yes                2,000          375,300lb       Mechanical     Yes       Yes        AB
2               Telescopic Double        3600m          No                2,000          400,275lb       Mechanical     Yes       Yes        ABIn the United States, CanEl-
7               Telescopic Double        3500m         Yes                2,000          400,275lb       Mechanical     Yes       Yes        ABson currently operates
9               Telescopic Double        3500m         Yes                2,000          400,275lb       Mechanical     Yes       Yes        AB
10              Telescopic Double        3500m          No                1,000          355,500lb       Mechanical     Yes       Yes        SK
                                                                                                                                               10 (net: nine) rigs in the
11              Telescopic Double        3500m          No                1,000          400,275lb       Mechanical     Yes       Yes        SKPermian Basin and North
12              Telescopic Double        3500m          No                1,600          355,500lb       Mechanical     Yes       Yes        SKDakota Bakken. Two rigs
14              Telescopic Double        3500m          No                1,000          400,275lb       Mechanical     Yes       Yes        SK
15              Telescopic Double        3500m          No                1,000          400,275lb       Mechanical     Yes       Yes        SK
                                                                                                                                               have seen their contracts
16              Telescopic Double        3500m          No                1,000          400,275lb       Mechanical     Yes       Yes        SKextended into 2012, while
21              Telescopic Double        3500m          No                  800          400,500lb       Mechanical     Yes       Yes        SKanother rig deployed in
22              Telescopic Double        3500m          No                  800          400,500lb       Mechanical     Yes       Yes        SK
23              Telescopic Double        3500m          No                1,000          400,500lb       Mechanical     Yes       Yes        SKJune 2011 is on a two-year
24              Telescopic Double        3500m          No                  800          400,500lb       Mechanical     Yes       Yes        SKcontract. In the Company’s
25              Telescopic Double        3500m          No                  800          400,500lb       Mechanical     Yes       Yes        SK
                                                                                                                                               JV, it has two rigs (net: one)
26              Telescopic Double        3500m          No                1,000          400,500lb       Mechanical     Yes       Yes        SK
27              Telescopic Double        3500m          No                1,000          400,500lb       Mechanical     Yes       Yes        SKon five-year contracts. Fur-
28              Telescopic Double        3500m          No                1,000          400,500lb       Mechanical     Yes       Yes        SKther to the JV with Fasken
* Note that all rigs are capable of operating top drives
Source: Company Reports
                                                                                                                                               Oil and Ranch Ltd., CanEl-
nine. However, all of the rigs in CanElson’s fleet are ca-                                                                                     son and its partner each
pable of running top drives. The Company has offices                                                            own 50% and CanElson will be responsible for running
in Calgary, Alberta; Carlyle, Saskatchewan; and Nisku,                                                          each of the two rigs. Costs within the JV, including the
Alberta. Currently, four rigs are working in Alberta                                                            sale price of the rigs, will be split 50/50.
and fourteen rigs are in Saskatchewan. We believe the
geographic dispersion is an indication of the high de-                                                          In Mexico, CanElson subcontracts two rigs and owns
mand for these rigs to drill oil directed targets.                                                              two service rigs (net: one) in a joint venture with Grupo
                                                                                                                Diavaz. Grupo Diavaz (with Sinopec as its 50/50
                           CanElson Canadian Operating Performance                                              partner) is the operator in the EPC (Ebano-Panuco-
120%                                                                                                 35,000
                                                                                                                Cacalilao) field of the Misantla-Tampico Basin. The
                          Day Rate         Industry Utilization   CanElson Utilization
                                                                                                     30,000
                                                                                                                majority of the production from this area is from heavy
100%
                                                                                                                oil targets. In this JV, CanElson is paid for services ren-
                                                                                                     25,000     dered but there is no management fee. CanElson owns
80%
                                                                                                                a 3,000 m telescopic double service rig and a 2,800 m
                                                                                                     20,000
                                                                                                                telescopic single service rig. CDI also operates two
60%
                                                                                                     15,000
                                                                                                                telescopic Range III mobile drilling singles, which are
                                                                                                                well suited to drill heavy oil. Both of these drilling rigs
40%
                                                                                                     10,000     are subcontracted from a large, Canadian based driller.
20%
                                                                                                                The relationship with the operator, the economic na-
                                                                                                     5,000
                                                                                                                ture of the oil wells, and the lack of material assets by
  0%                                                                                                 0
                                                                                                                CanElson alludes to higher return on assets from these
        Q110 Q210 Q310 Q410 Q111 Q211e Q311e Q411e Q112e Q212e Q312e Q412e                                      operations. Due to the JV nature of the operations, the
  Source: FCC Estimates, Company Reports
                                                                                                                Company does not provide operational data.
While we will go into more detail later about our fore-
cast, we believe CanElson will generate above average                                                           Operationally, the U.S. and International days work
utilization as the Company’s fleet is composed of the                                                           count has grown commensurately with rigs added.
style of rigs that are in high demand to drill horizontal                                                       However, revenue per operating day is more volatile
targets. Historically, the Company has achieved above                                                           because of the performance based contracts. As well,
industry average utilization and that is due to the fact                                                        the Company does not record any operating days for
that it does not have any shallow focused rigs in its                                                           its contract drilling rigs in Mexico, because they are
fleet.                                                                                                          subcontracted. We expect the well performance con-
                                                                                                                tracts to be reworked in upcoming months. Moreover,
                                                                                                                target depths are getting deeper in West Texas and the
                                                                                                                deeper footage takes longer to drill than the shallower
                                                                                                                footage. As such, we expect the price per foot rate to
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      7




                                                                                  Overall, we believe the management team and             U.S. Rig Fleet
                                    Rig Depth Mud Pump
                                                                                  Board of Directors have the experience needed
Rig Name Type                                                          Customer
                                    Rating (m)       HP                           to provide the stewardship to grow and oper-
3         Telescopic Double             3,600     1,600          Henry Petroleum ate the business. It is important to highlight Mr.
4         Telescopic Double             3,600     1,600          Henry Petroleum McDougald and Mr. Hawking’s past successes
5         Telescopic Double             3,600     1,600      Cog Petroleum Corp.
                                                                                  and their ability to grow a business. Their most
6         Telescopic Double             3,600     1,600 Fasken Oil and Ranch Ltd.
8         Telescopic Double             3,600     1,600 Fasken Oil and Ranch Ltd.
                                                                                  recent sale was Western Lakota to Savanna En-
17        Telesopic Double              3,600     1,600                           ergy Services announced June 20, 2006 (closed
40        Mechanical Triple             4,600     2,000         Legacy Oil & Gas August 28, 2006). Investors who participated in
41        Electric Triple               5,000     3,200  Slawson Exploration Co.  the Company, beginning June 11, 2001, when
42        Telescopic Double             3,500     2,000        Behm Energy Inc.
43        Cantilever Double             2,500     1,800
                                                                                  Western Lakota was amalgamated into a public
                                                                                  company, would have made a return of 1398%
Source: Company Reports, Smith Bits
                                                                                  or a CAGR of         Management and Insider Holdings
                                                                                                                        Common
                                                                                  70%. At June                            Shares
increase. Lastly, service rigs revenue also complicates                           11, 2001 West- Owner                      (mm) Options
                                                                                                  Hugh Borgland              2.06     0.06
the calculation making operational performance evalu-                   ern Lakota was in the Elson McDougald                1.52     0.17
ation more difficult.                                                   midst of its first rig    Derrick Big Eagle          1.46     0.15
                                                                                                  Randy Hawkings             1.25     0.29
                                                                        build program, which Donald Seaman                   0.51     0.30
Management Team                                                         comprised four rigs. Michael Smith                   0.20     0.15
                                                                        At the time of its sale, Lawrence Kolasa             0.15     0.15
                                                                                                  Kent Jespersen             0.14     0.11
We believe one of the key factors that should draw an                   Western Lakota was Daniel Kolibar                    0.10     0.05
investor to CanElson is its senior management team                      operating 42 (net: 37) Rodger Hawkins                0.05     0.06
which has built, run and sold previous drilling com-                    drilling rigs and five John Logan                    0.04     0.07
                                                                                                  Robert Skilnick            0.06     0.15
panies. Elson McDougald, Executive Chairman, was                        coil service units. As Dale Johnson                  0.01     0.06
the founder of Western Lakota Energy Services Inc.,                     such, the Company
Tetonka Drilling Inc. and Laredo Drilling Inc., which                   delivered impressive Insider Holdings                7.54     1.78
                                                                                                  Insider Holdings (%)       10%      60%
were all built and sold. In addition, Randy Hawkings,                   stock performance
President, CEO and Director, was the COO of Western                     and fleet growth over Total Outstanding             72.82     2.97

Lakota Energy Services Inc., and has over 32 years of                   the course of its his-
                                                                                                  Source: Sedi
domestic and international energy experience. Rob                       tory.
Skilnick, CFO, has been with CanElson since July 2009
and in his current role since February 2010. Prior to                   Prior to Western Lakota, Mr. McDougald was Chair-
CanElson, Mr. Skilnick worked with KPMG in a variety man and Director of Tetonka Drilling Inc. Tetonka
of roles.                                                               completed its initial public offering on December 19,
                                                                        1997 at $1.90 per share and closed at $4.90 per share
                                                                        on its last trading day (November 3, 2000). Using these

                                           Western Lakota Relative Stock Performance vs.                                                                                                                                                                                                                                      Tetonka Drilling Relative Stock Performance vs.
                                                      S&P/TSX Energy Index                                                                                                                                                                                                                                                                 S&P/TSX Energy Index
                                                                                                                                                                                                                                                                                         3.00
25.00                                                                                                                                                                                                                                                                                                             Tetonka Drilling
                                  Western Lakota                                                                                                                                                                                                                                                                  S&P/TSX Energy Index
                                  S&P/TSX Energy Index                                                                                                                                                                                                                                   2.50
20.00

                                                                                                                                                                                                                                                                                         2.00

15.00
                                                                                                                                                                                                                                                                                         1.50

10.00
                                                                                                                                                                                                                                                                                         1.00


 5.00                                                                                                                                                                                                                                                                                    0.50



 0.00                                                                                                                                                                                                                                                                                      -
                                                                                                                                                                                                                                                                                                21/12/1997

                                                                                                                                                                                                                                                                                                             21/02/1998

                                                                                                                                                                                                                                                                                                                          21/04/1998

                                                                                                                                                                                                                                                                                                                                       21/06/1998

                                                                                                                                                                                                                                                                                                                                                    21/08/1998

                                                                                                                                                                                                                                                                                                                                                                 21/10/1998

                                                                                                                                                                                                                                                                                                                                                                              21/12/1998

                                                                                                                                                                                                                                                                                                                                                                                           21/02/1999

                                                                                                                                                                                                                                                                                                                                                                                                        21/04/1999

                                                                                                                                                                                                                                                                                                                                                                                                                     21/06/1999

                                                                                                                                                                                                                                                                                                                                                                                                                                  21/08/1999

                                                                                                                                                                                                                                                                                                                                                                                                                                               21/10/1999

                                                                                                                                                                                                                                                                                                                                                                                                                                                            21/12/1999

                                                                                                                                                                                                                                                                                                                                                                                                                                                                         21/02/2000

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      21/04/2000

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   21/06/2000

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                21/08/2000

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             21/10/2000
        11/06/2001

                     11/09/2001

                                  11/12/2001
                                               11/03/2002

                                                            11/06/2002

                                                                         11/09/2002

                                                                                      11/12/2002
                                                                                                   11/03/2003

                                                                                                                11/06/2003

                                                                                                                             11/09/2003

                                                                                                                                          11/12/2003

                                                                                                                                                       11/03/2004

                                                                                                                                                                    11/06/2004

                                                                                                                                                                                 11/09/2004

                                                                                                                                                                                              11/12/2004
                                                                                                                                                                                                           11/03/2005

                                                                                                                                                                                                                        11/06/2005

                                                                                                                                                                                                                                     11/09/2005

                                                                                                                                                                                                                                                  11/12/2005
                                                                                                                                                                                                                                                               11/03/2006

                                                                                                                                                                                                                                                                            11/06/2006




                                                                                                                                                                                                                                                                                           Source: FCC Estimates, Company Reports
  Source: FCC Estimates, Company Reports
 8     FirstFocus • CanElson Drilling Inc. - CDI • August 3, 2011




prices, capital appreciation would have been 158% with              tive targets that would be of a reasonable size have
an annual CAGR of 27%. Over the same period, the                    been purchased over the last 18 months. As well,
S&P/TSX Energy Index was up a much more modest                      CanElson has a well funded competitor in Western
14%. At the closing of the IPO, Tetonka had two op-                 Energy Services, which is likely looking at many of
erational rigs and was in the midst of a seven rig build            the same targets, which will induce higher pricing.
program and had 24 rigs when it sold in 2000. Once
again, the management team demonstrated its ability            2.   Build More Rigs – CanElson has shown itself to be
to grow a rig fleet, while delivering strong investor               apt at winning contracts and building rigs. It seems
returns.                                                            likely the Company will continue down this path
                                                                    to augment its fleet. Moreover, we expect the Com-
Lastly, Mr. McDougald built and ran Laredo Drilling                 pany to add additional rigs to Alberta and North
Ltd., which was a private, seven-rig company that was               Dakota. CanElson also continues to explore op-
sold in 1980.                                                       portunities to build additional rigs for West Texas
                                                                    and the Eagle Ford, due to the demand for rigs in
Appendix A contains full biographies on senior man-                 these areas. Internationally, we don’t expect the
agement and the Board of Directors.                                 Company to build any rigs for Mexico in the near
                                                                    term. However, this could change if the scope of
Balance Sheet Flexibility and                                       the Company’s contract changes to provide more
                                                                    services which would then make the economics
2011e Capex Program                                                 more attractive.

In 2011e, CanElson is embarking on a build program             3.   Enter into a New Operating Region – As noted
for six rigs (net: 5) to be added to its fleet for a cost of        above, the majority of the Company’s revenue
$45 mm. Total capex for the year is expected to be ~$54             comes from the Saskatchewan Bakken, North
mm. CanElson has also made two acquisition this year                Dakota Bakken, West Texas, and Mexico. As such,
for a total cost of ~$97 mm.                                        there is any number of ways that CanElson could
                                                                    expand its rig fleet and enter into other basins. As
The Company’s total available credit amount was in-                 noted above, we believe the basin the Company is
creased on January 28, 2011 to $72.5 mm. The facility is            most likely to enter is the Eagle Ford by the way of
comprised of $55 mm committed credit facility, $5 mm                a current customer’s request.
operating line and $12.5 mm in finance leases. Previ-
ously, the line consisted of a $35 mm revolving loan           4.   Enter into a New Service Line – CanElson’s
and $5 mm operating loan.                                           management team has prior experience operating
                                                                    other drilling related services lines, such as service
Currently, we are forecasting CanElson to exit 2011e                rigs. Currently, the Canadian service rig market is
and 2012e with negative net debt of $3 mm and $46                   fractured and there is an opportunity for consolida-
mm, respectively. The Company has a significant                     tion. We believe that for a service rig company to
amount of room within its current capital structure to              be successful it has to have a large fleet of at least
use debt for a larger rig build program or additional               50 rigs to generate sufficient scale to generate an
acquisitions.                                                       adequate return on capital. We do not believe this
                                                                    direction is likely in the near to mid term.
Avenues for Value Creation                                     5.   Enter into a Sale Process – Like Western Lakota,
1.   Acquire Further Companies – CanElson could                     Tetonka and Laredo, we believe this Company will
     continue hunting for further acquisitions in either            eventually enter into in a sale process. Since the
     the United States or Western Canada. It is our                 Company’s inception, it has built an impressive
     belief that deals are going to be more difficult to            critical mass in Saskatchewan and has won con-
     come by in Western Canada going forward due                    tracts in Texas and Mexico that many companies
     to the significant amount of consolidation among               would covet.
     smaller players in the industry. Most of the attrac-
                                                                                                                                               9




Estimates                                                                     Based on these operational forecasts, we arrive at 2011e
                                                                              and 2012e revenue estimates of $188 mm and $251
                                                                              mm, which represent y/y revenue growth of 32.4%.
CanElson’s rig fleet has been constructed to work in
                                                                              We have forecast 2011e EBITDAS margins of 26.6%
North American unconventional plays. In addition, the
                                                                              ($50 mm), which is materially ahead of 19.0% in 2010a,
fleet has no rigs that would be classified as “shallow”
                                                                              which is due to increased operational efficiencies as
focused. Due to this, we expect CanElson to achieve
                                                                              the business grows and pricing improves. In 2012e, we
above industry average utilization in Canada and
                                                                              have forecasted EBITDAS margins of 29.0% ($73 mm),
high utilization levels in the U.S. More specifically to
                                                                              as pricing continues to improve and more rigs are
Canada, the Company has ~78% of its fleet in oil fo-
                                                                              added into the fleet.
cused Saskatchewan, which is another reason to expect
sustained high utilization (ex-seasonal spring break-
                                                                              We have forecasted an average depreciation rate of
up). In Canada, we are forecasting 2011e and 2012e
                                                                              5.8% in 2011e and 7.8% in 2012e. With the switch to
utilization of 62% and 65%, respectively. In compari-
                                                                              IFRS, different parts of a rig are depreciated over dif-
son, we have estimated industry utilization at 48% in
                                                                              fering time periods on a unit of production basis. All
2011e and 45% in 2012e. In the U.S., we are forecasting
                                                                              of the equipment also has a 20% salvage at the end of
utilization of 87% and 93% in 2011e and 2012e, respec-
                                                                              its accounting life. We expect CanElson to be taxed at a
tively. Moreover, these utilization levels reflect the
                                                                              rate of 29.2% in 2011e and 28.0% in 2012e. As a result,
Company’s exposure to oil activity in both West Texas
                                                                              we have forecasted EPS of $0.36 in 2011e and $0.53 in
and the North Dakota Bakken.
                                                                              2012e. Moreover, this is annual EPS growth of 52%
OPERATIONAL SUMMARY                                                           from 2010 to 2012.

Fleet Summary (# of rigs/units)     2010a    2011e          2012e
Cdn Drilling Rigs - Year End          10       20             20              How Does It Compare to Its Peers?
United States Rigs - Year End         3.5      10             11
  Total                              13.5      30             31
                                                                              One then must ask, where does CanElson fit in com-
Canadian Utilization                 67%      62%            65%
Industry (CAODC)                     39%      49%            46%              pared to its Canadian drilling peers? In Canada, we ex-
Canada Day Rates                    22,728   26,496         28,524            pect CanElson to deliver above average utilization due
U.S. and Int'l Utilization           82%      82%            92%              to the makeup of its fleet and it is among the highest in
U.S. and Int'l Day Rates            31,614   30,539         30,834            our coverage in 2011e and the highest in 2012e. With
  Note: Rigs are net to CanElson
                                    2010a    2011e          2012e
                                                                              respect to rates, we are also expecting above average
Revenue $mm
Cdn Drilling                         38       107            136              performance in Canada as the Company’s fleet should
U.S. and International Drilling      30       73             115              be in high demand to drill the Cardium and oil levered
Rig Construction and Sales             5       8              0               plays in Saskatchewan.
Total Revenue                         73      188            251

                                                                              In the U.S., we are expecting CanElson’s rates to be
Revenue (% of total)                 2010a   2011e          2012e
Cdn Drilling                         51.7%   56.8%          54.1%
                                                                              higher than the other companies in our coverage uni-
U.S. and International Drilling      40.9%   38.8%          45.9%             verse. As noted above, the Company’s six rigs in West
Rig Construction and Sales           7.4%    4.4%           0.0%              Texas work on footage contracts, which means rates
Source: FCC estimates, Company Reports                                        can vary by a significant amount quarter to quarter,

In Canada, we are forecasting a 2011e day                                  Canada Ops Summary                       U.S. Ops Summary
rate of $26,496, which is reflective of the                           Day Rates          Utilization          Day Rates          Utilization
Company’s rig style and location, while                               2011e      2012e    2011e    2012e      2011e    2012e     2011e     2012e
                                                      CDI            26,496     28,524     62%      65%      30,539   30,834      82%       92%
in 2012e we are forecasting $28,524. In the
                                                      PD             18,440     20,046     48%         46%   21,654   23,138       66%         66%
U.S., we are forecasting rates of $30,539
                                                      ESI            21,983     22,629     47%         47%   31,768   30,030       57%         63%
and $30,834 in 2011e and 2012e, respec-               TDG            25,240     26,547     61%         61%   20,796   21,635       86%         83%
tively. Rates in the U.S. are likely to have          SVY            22,851     25,462     43%         46%   21,740   21,678       84%         85%
                                                      TOT            17,965     18,756     64%         59%
more variability from our estimates than
                                                      WRG            27,338     28,745     66%         62%   25,616   26,590       66%         81%
in Canada, due to the footage contracts in            Average      22,902       24,387     56%         55%   25,352   25,651       73%         78%
West Texas rather than day rate contracts.            Source: FCC Estimates
10      FirstFocus • CanElson Drilling Inc. - CDI • August 3, 2011




             Gross Margin
                                     Financial Comparison
                                 EBITDAS Margin                ROE             ROCE             Investment Thesis
              2011e     2012e     2011e     2012e           2011e    2012e   2011e      2012e
CDI            32%       32%       27%       29%             10%      14%     15%        17%
                                                                                                There are three key reasons to own
PD             43%       45%        37%      40%             12%      16%     11%        17%
                                                                                                CanElson:
ESI            33%       32%        30%      29%             15%      14%     15%        14%
TDG            39%       41%        32%      34%              7%      11%      8%        11%
SVY            29%       32%        24%      27%              7%       9%      7%        10% 1. Management Experience – Elson
WRG            41%       42%        35%      37%             12%      14%     14%        14%
                                                                                             McDougald has a successful history of
Average         36%      38%        31%      33%             10%      13%     12%      14%
Source: FCC Estimates                                                                        building, running and then selling drill-
                                                                                             ing companies. Based on CanElson’s
based on the operating performance of the rigs. For                                          performance to date, we do not see it be-
example, if a number of wells takes longer than ex-                               ing any different. In addition, Randy Hawkings has
pected to drill it can materially lower the overall “day                          a significant amount of experience running drilling
rate” and margins. In North Dakota, we expect the four                            companies.
rigs to see high utilization after upgrades are complete.
The supply of energy services equipment in this region                       2. Exposure to Saskatchewan – Saskatchewan is a
remains constrained, which is allowing service provid-                          difficult place to build a presence, but CanElson
ers to attain excellent utilization and rates.                                  has shown its ability to do this in a short period of
                                                                                time. Currently, CanElson operates roughly 8.1%
We expect CanElson to generate slightly below average                           of the rigs in Saskatchewan and we expect that to
gross margins and EBITDAS margins despite above                                 grow. As important, 72% of its fleet is exposed to
industry average day rates. Due to CanElson’s smaller                           this area, which we believe is going to have a long
size, it is not able to achieve the same economies of                           life and should present CanElson with continued
scale as the larger drillers such as Precision and Trini-                       opportunities for rig builds.
dad. As well, making these comparisons is not always
fair as some companies take different policies on what                                        Contract Drillers Exposure to Saskatchewan
                                                                                                                               Market    % of CDN
expenses are capitalized and which are treated as cash
                                                                             Company                                Rigs       Share     Fleet in SK
expenses.                                                                    Precision Drilling                      33        20.5%        16%
                                                                             Ensign Energy Services                  33        20.5%        26%
                            CDI Dupont Analysis
                                                                             CanElson Drilling                       13         8.1%        72%
                                   2010a     2011e      2012e
                                                                             Savanna Energy Services                 12         7.5%        17%
            Net Profit Margin          8%      14%        16%
                                                                             Trinidad Driling                         8         5.0%        15%
            Asset Turnover            0.3x      0.6x      0.7x
                                                                             Western Energy Services                  4         2.5%        10%
            Financial Leverage        1.3x      1.3x      1.3x               Total Energy Services                    1         0.6%         7%
            ROE                      3.2%    10.4%      14.8%
                                                                             Total Saskatchewan Rigs                161
            Contract Driller Average
            Net Profit Margin          9%      13%        15%                Source: Nickle's Rig Locator
            Asset Turnover            0.4x      0.5x      0.5x
            Financial Leverage        1.6x      1.7x      1.6x
            ROE                      5.0%    10.3%      13.2%
                                                                             3. Valuation – CanElson’s valuation is compelling
            Source: FCC Estimates, Company Reports
                                                                                given its forecasted operational performance and
As seen above, CanElson also generates return on eq-                            its well positioned balance sheet. Currently, the
uity above its peer group average. It does so by gener-                         stock is trading at 2012e multiples of 8.7x earn-
ating higher net profit margins, higher asset turnover                          ings and 4.0x EV/EBITDAS, whereas the contract
reflecting its more active asset base and below industry                        driller average is 10.4x and 4.8x. Our sector average
average financial leverage. Is this sustainable? We                             multiples for 2012 are 11.1x earnings and 4.8x EV/
believe so, because the Company is going to continue                            EBITDAS.
building rigs that should attain high utilization. The
gap may close somewhat though, as drillers such as                                   In our view, the discount is too steep despite its
Ensign, Precision and Savanna convert rigs to become                                 lower level of liquidity and smaller market capital-
more capable of drilling more technically challenging                                ization. The management team has a strong his-
wells.                                                                               tory of running drilling companies, in addition to
                                                                                     having a current fleet being well suited to achieving
                                                                                     above industry average performance.
                                                                                                                                     11




                                 Trading Multiples Comparison                                      Reliance on Mechanical Rigs –
            EV/EBITDAS                 P/E                  2011e              EV Per Rig (mm)     CanElson’s fleet is comprised mostly
Ticker      2011e     2012e         2011e    2012e     P/Book       P/NTA       2011e     2012e
                                                                                                   of mechanical rigs. The rigs are an
CDI           6.4x      4.0x         12.7x     8.7x       1.3x        1.5x       $10.7      $9.5
                                                                                                   older style than many which are built
ESI           6.3x      5.2x        12.4x    11.7x        1.8x        1.8x       $10.7     $9.5
                                                                                                   today. While the rigs remain active,
PD            6.9x      5.2x        17.1x    11.5x        2.0x        2.4x       $13.8    $11.7
SVY           5.8x      4.1x        13.9x     9.3x        0.9x        0.9x        $6.4     $5.8    and under a good crew would be
TDG           6.4x      4.8x        20.5x    11.9x        1.4x        1.6x       $13.5    $11.3    as efficient as the new rig style, any
WRG           7.3x      5.3x        12.0x     9.5x        1.4x        1.5x       $15.7    $14.0    slowdown or change to customer ap-
Average       6.5x      4.8x        14.8x    10.4x        1.5x        1.6x       $11.8    $10.3    petite for this equipment could put
Source: FCC Estimates, Company Reports                                                             CanElson at a disadvantage.
    From a price to book and price to net tangible asset
    basis, CanElson is less expensive than the group
    average, despite having a newer vintage of assets.
                                                                             Target and Rating
    Its fleet is comprised of contract drilling assets that                  We are initiating coverage on CanElson with a $6.50
    will work at a more frequent rate than the industry                      pers share target price, which equates to 2012e target
    average, which should warrant an above average                           multiples of 5.9x EV/EBITDAS and 12.4x earnings. In
    multiple. On an EV per rig basis, CanElson is trad-                      comparison, our contract driller average target multi-
    ing at a 15% discount in 2011e and 2012e, respec-                        ples are 6.2x EV/EBITDAS and 13.7x earnings. Our ser-
    tively. We do not feel this is warranted for the                         vices coverage universe average is 6.2x and 14.1x. We
    same reasons mentioned above for the P/Book and                          believe CanElson presents value for investors looking
    P/NTA multiples. As such, an upward revaluation                          for exposure to solid management teams, with signifi-
    of the Company’s assets could occur.                                     cant, growing exposure to many oil levered plays such
                                                                             as the Bakken (Canada and the U.S.) and the Permian
Risks                                                                        and an inexpensive valuation. In addition, we believe
                                                                             the Company will continue to search out transactions
Concentrated Canadian Asset Base – In Canada, 72%                            to further augment its fleet. With implied upside of
of CanElson’s fleet is in Saskatchewan. Should there                         41%, we rank CanElson as an Outperform.
be a major shift in drilling activity or political motiva-
tions that stems drilling activity, it would be negatively
affected. With that said, we view this as unlikely and
believe if the Company moved the rigs out of Saskatch-
ewan, they would find work in Alberta.

Lack of Term Contracts – CanElson primarily operates
in the spot market in Canada and North Dakota which
leaves it exposed to changes in spot market pricing.
Currently, this is benefitting CanElson as spot pricing
is at elevated levels, which is helping to generate strong
performance. However, if activity were to decline to
low levels, spot pricing in turn would fall and could
hurt CanElson’s financial performance.

Key Management Departures – much of CanElson’s
success can be attributed to Elson McDougald and
Randy Hawkings. We believe if either were to leave the
Company it could have a negative impact on its perfor-
mance. It is our view that both of these key members
will remain with CanElson for the foreseeable future.
12   FirstFocus • CanElson Drilling Inc. - CDI • August 3, 2011




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           13




Appendix
14   FirstFocus • CanElson Drilling Inc. - CDI • August 3, 2011




                                                           Management Team
               Name            Title
               Elson McDougald Executive Chairman         Independent businessman and Executive Chairman of CanElson.
                                                          Mr. McDougald was Chief Executive Officer of CanElson from
                                                          December 2008 to December 2010. From August 2006 to May
                                                          2008, Mr. McDougald was Chairman of Savanna Energy Services
                                                          Corp. Prior thereto, Mr. McDougald was the Chairman and Chief
                                                          Executive Officer of Western Lakota Energy Services Inc.

               Randy Hawkings      President and Chief President and Chief Executive Officer from January 1, 2011 of
                                   Executive Officer and CanElson and Principal Engineer of Enercon International Inc.
                                   Director              From August 2006 to August 2007, Vice President and General
                                                         Manager of the Lakota Drilling Division of Savanna Energy
                                                         Services Corp. Prior thereto, Vice President and Chief Operating
                                                         Officer of Western Lakota Energy Services Inc.
               Rob Skilnick        Chief Financial       Chief Financial Officer of CanElson since February 2010. From
                                   Officer               July 2009 to February 2010 Mr. Skilnick was the controller at
                                                         CanElson. Prior thereto Mr. Skilnick worked at KPMG in Calgary
                                                         and KPMG in the Cayman Islands, in various capacities, most
                                                         recently as a Senior Manager in the audit practice of KPMG
                                                         Calgary.
               Lawrence Kolasa     Vice President, Rig Vice President, Rig Construction of CanElson from December
                                   Construction          2008. Mr. Kolasa was the field superintendent for Western Lakota
                                                         Energy Services Inc. and was responsible for constructing all of
                                                         Western Lakota’s rigs. Prior to joining CanElson, Mr. Kolasa was
                                                         a rig manager for Tetonka Drilling Inc. and Precision Drilling Corp.

               Terry Kuiper        Vice President &       Vice President & General Manager – Canada of CanElson from
                                   General Manager -      February 2010. Prior thereto from September 2009 he held the
                                   Canada                 role of Manager International/Domestic Marketing and Health and
                                                          Safety of CanElson. Prior thereto contracts representative and
                                                          manager for Savanna Energy Services Corp.

               Michael Smith       Vice President &       Vice President and General Manager – Saskatchewan of
                                   General Manager -      CanElson. Prior to February 2010 was Vice President of
                                   Saskatchewan           Operations of CanElson and prior to October 27, 2010 was Vice
                                                          President and General Manager - Texas of CanElson. From 2005
                                                          to 2008, Mr. Smith was a field supervisor for Ensign Energy
                                                          Services Inc. where he supervised 8 drilling rigs.

               Derrick Big EagleVice President of         Vice President of Business Development of CanElson. Prior
                                Business                  thereto independent businessman and President of Eagle Drilling
                                Development               Services Inc.
               Source: Company Reports
                                                                                                           15




                                          Board of Directors
Name            Title
Elson McDougald Executive Chairman      Same as prior.
Randy Hawkings President and Chief      Same as prior.
                Executive Officer and
                Director
Dan Kolibar     Corporate Secretary     Partner with Borden Ladner Gervais LLP.
                and Director
Rodger Hawkins Director                 Independent business advisor. Prior to January 1, 2007 Mr.
                                        Hawkins was a partner with BDO Canada LLP.
Dale Johnson     Director               Business management consultant since 2007 and Chairman of
                                        Neovia Financial Plc. Prior thereto Mr. Johnson was President of
                                        NeTeller Asia and Executive VP and Director of Neovia Financial
                                        Plc.
Kent Jespersen   Director               Chairman and Chief Executive Officer of La Jolla Resources
                                        International Ltd.
Donald Seaman    Director               President of D.R.S. Resource Investments Inc., a personal
                                        investment holding company.
Robert Logan     Director               Managing Member of ShaMac Holdings, LLC a private investment
                                        company.
Hugh Borgland    Director               Chairman of the Board of Highrock Energy Ltd. President of
                                        Totem Drilling Ltd. from February 2006 to June 2010.
Source: Company Reports
16   FirstFocus • CanElson Drilling Inc. - CDI • August 3, 2011




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                        CanElson Drilling Inc. - CDI                                                                                                                                                                                                                                                                                                                                                           August 2011
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          5.               Does FirstEnergy or the analyst have any actual material conflicts of interest with the issuer?                                                                                                                                                                                                                                                                                          N
                           Explanation:
          6.               Does any director, officer, employee of FirstEnergy or member of their household serve as a director or officer or                                                                                                                                                                                                                                                                       N
                           advisory capacity of the issuer? (if so, list name)
          7.               Did the analyst and/or associate who prepared this research report receive compensation based solely upon                                                                                                                                                                                                                                                                                N
                           investment banking revenues?
          8.               Did the analyst receive any payment or reimbursement of travel expenses by the issuer?                                                                                                                                                                                                                                                                                                   N
          9.               Since July 9, 2002, has the analyst received any compensation based on a specific investment                                                                                                                                                                                                                                                                                             N
                           banking transaction relative to this issuer?
          10. Has any director, officer or employee who prepared this research report received any                                                                                                                                                                                                                                                                                                                  N
              compensation from the subject company in the past 12 months?
          11. Has FirstEnergy provided the issuer or its predecessor with non-investment banking securities-related services                                                                                                                                                                                                                                                                                        N
              in the past 12 months?
          12. Has FirstEnergy managed or co-managed an offering of securities by the issuer or its predecessor in the                                                                                                                                                                                                                                                                                               N
              past 12 months?
          13. Has FirstEnergy received compensation for investment banking and related services from the                                                                                                                                                                                                                                                                                                            N
              issuer or its predecessor in the past 12 months?
                                                                                                                                                                                                                                                                                                                                              Ranking System
                                                                                CanElson Drilling Inc. (TSX-V: CDI)
                                                                      CanElson Drilling Inc. (TSX-V: CDI)
                                                                                      Ranking and Target Changes 2008 - 2011
                                                                         Ranking and Target Changes 2008 - 2011
                                                                                                                                                                                                                                                                                                                           Ranking System
                                                                                                                                                                                                                                                                                                                                       FirstEnergy’s rating system reflects our outlook for expected
                                                                                                                                                                                                                                                                                                                                           performance reflects our equity securities relative to its peer
                                                                                                                                                                                                                                                                                                                           FirstEnergy’s rating system of an issuer’s outlook for expected performance
                        $10.00                    $10.00
                                                                                                                                                                                                                                                                                                                                           group over the next 12 months.
                                                                        Closing Price
                                                            Closing Price                                                                                                                                                                                                                                                  of an issuer’s equity securities relative to its peer group over the next 12
                                                                      Ranking Change
                                                            Ranking Change
                         $8.00                     $8.00 Target PriceTarget Price Change
                                                                      Change
                                                                                                                                                                                                                                                                                                                           months.           A Top Pick (Buy) rating represents a security expected to provide
                                                                                                                                                                    a return materially higher than expected to provide a
                                                                                                                                                    A Top Pick (Buy) rating represents a securitythe peer group average. return mate-                                                                                      „
  Daily Closing Price



                            Daily Closing Price




                                                                                                                                                                                                                               Aug-02-11 (O)
                         $6.00
                                                                                                                                                    rially higher than the peer group average.                              Initiating Coverage
                       $6.00
                                                                                                                                          „                        (Buy) rating represents a security expected to provide a provide
                                                                                                                                                    An OutperformAn Outperform (Buy) rating represents a security expected to return
                                                                                                                                                    greater than the peer group average. peer group average.
                                                                                                                                                                     a return greater than the
          $4.00
                       $4.00                                                                                                              „         A Market Perform (Hold) rating represents a security expected to provide a
                                                                                                                                                                   A Market Perform (Hold) rating
                                                                                                                                                    return in line with the peer group average. represents a security expected
                                                                                                                                                                     to (Sell) rating represents a the peer group average.
                                                                                                                                                    An Underperform provide a return in line withsecurity expected to provide a
          $2.00
                       $2.00
                                                                                                                                          „
                                                                                                                                                    return less than the peer group average.
          $0.00
                                                                                                                                          „                        An (Buy) rating represents a security where the return potential
                                                                                                                                                    A Speculative Buy Underperform (Sell) rating represents a security expected
                                                                                                                                                                     to provide a return less than the peer group average.
                                                                Nov-08




                                                                                                                                                                                                               Nov-10
                                    Jan-08




                                                                 Jan-09




                                                                                                                               Nov-09

                                                                                                                                             Jan-10




                                                                                                                                                                                                                             Jan-11




                                                                                                                                                                                                                                                                                               Nov-11
                                                                May-08

                                                                  Jul-08




                                                                                                     Jul-09




                                                                                                                                                                       May-10

                                                                                                                                                                                     Jul-10
                                                                                       May-09




                                                                                                                                                                                                                                                                     Jul-11
                                                  Mar-08




                                                                Sep-08




                                                                Mar-09




                                                                                                                  Sep-09




                                                                                                                                                          Mar-10




                                                                                                                                                                                                  Sep-10




                                                                                                                                                                                                                                          Mar-11

                                                                                                                                                                                                                                                       May-11



                                                                                                                                                                                                                                                                                  Sep-11




                       $0.00
                                                                                                                                                    is high, but the risk of a significant loss is material.
                                                            Jul-08




                                                                                                                                        Jul-09




                                                                                                                                                                                                                        Jul-10




                                                                                                                                                                                                                                                                                                        Jul-11
                                                           Jan-08




                                                           Sep-08

                                                                                   Nov-08

                                                                                                Jan-09




                                                                                                                                                      Sep-09

                                                                                                                                                                   Nov-09

                                                                                                                                                                                Jan-10




                                                                                                                                                                                                                                      Sep-10

                                                                                                                                                                                                                                                   Nov-10

                                                                                                                                                                                                                                                                Jan-11




                                                                                                                                                                                                                                                                                                                 Sep-11

                                                                                                                                                                                                                                                                                                                          Nov-11
                                                           Mar-08




                                                                                                              Mar-09




                                                                                                                                                                                              Mar-10




                                                                                                                                                                                                                                                                              Mar-11
                                                           May-08




                                                                                                                           May-09




                                                                                                                                                                                                           May-10




                                                                                                                                                                                                                                                                                           May-11




RATING SYSTEM: T = Top Pick (Buy); O = Outperform (Buy); M = Market Perform (Hold); U = Underperform (Sell); SB = Speculative Buy (Buy);  „                       represents a security where investors are security where the
                                                                                                                                                    A Tender (X) A Speculative Buy (Buy) rating represents aguided to tender to the
R = Under Review; * = Restricted; As of April 15, 2009 X = Tender; NR = Not Rated
Source: FirstEnergy Capital Corp. & Bloomberg                                                                                                                       return offer.
                                                                                                                                                    terms of the takeoverpotential is high, but the risk of a significant loss is material.
             RATING SYSTEM: T = Top Pick (Buy); O = Outperform (Buy); M = Market Perform (Hold); U = Underperform (Sell); SB = Speculative Buy (Buy);
                          R = Under Review; * = Restricted; As of April 15, 2009 X = Tender; NR = Not Rated
                          Source: FirstEnergy Capital Corp. & Bloomberg                                                                                                                                                                                                                                                    The author of this report hereby certifies that the views expressed in this report accu-
                                                                                                                                                                                                                                                                                                                                               A Tender (X) represents a security where investors are guided to tender
                                                               Opinion: Outperform
                                                                      Opinion: OUTPERFORM
                                                                                                                                                                                                                                                                                                                           rately reflect his/her personal views about the subject security and issuer.
                                                                                                                                                                                                                                                                                                                                                   the terms of the takeover offer.
                                                           12 MONTH TARGET PRICE: $6.50
                                                                  12 MONTH TARGET PRICE: $6.50                                                                                                                                                                                                                             The author of this reports further certifies that no part of his/her compensation was,
                                                                                                                                Ranking                                                                    % Investment
                                                                                                                                                                                                                                                                                                                                              The
                                                                                                                                                                                                                                                                                                                                                   or indirectly related to the specific views expressed in this report accurately
                                                                                                                                                                                                                                                                                                                           is, or will be directlyauthor of this report hereby certifies that therecommendations or views
                                                                                                    Ranking                                                                                    % Investment                                                                                                                                   reflect his/her personal views about the subject security and issuer.
                                                                                                                                                                                                                                                                                                                           contained in this research report.
                                                                                                       Distribution                                                                            Banking Clients
                                                                                                   Distribution                                                                               Banking Clients
                           Top Picks                                                                      10%                                                                                       8%                                                                                                                                        The author of this report further certifies that no part of his/her compensation was, is, or
                         Top Picks                                                                     10%                                                                                          8%                                                                                                                                                           or intends to seek compensation for investment banking
                                                                                                                                                                                                                                                                                                                           FirstEnergy Capital may receiveindirectly related to the specific recommendations or views contained in
                          Outperforms                                                                     48%                                                                                       24%                                                                                                                                      will be directly or
                         Outperforms                                                                   48%                                                                                         24%                                                                                                                                       issuers under research coverage within the next three months.
                                                                                                                                                                                                                                                                                                                           services from all this research report.
                          Market Performs                                                                 26%                                                                                       10%
                         Market Performs                                                               26%                                                                                         10%
                          Underperforms
                         Underperforms                                                                  3%3%                                                                                        0%
                                                                                                                                                                                                    0%                                                                                                                     This report has not been approved by FirstEnergyintends to seek for the purposes of section
                                                                                                          10%                                                                                       8%                                                                                                                                      FirstEnergy Capital Corp. may receive or Capital LLP compensation for investment
                          Speculative
                         SpeculativeBuys
                                       Buys                                                            10%                                                                                          8%                                                                                                                     21 of the Financial Services and Markets Act 2000 as it is being within the nextonly to per-
                                                                                                                                                                                                                                                                                                                                            banking services from all issuers under research coverage distributed three months.
                          Tenders
                         Under Review                                                                   1%0%                                                                                        0%
                                                                                                                                                                                                    0%                                                                                                                     sons who are investment professionals within the meaning of article 19 of the Financial
                          Not Rated
                         Restricted Companies                                                           1%0%                                                                                        0%
                                                                                                                                                                                                    1%                                                                                                                                      This report has not been approved by FirstEnergy Capital LLP and is not intended to,
                                                                                                                                                                                                                                                                                                                           Services and Markets Act 2000 (Financial Promotion) Order 2005 for the purposes of section 21
                          Under Review
                         Tenders                                                                        0%1%                                                                                        0%
                                                                                                                                                                                                    0%
                                                                                                                                                                                                                                                                                                                           and should not be relied upon, by any other person. as it is being distributed only to persons
                                                                                                                                                                                                                                                                                                                                            of the Financial Services and Markets Act 2000
                         Not RatedCompanies
                          Restricted                                                                    0%1%                                                                                        1%
                                                                                                                                                                                                    0%                                                                                                                                        who are investment professionals within the meaning of article 19 of the Financial Services
                         Total
                          Total                                                                       100%
                                                                                                         100%                                                                                                                                                                                                                                 and Markets Act 2000 (Financial Promotion) Order 2005 and is not intended to, and should
                                                                                                                                                                                                                                                                                                                                              not be relied upon, by any other person.


         Calgary Office: 1100, 311 - 6th Avenue SW Calgary, Alberta T2P 3H2 Tel: 403.262.0600 - London Office: 4th Floor, 85 London Wall, London, EC2M 7AD Tel: +44.207.448.0200 - www.firstenergy.com                                                                                                                                                                                                                          Page 1 of 1
         The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. While the accuracy or completeness of the information contained in this document cannot be
         guaranteed by FirstEnergy Capital, it was obtained from sources believed to be reliable. FirstEnergy Capital and/or its officers, directors and employees may from time to time acquire, hold or sell positions in the securities mentioned herein as principal or
         agent. FirstEnergy Capital (USA) Corp., a member of the Financial Industry Regulatory Authority, is a wholly owned subsidiary of FirstEnergy Capital Holdings Corp. and operates as a Broker-Dealer in the United States.
18    FirstFocus • CanElson Drilling Inc. - CDI • August 3, 2011




     FirstEnergy Capital Corp. . 1100, 311 . 6th Avenue S.W., Calgary, Alberta, Canada T2P 3H2
     Tel: 403.262.0600 Fax: 403.262.0633
     Research                            Title                                                    Direct         Email@firstenergy.com
     Jill T. Angevine                    Vice President & Director, Institutional Research        403-262-0668   jtangevine
     Michael P. Dunn                     Research Analyst, Exploration & Production               403-262-0643   mpdunn
     Darren B. Engels                    Vice President, Institutional Research                   403-262-0689   dbengels
     Robert J. Fitzmartyn                Managing Director, Institutional Research                403-262-0648   rjfitzmartyn
     Ian B. Gillies                      Research Associate                                       403-444-4886   ibgillies
     Michael J. Hearn                    Research Associate                                       403-444-8273   mjhearn
     A. Mark Jackson                     Research Associate                                       403-262-0609   amjackson
     Katrina L. Karkkainen               Research Associate                                       403-262-0624   klkarkkainen
     Martin King                         Vice President, Institutional Research                   403-262-0625   mking
     Cody R. Kwong                       Vice President, Institutional Research                   403-262-0638   crkwong
     Blair A. Lawson                     Research Associate                                       403-262-0661   balawson
     Kevin C.H. Lo                       Managing Director, Institutional Research                403-262-0626   klo
     Martin P. Molyneaux                 Managing Director, Institutional Research                403-262-0629   mpmolyneaux
     Steven I. Paget                     Vice President, Energy Infrastructure                    403-262-0662   sipaget
     Elaine C. Williams                  Research Associate                                       403-262-0622   ecwilliams

     Sales & Trading                     Title                                                    Direct         Email@firstenergy.com
     Trent D. Boehm                      Managing Director, Institutional Sales                   403-262-0673   tdboehm
     Ben J. Cohos                        Institutional Sales                                      403-444-4278   bjcohos
     Daniel J. Dorland                   Private Client Sales                                     403-262-0652   djdorland
     David J. Evans                      Retail Trader                                            403-262-0663   djevans
     David G. Fenwick                    Managing Director, Institutional Trading                 403-262-0676   dgfenwick
     A. Dan Forget                       Institutional Sales Associate                            403-444-4882   adforget
     Jai Hawker                          Vice President, Private Client Sales                     403-262-0650   jhawker
     Justin J. Ikebuchi                  Vice President, Institutional Trading                    403-262-0687   jjikebuchi
     Shane M. Jackson                    Equity Trader                                            403-262-0669   smjackson
     Andrew G. Judson                    Managing Director, Institutional Sales                   403-262-0620   agjudson
     David M. La Rocque                  Private Client Sales                                     403-262-0694   dmlarocque
     Douglas W. Laird                    Institutional Sales                                      403-262-0678   dwlaird
     Bryan E. Lopushinsky                Vice President, Institutional Trading                    403-262-0632   belopushinsky
     David W. Lovsin                     Institutional Equity Trader                              403-262-0685   dwlovsin
     John F. Prins                       Private Client Sales                                     403-262-0695   jfprins
     Kenneth W. Rowan                    Managing Director, Institutional & Retail Sales          403-262-0686   kwrowan
     Tyler L. Stuart                     Vice President, Institutional Sales                      403-262-0657   tlstuart
     Derek R. Stuart                     Institutional Sales                                      403-262-0692   drstuart
     Michael E. Wampler                  Institutional Equity Trader                              403-262-0681   mewampler

     Corporate Finance                   Title                                                    Direct         Email@firstenergy.com
     Erik B. Bakke                       Vice President & Director, Corporate Finance             403-262-0649   ebbakke
     M. Scott Bratt                      Managing Director, Corporate Finance                     403-262-0645   msbratt
     John S. Chambers                    Managing Director & President                            403-262-0664   jschambers
     James W. Davidson                   Chairman & Chief Executive Officer                       403-262-0672   jwdavidson
     Anthony M. De Nino                  Analyst, Corporate Finance                               403-444-8274   amdenino
     Jamie N. Ha                         Vice President & Director, Corporate Finance             403-262-0608   jnha
     Robyn T. Hemminger                  Vice President, Corporate Finance                        403-262-0665   rthemminger
     Shane A. Helwer                     Vice President, Corporate Finance                        403-262-0618   sahelwer
     Nicholas J. Johnson                 Managing Director, Corporate Finance                     403-262-0617   njjohnson
     Andrew E. Osborne                   Associate, Corporate Finance                             403-444-8269   aeosborne
     R. Scott Robertson                  Associate, Corporate Finance                             403-444-4896   rsrobertson
     Kyle B. Rookes                      Associate, Corporate Finance                             403-262-0660   kbrookes
     Troy T. Talkkari                    Associate, Corporate Finance                             403-262-0616   ttalkkari
     Nathan M. Trainor                   Analyst, Corporate Finance                               403-262-0611   nmtrainor
     Matthew M. Turner                   Analyst, Corporate Finance                               403-444-8266   mmturner
     Dean M. Willner                     Vice President, Corporate Finance                        403-444-8275   dmwillner

     Acquisitions & Divestitures         Title                                                    Direct         Email@firstenergy.com
     Craig G. Burns                      Vice President, Acquisitions & Divestitures              403-444-8268   cgburns
     Brian F. Dunn                       Managing Director, Acquisitions & Divestitures           403-262-0602   bfdunn
     Katelyn M. Clark                    Analyst, Acquisitions & Divestitures                     403-444-8285   kmclark
     Derek T. Kreba                      Vice President, Acquisitions & Divestitures              403-262-0660   dtkreba
     Peter C. Lundberg                   Vice President, Acquisitions & Divestitures              403-444-4892   pclundberg
     Richard J. Matthews                 Vice President & Director, Acquisitions & Divestitures   403-262-0677   rjmatthews
     Mark C. Pearson                     Associate, Acquisitions & Divestitures                   403-444-8284   mcpearson

     Administration                      Title                                                    Direct         Email@firstenergy.com
     John G. Breen                       Compliance Officer                                       403-262-0683   jgbreen
     Christina Gracey                    Manager, Conferences & Community                         403-262-0656   cgracey
     Chandra A. Henry                    Chief Financial Officer                                  403-262-0623   cahenry
     Bridget G. Mahoney                  Vice President, Syndication                              403-262-0627   bgmahoney
     Hinson Ng                           Vice President, Compliance                               403-262-0658   hng
     Mathew E. Peachment                 Fund & Staff Accountant                                  403-262-0610   mepeachment
     Marina Post                         Controller                                               403-262-0679   mpost
     Ruby F. Wallis                      Chief Operating Officer                                  403-262-0631   rfwallis
     Robert Q. Wood                      Vice President, Information Technology                   403-262-0619   rqwood
                                                                                                                                        19


FirstEnergy Capital LLP . 85 London Wall, London, United Kingdom EC2M 7AD
Tel: +44.0.207.448.0200 Fax: +44.0.207.448.0244
Research                          Title                                                    Direct               Email@firstenergy.com
Stephane G. Foucaud               Director, Institutional Research                         +44-0-207-448-0213   sgfoucaud
Gerry F. Donnelly                 Vice President, Institutional Research                   +44-0-207-448-0214   gfdonnelly
Kingsley O. Jibunoh               Associate, Institutional Research                        +44-0-207-448-0227   kojibunoh
Barry Leaper                      Associate, Institutional Research                        +44-0-207-448-0252   bleaper
David Przybyla                    Associate, Institutional Research                        +44-0-207-448-0251   dprzybyla

Sales & Trading                   Title                                                    Direct               Email@firstenergy.com
Richard Downard                   Sales Trader, Institutional Sales & Trading              +44-0-207-448-0209   rdownard
Matt E. Dunn                      Director, Institutional Sales                            +44-0-207-448-0248   medunn
John P. Gilbert                   Institutional Sales                                      +44-0-207-448-0206   jpgilbert
Chris Grudniewicz                 Director, Institutional Sales                            +44-0-207-448-0219   cgrudniewicz
Rupert Holdsworth Hunt            Director, Institutional Sales & Trading                  +44-0-207-448-0212   rhhunt
Jason D. Knowles                  Sales Trader, Institutional Sales & Trading              +44-0-207-448-0208   jdknowles
John R. Manison                   Settlements, Institutional Sales & Trading               +44-0-207-448-0210   jrmanison

Corporate Finance                 Title                                                    Direct               Email@firstenergy.com
Khalid Ahmed                      Analyst, Corporate Finance                               +44-0-207-448-0221   kahmed
Stephen A. Francavilla            Analyst, Corporate Finance                               +44-0-207-448-0201   safrancavilla
Travis K. Inlow                   Associate, Corporate Finance                             +44-0-207-448-0215   tkinlow
Hugh R. Sanderson                 Managing Director, Corporate Finance                     +44-0-207-448-0202   hrsanderson
Majid Shafiq                      Managing Director, Corporate Finance                     +44-0-207-448-0226   mshafiq
Derek A. Smith                    Vice President, Corporate Finance                        +44-0-207-448-0203   dasmith
David R. van Erp                  Associate, Corporate Finance                             +44-0-207-448-0243   drvanerp

Acquisitions & Divestitures       Title                                                    Direct               Email@firstenergy.com
Rolf E.G. Bakker                  Director and UK Co-Head, Acquisitions and Divestitures   +44-0-207-448-0225   rebakker
Paul P. Bannister                 Associate, Acquisitions and Divestitures                 +44-0-207-448-0241   ppbannister
Romain Bohbote                    Associate, Acquisitions and Divestitures                 +44-0-207-448-0223   rbohbote
Mark W. Llamas                    Managing Director, Acquisitions and Divestitures         +44-0-207-448-2224   mwllamas

Administration                    Title                                                    Direct               Email@firstenergy.com
Marcia C. Manarin                 Financial Controller                                     +44-0-207-448-0229   mcmanarin
Adrian Penny                      Chief Operating Officer (UK)                             +44-0-207-448-0207   apenny
Moya C. Wooder                    Office Manager                                           +44-0-207-448-0204   mcwooder
Calgary Office: 1100, 311 - 6th Avenue SW Calgary, Alberta T2P 3H2 Tel: 403.262.0600
London Office: 85 London Wall, London, EC2M 7AD Tel: +44.207.448.0200
www.firstenergy.com
The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of
securities. While the accuracy or completeness of the information contained in this document cannot be guaranteed by FirstEnergy Capital, it was
obtained from sources believed to be reliable. FirstEnergy Capital and/or its officers, directors and employees may from time to time acquire, hold or
sell positions in the securities mentioned herein as principal or agent. FirstEnergy Capital (USA) Corp., a member of the Financial Industry Regulatory
Authority, is a wholly owned subsidiary of FirstEnergy Capital Holdings Corp. and operates as a Broker-Dealer in the United States.

				
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