Mr. Michael West reports

CE FRANKLIN LTD. ANNOUNCES 2011 FOURTH QUARTER RESULTS

CE Franklin Ltd. has released financial results, including net earnings of $4.5-million or 26 cents per share (basic), for the fourth quarter ended Dec. 31, 2011, a significant increase from net earnings of $1.6-million or nine cents per share (basic) generated in the fourth quarter ended Dec. 31, 2010. For 2011, net income was $14.3-million or 82 cents per share (basic), an increase of 142 per cent from the $5.9-million or 34 cents per share (basic) earned in 2010.

"Strong year-over-year revenue growth, improved product margins and disciplined cost management led to significant year-over-year improvement in the fourth quarter. We will continue to leverage our strategies into 2012," said Michael West, president and chief executive officer.

The Dec. 31, 2011, condensed interim consolidated financial statements are prepared under international financial reporting standards. Consequently the comparative figures for 2010 and the company's statement of financial position as at Jan. 1, 2010, have been restated from accounting principles generally accepted in Canada to comply with IFRS. The reconciliations from the previously published Canadian generally accepted accounting principles financial statements are summarized in Note 3 to the condensed interim consolidated financial statements, and there were no material differences.

Net earnings for the fourth quarter of 2011 were $4.5-million, an increase of $2.9-million from the fourth quarter of 2010. Revenues for the fourth quarter of 2011 were $154.3-million, an increase of $18.7-million (14 per cent) from the fourth quarter of 2010. Well completions decreased 9 per cent compared with the fourth quarter of 2010 as the fourth quarter of 2010 was a busy quarter and those activity levels carried into 2011, while the fourth quarter 2011 slowed down slightly due to lower natural gas activity. Capital project business revenue grew $6.8-million year over year due to the improved overall industry activity levels. Gross profits increased by $4.8-million (23 per cent) due to the increase in revenues and improved gross profit margins year over year. Average gross profit margins in the fourth quarter of 2011 were lower than the third quarter of 2011 due to more pipe flange and fitting sales to lower margin alliance customers. Average gross profit margins for the fourth quarter of 2011 were higher than the fourth quarter 2010 as increased purchasing levels contributed to higher-volume rebates. Sales, general and administrative expenses increased by $800,000 (5 per cent) to $17.5-million for the quarter as compensation and operating costs have increased in response to higher revenue levels. Fourth quarter earnings for 2010 included a $700,000 after-tax charge associated with the elimination of the stock option cash settlement mechanism. The company also recorded an unrealized foreign exchange loss of $800,000 in the quarter on foreign exchange contracts used to manage currency exposure on U.S.-denominated product purchases, which reversed a previously recognized unrealized gain on these contracts in the third quarter. The weighted average number of shares outstanding during the fourth quarter was consistent with the prior-year period as the rise in share price during the last year limited the activity occurring under the normal course issuer bid program. Net earnings per share (basic) were 26 cents in the fourth quarter of 2011, compared with net earnings of nine cents per share in the fourth quarter of 2010.

Net income for the year ended Dec. 31, 2011, was $14.3-million, an increase of $8.4-million (142 per cent) compared with 2010, as industry activity levels improved year over year. Well completions in 2011 rose by 17 per cent compared with 2010 as the industry was focused on oil, oil sands and liquid-rich natural gas plays. Revenues increased by 12 per cent to $546.4-million, as both capital project and maintenance repair and operating sales increased year over year. Gross profits increased by $15.7-million (21 per cent) due to the impact of higher sales and increased vendor rebates from increased purchasing levels. Sales, general and administrative costs increased by $6.2-million (9.8 per cent) to $68.7-million in 2011 as compensation costs and operating costs have increased in response to higher activity levels. Income tax expense increased by $1.9-million as a result of higher pretax earnings in 2011. The weighted average number of shares outstanding (basic) during 2011 was consistent with the prior year as the rise in the share price during the last year has limited the activity occurring under the normal course issuer bid program. Net earnings per share (basic) were 82 cents in 2011, a 141-per-cent increase from 2010, consistent with the increase in net income.

Business outlook

CE Franklin's revenues are expected to increase modestly in 2012 as the oil and gas industry activity levels remain relatively consistent with 2011 levels. Natural gas prices remain depressed as North American production capacity and inventory levels continue to dominate demand. Natural gas capital expenditure activity is focused on the emerging shale gas plays in northeastern British Columbia and liquid-rich gas plays in northwestern Alberta, where the company has a strong market position. Conventional and heavy oil economics are attractive at current price levels leading to increased activity in eastern Alberta and southeast Saskatchewan. The company expects oil sands project announcements will continue at current levels, assuming current oil price levels are maintained. Approximately 50 per cent to 60 per cent of the company's total revenues are driven by the company's customer capital expenditure requirements.

Gross profit margins are expected to remain under pressure as customers that produce natural gas focus on reducing their costs to maintain acceptable project economics and due to continued aggressive oil field supply industry competition as industry activity levels remain below the last five-year average. The company will continue to manage its cost structure to protect profitability while maintaining service capacity and advancing initiatives.

Over the medium to longer term, the company's strong financial and competitive positions should enable profitable growth of its distribution network through the expansion of its product lines, supplier relationships, and capability to service additional oil and gas and other industrial end use markets.

Business strategy

The Canadian oil field equipment supply industry is highly competitive and fragmented. There are approximately 230 oil field supply stores in Canada, which generate annual estimated sales of $2-billion to $3-billion. CE Franklin competes with three other large oil field product distributors and with numerous local and regional distributors, as well as specialty equipment distributors and manufacturers. The oil field equipment market is part of the larger industrial equipment supply market, which is also serviced by numerous competitors. The oil sands and niche industrial product markets are more specialized and solutions oriented and require more in-depth product knowledge and supplier relationships to service specific customer requirements.

Oil field equipment distributors compete based on price and level of service. Service includes the ability to provide required products consistently to a customer's operating site when needed, project management services, product expertise and support, billing and expenditure management services, and related equipment services.

Demand for oil field products and services is driven by the level of capital expenditures in the oil and gas industry in the Western Canadian sedimentary basin, as well as by production-related maintenance, repair and operating requirements. MRO demand tends to be relatively stable over time and predictable in terms of product and service requirements and typically comprises 40 per cent to 50 per cent of the company's annual sales. Capital project demand fluctuates over time with oil and gas commodity prices, which directly impact the economic returns realized by oil and gas companies.

The size, scope and product mix of each order will affect profitability. Local walk in relationship business with smaller orders or more specialized products will typically generate higher profit margins compared with large project bids for alliance customers, where the company can take advantage of volume discounts and longer lead times. Larger oil and gas customers tend to have a broader geographic operating reach requiring multisite service capability, conducting larger capital projects, and requiring more sophisticated billing and project management services than do smaller customers. The company has entered into a number of formal alliances with larger customers, where the scale and repeat nature of business enable efficiencies, which are shared with the customer through lower profit margins.

Barriers to entry in the oil field supply business are low with start-up operations typically focused on servicing local relationship-based MRO customers. To compete effectively on capital project business and to service larger customers require multilocation branch operations, increased financial, procurement, product expertise and breadth of product lines, information systems, and process capability.

The company's 39-branch operations provide substantial geographic coverage across the oil- and gas-producing regions in Western Canada. Each branch services and competes for local business and services the company's alliance customers supported by centralized support services provided by the company's distribution centre and corporate office in Calgary. The company's large branch network, coupled with its centralized capabilities, enables it to develop strong supply chain relationships with suppliers and provide it with a competitive advantage over local independent oil field and specialty equipment distributors for large alliance customers, which are seeking multilocation, one-stop shopping and more comprehensive service. The company's relationship with Wilson Supply, a leading oil field equipment distributor operating in the United States, and a wholly owned subsidiary of Schlumberger, enables it to provide North American solutions to its customer base and provides increased purchasing scale with equipment suppliers.

The company is pursuing the following strategies to build its business profitably:

• Expand the reach and market share serviced by the company's distribution network; the company is focusing its sales efforts and product offering on servicing complex, multilocation needs of large and emerging customers in the energy sector; organic growth may be complemented by selected acquisitions;
• Expand production equipment service capability to capture more of the product life cycle requirements for the equipment the company sells, such as downhole pump repair, oil field engine maintenance, well optimization and on-site project management; this will differentiate the company's service offering from its competitors and deepen relationships with its customers;
• Expand oil sands, industrial project and MRO business by leveraging the company's existing supply chain infrastructure, product and major project expertise;
• Increase the resourcing of customer project sales quotation and order fulfilment services provided by the company's distribution centre to augment local branch capacity to address seasonal and project-driven fluctuations in customer demand; by doing so, the company aims to increase its capacity flexibility and improve operating efficiency while providing consistent customer service.

Strategy accomplishments

In the spring of 2008, the company moved into a new 153,000-square-foot distribution centre and nine-acre pipe yard located in Edmonton, Alta. The new distribution centre provided a 76-per-cent increase in functional warehousing capacity over the company's previous facility, increasing its capability to support and build sales through the company's branch network. The larger facility also enabled the company to increase the company's central project execution capability and processes and to service larger projects and ship direct to customers, avoiding double handling of material by branches.

In June of 2009, the company increased its market share, customer base and branch network through the acquisition of a Western Canadian oil field supply competitor. The acquired business operated 23 supply stores of which 18 stores were proximate to existing company branches and were integrated. The remaining five operations were focused in the eastern Alberta heavy oil corridor and have extended the company's distribution network reach. Total oil field supply sales have increased an estimated 15 per cent as a result of the acquisition. The company's Fort St. John and Lloydminster branches moved to larger locations during the year, increasing capacity to service customer requirements in these important markets. Sales to oil sands customers increased for the fifth year in a row, reaching a record $64.5-million in 2009, comprising 15 per cent of total company sales. The company added process automation products to its product line and opened a valve actuation centre at the company's Edmonton distribution centre to broaden the spectrum of solutions the company provides to existing oil field, oil sands and other industrial customers and enhance its ability to attract new customers. The company recruited new product, operations and supply chain expertise into the organization to advance its strategies.

In 2011 and 2010, the company made advances in the central resourcing of project work by processing $161.2-million (2010: $99.3-million) of sales orders through the company's Edmonton distribution centre, representing 29 per cent (2010: 20 per cent) of total company sales. This enabled the company to service the 12-per-cent year-over-year increase in sales (2010: 12-per-cent increase). In 2011 and 2010, the company has continued to build its valve actuation business.

Revenues

Revenues for the quarter ended Dec. 31, 2011, were $154.3-million, an increase of 14 per cent from the quarter ended Dec. 31, 2010.

Oil and gas commodity prices are a key driver of industry capital project activity as commodity prices directly impact the economic returns realized by oil and gas companies. The company uses oil and gas well completions and average rig counts as industry activity measures to assess demand for oil field equipment used in capital projects. Oil and gas well completions require the products sold by the company to complete a well and bring production on stream and are a general indicator of energy industry activity levels. Average drilling rig counts are also used by management to assess industry activity levels as the number of rigs in use ultimately drives well completion requirements.

Revenues from capital project related products were $80.3-million in the fourth quarter of 2011, an increase of 9 per cent ($6.8-million) from the fourth quarter of 2010. Total well completions decreased by 9 per cent in the fourth quarter of 2011, and the average working rig count increased by 23 per cent compared with the prior-year period. Gas wells comprised 23 per cent of the total wells completed in Western Canada in the fourth quarter of 2011 compared with 45 per cent in the fourth quarter of 2010. Spot gas prices ended the fourth quarter at $2.64 per gigajoule (AECO), a decrease of 18 per cent from fourth quarter 2010 average prices. Oil prices ended the fourth quarter at $103.61 per barrel (synthetic crude), an increase of 1 per cent from the fourth quarter 2010 average. Depressed gas prices are expected to continue to impact gas drilling activity negatively into 2012, which in turn is expected to constrain demand for the company's products. Natural gas customers continue to utilize a high level of competitive bid activity to procure the products they require in an effort to reduce their costs. The company is addressing this industry trend by pursuing initiatives focused on improving revenue quotation processes and increasing the operating flexibility and efficiency of its branch network. The company is well positioned to support customers which are pursuing oil plays and more particularly tight oil plays.

Revenues for capital-project-related products were $286.0-million for the full year 2011, up $30.7-million (12 per cent) from 2010. The increase in capital-project end use revenues reflects the 17-per-cent increase in total industry well completions to 14,471 in 2011. Capital project business for the year comprised 52 per cent of total revenues as it did in 2010. While the capital project business represented the same percentage of the business year over year, its makeup changed as a 19-per-cent decline in tubular revenues was offset by a 4-per-cent increase in oil sands sales and increased branch-based capital project sales. Tubular sales in the year declined as the company followed a disciplined approach in its competitive bid processes and, as a result, were not as successful as they had been in prior years. There remains a significant amount of tubular product inventory on hand in the industry, which has led to a very competitive environment for tubular product sales.

MRO product revenues are related to overall oil and gas industry production levels and tend to be more stable than capital project revenues. MRO product revenues for the quarter ended Dec. 31, 2011, increased by $11.9-million (19 per cent) to $74.0-million compared with the quarter ended Dec. 31, 2010, and comprised 48 per cent of the company's total revenues (2010: 46 per cent). MRO product revenues for the full year 2011 increased by $26.1-million (11 per cent) to $260.4-million compared with 2010 and comprised 48 per cent of the company's total revenues (2010: 48 per cent). Higher MRO revenues in 2011 were due to increased conventional oil field activity.

The company's strategy is to grow profitability by focusing on its core Western Canadian oil field product distribution business, complemented by an increase in the product life cycle services provided to its customers and the focus on the emerging oil sands capital project and MRO revenues opportunities.

Revenues from oil field products to conventional Western Canada oil and gas end use applications were $132.4-million for the fourth quarter of 2011, an increase of 12 per cent from the fourth quarter 2010. This increase was driven by an increase in oil well completions compared with the prior-year period.

Revenues from oil sands end use applications were $15.5-million in the fourth quarter, an increase of $4.0-million (35 per cent) compared with $11.5-million in the fourth quarter of 2010 reflecting increased capital project revenues, which were partially offset by the impact of not having a large tailing line pipe order and having less turnaround work in 2011 with the company's Fort McMurray-based customers.

Production service revenues were $6.4-million in the fourth quarter of 2011, a 7-per-cent increase from the $6.0-million of revenues in the fourth quarter of 2010, reflecting improved oil production economics resulting in increased customer maintenance activities.

Gross profit was $25.3-million in the fourth quarter of 2011, an increase of $4.8-million (23 per cent) from the fourth quarter of 2010 due to increased revenues and average gross profit margins compared with the prior-year period. Gross profit margins for the quarter were lower than the third quarter of 2011 due to more pipe, flange and fittings sales to lower margin alliance customers. Average gross profit margins were better than the prior-year period at 16.4 per cent as increased purchasing levels contributed to higher-volume rebate income. Increased pipe, flanges, fittings and pumps production equipment and services' gross profit composition was due to improved gross profit margins.

Sales, general and administrative costs increased $800,000 (5 per cent) in the fourth quarter of 2011 from the prior-year period and represented 11 per cent of revenues compared with 12 per cent in the prior-year period. The $800,000 increase in expenses was attributable to higher incentive and higher-agent-commission costs reflecting the improved profit performance of the business year over year.

Depreciation expense

Depreciation expense of $600,000 in the fourth quarter of 2011 was comparable with the fourth quarter of 2010.

Interest expense

Interest expense of $100,000 in the fourth quarter of 2011 was lower than the prior year due to lower borrowing levels.

Foreign exchange and other

Foreign exchange and other in the quarter were a loss of $1.1-million as the Canadian dollar strengthened, which increased the translation loss from U.S.-denominated net working capital assets. The company recognized a $200,000 unrealized foreign currency gain on $18.3-million of foreign currency forward contracts it had outstanding at quarter-end. As at Dec. 31, 2011, a 1-per-cent change in the Canadian dollar relative to the U.S. dollar would decrease or increase the company's annual net income by approximately $200,000.

Income tax expense

The company's effective tax rate for the fourth quarter of 2011 was 24.4 per cent down from a 46.6-per-cent effective rate in the fourth quarter 2010. The fourth quarter 2010 effective rate resulted from the write-off of $500,000 of future tax assets related to the removal of the cash settlement mechanism from the company's stock option plan as a result of provisions contained in the federal government's 2010 budget, which effectively eliminated the ability to deduct for tax purposes cash payments made to settle stock option obligations. The current effective tax rate is lower than the statutory rate due to the impact of non-deductible items and other adjustments. Substantially all of the company's tax provision is currently payable.

                                                                          
        CONDENSED INTERIM CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME 
                    (in thousands of Canadian dollars except per share amounts) 

                                                 Three months ended      Twelve months ended   
                                                Dec. 31,    Dec. 31,     Dec. 31,    Dec. 31, 
                                                   2011        2010         2011        2010 
                                                                                             
Revenue                                        $154,331    $135,641     $546,352    $489,585 
Cost of sales                                   129,077     115,095      455,669     414,579 
Gross profit                                     25,254      20,546       90,683      75,006 
Other expenses                                                                               
Selling, general and                                                                     
administrative expenses                          17,535      16,738       68,715      62,554 
Depreciation                                        613         610        2,450       2,465 
Total                                            18,148      17,348       71,165      65,019 
Operating profit                                  7,106       3,198       19,518       9,987 
Foreign exchange gain/(loss) and other            1,119         (20)        (649)        (65)
Interest expense                                     65         158          464         698 
Earnings before tax                               5,922       3,060       19,703       9,354 
Income tax expense (recovery)                                                       
Current                                           1,862         979        6,245       3,102 
Deferred                                           (417)        448         (853)        341 
Total                                             1,445       1,427        5,392       3,443 
Net earnings and comprehensive income             4,477       1,633       14,311       5,911 
Net earnings per share                                                              
Basic                                              0.26        0.09         0.82        0.34 
Diluted                                            0.25        0.09         0.79        0.33 

Conference call and webcast information

A conference call to review the fourth quarter 2011 results, which is open to the public, will be held on Feb. 3, 2012, at 11 a.m. Eastern Time (9 a.m. Mountain Time).

Participants may join the call by dialling 1-647-427-7450 in Toronto or dialling 1-888-231-8191 at the scheduled time of 11 a.m. Eastern Time. For those unable to listen to the live conference call, a replay will be available at approximately 2 p.m. Eastern Time on the same day by calling 1-416-849-0833 in Toronto or dialling 1-855-859-2056 and entering the passcode of 42851162 and may be accessed until Feb. 9, 2012, at midnight.

The call will also be webcast and available on the company's website.

Michael West, president and chief executive officer, will lead the discussion and will be accompanied by Derrren Newell, vice-president and chief financial officer. The discussion will be followed by a question-and-answer period.

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