Jeff Mochoruk, CFA, (403) 750-7207; jmochoruk@cormark.com Stephen Kammermayer, CFA Associate, (403) 750-7219; skammermayer@cormark.

.com MORNING MEETING NOTES SEPTEMBER 2, 2011

Recommendation: Top Pick Target Price: $23.00

Current Price 52 Wk High 52 Wk Low Net Debt (MM) BVPS Price/Book Dividend* Dividend Yield Fiscal YE Dec. 31 Revenue (MM) EBITDA (MM) $11.99 $16.26 $4.99 $(29.9) $4.01 3.0x $0.10 0.8% Shares Outstanding (MM) Basic 60.9 Fully Diluted 63.2 Mngt. & Dir. 12% Market Cap. (MM) $730.3 Float (MM) $663.8 EV (MM) $700.4 Net Debt/Total Cap. nmf 2010A $215.9 $89.7 $16.1 $3.3 $30.0 $40.2 41.5% $0.93 $0.25 $0.01 $0.28 $0.40 $1.00 nmf 6.1x 3.2x 2011E $346.9 $146.5 $48.0 $(3.1) $44.7 $56.9 42.2% $1.38 $0.48 $(0.11) $0.44 $0.57 $1.44 48% 8.7x 4.8x 2012E $505.0 $210.8 $69.6 $6.8 $63.8 $70.7 41.7% $2.06 $0.71 $(0.02) $0.64 $0.73 $2.11 49% 5.8x 3.3x

Canyon Services Group (FRC-TSX)

Built For The Long-Haul, Protected On The Downside

Unless otherwise denoted, all figures shown in C$

Investment Thesis: Canyon offers a wide-range of pressure pumping services with increased focus on deeper capacity and more technically challenging fracturing jobs in unconventional resources of western Canada. We believe the long-term outlook for Canyon is positive with the need for increased well stimulation services required to unlock unconventional resources. Highlights: Built For The Long-Haul, Protected On The Downside With increasing volatility in the equity markets (particularly for the energy service stocks, which have high beta), we believe Canyon offers investors a long-term investment opportunity, while providing protection on the downside given its balance sheet strength. We believe there are several macro trends that are working in Canyons favor as well as company specific factors that provide investors with a long-term investment opportunity with downside protection in the event of a downturn in activity levels, which we explore in further detail in the following report. We are rating Canyon a Top Pick with a $23.00 target price.

EBITDA Margin Diluted EPS (reported)

Adjusted EPS^ EPS y/y chg P/E EV/EBITDA

FY FY Q1 Q2 Q3 Q4 FY FY Q1 Q2 Q3 Q4 FY

A A

A A

* Annual ^ Earnings before stock-based compensation, tax effected.

Company Description:
Canyon is a western Canadian based oilfield service company specializing in pressure pumping services. It provides a full range of pressure pumping services including fracturing, acidizing, coiled tubing and remedial cementing.

Source: BigCharts.com, September 1, 2011

During the past twenty-four months, Cormark Securities Inc., either on its own or as a syndicate member, participated in the underwriting of securities for Canyon Services Group.
Our disclosure statements are located at the end of this report

Jeff Mochoruk, CFA, (403) 750-7207; jmochoruk@cormark.com Stephen Kammermayer, CFA Associate, (403) 750-7219; skammermayer@cormark.com MORNING MEETING NOTES SEPTEMBER 2, 2011 Built For The Long-Haul, Protected On The Downside: We believe there are several macro trends that are working in Canyons favor as well as company specific factors that provide investors with a long-term investment opportunity with downside protection, specifically; 1. A move down the resource triangle and changes in completion technology macro trend 2. Completion costs per well macro trend 3. International opportunities macro trend 4. Demand visibility macro trend 5. Modern fleet company specific attribute 6. Balance sheet company specific attribute 7. Valuation company specific attribute Macro Trends: 1. A move down the resource triangle and changes in completion technology: With the majority of the easy to produce oil and natural gas reserves having been developed, E&P companies are continuing to move down the resource triangle to harder and more complex reserves. As we move down the resource triangle, the cost to develop and produce these reserves increases, usually to the net benefit of the energy service companies. Generally advances in technology are required to move down the resource triangle and the biggest change the energy service sector has experienced over the past few years relates to well completion technology (i.e. packers plus, sliding sleeves) and multi-stage fracturing which has resulted in significant growth for the pressure pumping companies.
Figure 1: Resource Triangle

Source: Canadian society for Unconventional Gas

Our disclosure statements are located at the end of this report

Jeff Mochoruk, CFA, (403) 750-7207; jmochoruk@cormark.com Stephen Kammermayer, CFA Associate, (403) 750-7219; skammermayer@cormark.com MORNING MEETING NOTES SEPTEMBER 2, 2011 2. Completion costs per well: Generally wells costs fit into two categories a) drilling and b) completion. The increased costs associated with the move down the resource triangle has lifted the costs to E&P companies for both the drilling and completion of wells, however, the biggest increases have come on the completion side. Where completion costs used to amount to less than 10% of a well, increased horizontal drilling and multi-stage fracturing have seen completion costs climb to as high as 50% of a wells overall cost. 3. International opportunities Changes in the development of oil and natural gas reserves in North America moved quickly over the past few years as E&P companies have moved down the resource triangle into more unconventional resources with advances in technology. While we still expect the North American market to be the dominant market for pressure pumping services, we believe there will be increasing opportunities in international markets as other regions/countries move down the resource triangle. Such areas are likely to include Europe, and in particular Poland, South America (where several E&P companies are in the process of executing horizontal multi-stage fracturing programs in countries such as Argentina and Colombia) and Australia where its massive coal-seam-gas reserves (which are being developed to supply several LNG export terminals being developed) will likely require the use of pressure pumping services. 4. Demand visibility: Pressure pumping companies continue to have good visibility (normally a rarity in the North American energy services market) for their services well into 2012. Most pressure pumping companies operating in North America, including Canyon, indicated they are fully booked through Q1/12. With continued strong demand we are forecasting increased pricing levels, however, at a slower rate than in 2010. While many investors may discount the optimistic outlook that the pressure pumping companies are providing, we would point you in the direction of their customers, many of who are anxious to sign long-term contracts, even in the current market, to guarantee pressure pumping services. Most pressure pumping companies currently have 40-70% of their capacity under some type of long-term commitment and Canyon is no different with approximately 50% of its fleet under long-term commitment. Investors have been reluctant in the past to put much faith in these long-term contracts; however, we would be much more inclined to believe in the strength of them compared to the past. As we witnessed with the drillers in 2009, and much to the surprise of the investment community, the contracts they had in force provided a base level of EBITDA and earnings as the industry experienced a sharp drop in activity levels. Company Specific Attributes: 5. Modern fleet: Canyon operates one of the most modern fleets of pressure pumping equipment in Canada, with the majority of its equipment (150,000 Hp of 175,000 Hp) being added since the beginning of 2010. Why does this matter? The operating environment has changed significantly over the past several years for fracturing equipment, becoming much more demanding. Whereas in the past when vertical wells dominated the landscape, fracturing services on these wells typically required 1-2 hours of pumping services (i.e. the pump running for a sustained period) and even with the horizontal wells that were being fracture treated, they were typically operating for less than three hours for a sustained period. Now with horizontal wells and multi-stage fracturing dominating the landscape, fracturing pumps can run in excess of 8 hours during a 24-hour period. This along with higher pumping rates causes significantly more stress on the pumping unit. Most units manufactured prior to 2005, while

Our disclosure statements are located at the end of this report

Jeff Mochoruk, CFA, (403) 750-7207; jmochoruk@cormark.com Stephen Kammermayer, CFA Associate, (403) 750-7219; skammermayer@cormark.com MORNING MEETING NOTES SEPTEMBER 2, 2011 capable of operating in these environments, require significantly higher level of maintenance leading to increased downtime, higher costs and lower margins. 6. Balance sheet: Canyon offers a very strong balance sheet relative to its peers, providing it with significant flexibility and protection in the event of a drop in forecast activity levels. At the end of Q2/11, Canyon had $33 MM in cash and $1.6 MM in long-term debt related to equipment loans and leases. While we expect its cash position to decline over the remainder of 2011 as it completes its 2011 CAPEX program and makes progress payments on its planned 2012 CAPEX program, we still expect the company to be in a net cash position, with no long-term debt as it exits 2011. With the financial strength that Canyons balance sheet offers, it provides considerable flexibility and opportunities. If demand for pressure pumping services remain strong into 2012 (which we expect) Canyon could increase its 2012 CAPEX program, further adding to its asset base and its earnings and EBITDA generating ability. Alternatively, it could increase its dividend or embark on a share buyback program if management deems its shares are undervalued. 7. Valuation: Canyon currently trades at 3.3x our 2012 EBITDA estimate, the lowest amongst the pressure pumping companies and one of the cheapest on our coverage list. We highlight that if Canyon were to trade at a similar 2012 EBITDA multiples as the other pressure pumping companies it would imply a share price higher by approximately $1.80 or 15% from current levels. We do not believe this discount is warranted for Canyon given the points mentioned above and specifically its balance sheet (best among the pressure pumping peers) and its modern fleet which has aided in providing it with peer leading margins over the past several years.
Figure 2 Valuation Comparison
Current Basic Price S/O Company Canyon
($) (mm)

EV
($mm)

EPS 2011E 2012E

($) ($)

P/E 2011E 2012E

(x) (x)

EBITDA 2011E 2012E

($MM) ($MM)

EV/EBITDA 2011E 2012E

(x) (x)

$11.99

60.9

$700

$1.38

$2.06

8.7x 9.7x 13.4x 13.7x 13.4x

5.8x 8.2x 8.6x 8.2x 9.4x

$146

$211

4.8x 7.8x 6.4x 7.1x 6.9x

3.3x 3.8x 4.2x 4.1x 4.4x

Pressure Pumpers Average Oilfield Services Group Average Small Cap Average Large Cap Average

Sources: Cormark Securities Inc and Company Reports

With the recent pullback in the share price of Canyon we view the value that is much more compelling given our positive long-term outlook for the pressure pumping market. In addition to this Canyons solid balance sheet provides downside protection in the event of an industry downturn in activity. We are reiterating our Top Pick rating for the stock and $23.00 target price.
We, Jeff Mochoruk and Stephen Kammermayer, hereby certify that the views expressed in this research report accurately reflect our personal views about the subject company(ies) and its (their) securities. We also certify that we have not been, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report.

Our disclosure statements are located at the end of this report

Jeff Mochoruk, CFA, (403) 750-7207; jmochoruk@cormark.com Stephen Kammermayer, CFA Associate, (403) 750-7219; skammermayer@cormark.com MORNING MEETING NOTES SEPTEMBER 2, 2011

Our disclosure statements are located at the end of this report

MORNING MEETING NOTES SEPTEMBER 2, 2011

RECOMMENDATION TERMINOLOGY
Cormarks recommendation terminology is as follows: Top Pick our best investment ideas, the greatest potential value appreciation Buy expected to outperform its peer group Market Perform expected to perform with its peer group Reduce expected to underperform its peer group Our ratings may be followed by "(S)" which denotes that the investment is speculative and has a higher degree of risk associated with it. Additionally, our target prices are set based on a 12-month investment horizon.

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