CE Franklin Ltd. announces 2012 First Quarter Results

CALGARY, April 26, 2012 /PRNewswire/ - CE FRANKLIN LTD. (TSX.CFT, NASDAQ.CFK) reported net earnings of $7.9 million or $0.46 per share (basic) for the first quarter ended March 31, 2012, a significant increase from net earnings of $3.4 million or $0.19 per share (basic) generated in the first quarter ended March 31, 2011.

Financial Highlights

"Solid revenue growth, improved product margins and disciplined cost management lead to increased profitability.  Activity levels are expected to remain at prior year levels as strong oil and oilsands activity offsets softer gas activity," said Michael West, President and CEO.

Net earnings for the first quarter of 2012, were $7.9 million, an increase of $4.5 million (132%) from the first quarter of 2011.  Revenues were $160.3 million, an increase of $22.6 million (16%) from the first quarter of 2011. Despite well completions decreasing by 26% compared to the first quarter of 2011, both the capital project business and maintenance repair and operating ("MRO") revenues grew by $7.3 million and $15.1 million respectively year over year. The increase in capital projects revenue was driven by higher sales to oil and oilsands projects.  Increased MRO activity came from all areas of the business.  Spring break up arrived earlier than normal and dampened activity levels late in the quarter.  Gross profits increased by $7.1 million (32%) due to the increase in revenues and improved gross profit margins year over year. Average gross profit margins improved sequentially compared to the fourth quarter of 2011 and improved over the first quarter 2011 due to improved supply chain costs and increased volume rebate income arising from increased purchasing levels. Selling, general and administrative expenses increased by $0.8 million (5%) to $17.8 million for the quarter as compensation and operating costs have increased in response to higher revenue levels. The weighted average number of shares outstanding during the first quarter was consistent with the prior year period as the rise in share price during the last year has limited the activity occurring under the normal course issuer bid program. Net earnings per share (basic) was $0.46 in the first quarter of 2012, compared to net earnings of $0.19 per share in the first quarter of 2011.

Business Outlook
Oil and gas industry activity in 2012 is expected to remain at 2011 levels for the remainder of the year.  Natural gas prices remain depressed as North American production capacity and inventory levels continue to exceed demand.  Natural gas capital expenditure activity is focused on liquid rich gas plays and the Company is well positioned to service customers pursuing these gas plays.  Conventional and heavy oil economics are attractive at current price levels leading to continuing activity in on these plays.  Activity is especially strong in southeast Saskatchewan.  Oil sands project announcements are expected to continue with current oil price levels. Approximately 50% to 60% of the Company's total revenues are driven by our customers' capital expenditure requirements. CE Franklin's revenues are expected to increase modestly in 2012 through organic growth as the oil and gas industry activity levels remain relatively consistent with 2011 levels.

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 oilfield supply industry competition as industry activity levels remain below the five year average. The Company will continue to manage its cost structure to protect profitability while maintaining service capacity and advancing strategic 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.

Additional Information

Additional information relating to CE Franklin, including its first quarter 2012 Management Discussion and Analysis and interim consolidated financial statements and its Form 20-F / Annual Information Form, is available under the Company's profile on the SEDAR website at www.sedar.com and at www.cefranklin.com.

Conference Call and Webcast Information

A conference call to review the 2012 first quarter results, which is open to the public, will be held on Friday, April 27, 2012 at 11:00 a.m. Eastern Time (9:00a.m. Mountain Time).

Participants may join the call by dialing 1-647-427-7450 in Toronto or dialing 1-888-231-8191 at the scheduled time of 11:00 a.m. Eastern Time.  For those unable to listen to the live conference call, a replay will be available at approximately 2:00 p.m. Eastern Time on the same day by calling 1-416-849-0833 in Toronto or dialing 1-855-859-2056 and entering the Passcode of 63408715 and may be accessed until midnight May 3, 2012.

The call will also be webcast live at: http://www.newswire.ca/en/webcast/detail/938361/1004129 and will be available on the Company's website at http://www.cefranklin.com.

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.

About CE Franklin

For more than 75 years, CE Franklin has been a leading supplier of products and services to the energy industry.  CE Franklin distributes pipe, valves, flanges, fittings, production equipment, tubular products and other general oilfield supplies to oil and gas producers in Canada as well as to the oil sands, refining, heavy oil, petrochemical, forestry and mining industries.  These products are distributed through its 39 branches, which are situated in towns and cities serving particular oil and gas fields of the western Canadian sedimentary basin.

Forward-looking Statements: The information in this news release may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and other applicable securities legislation.  All statements, other than statements of historical facts, that address activities, events, outcomes and other matters that CE Franklin plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates or anticipates (and other similar expressions) will, should or may occur in the future are forward-looking statements.  These forward-looking statements are based on management's current belief, based on currently available information, as to the outcome and timing of future events.  When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements and refer to the Form 20-F or our annual information form for further detail.

The following is provided to assist readers in understanding CE Franklin Ltd.'s ("CE Franklin" or the "Company") financial performance and position during the periods presented and significant trends that may impact future performance of CE Franklin. This should be read in conjunction with the Company's condensed interim consolidated financial statements for the three month period ended March 31, 2012 and the MD&A and consolidated financial statements for the year ended December 31, 2011. All amounts are expressed in Canadian dollars and are in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"), except where otherwise noted.

Overview

CE Franklin is a leading distributor of pipe, valves, flanges, fittings, production equipment, tubular products and other general industrial supplies, primarily to the oil and gas industry in Canada through its 39 branches situated in towns and cities that serve oil and gas fields of the Western Canadian sedimentary basin. In addition, the Company distributes similar products to the oil sands, midstream, refining, petrochemical and non-oilfield related industries such as forestry and mining.

The Company's branch operations service over 3,000 customers by providing the right materials where and when they are needed, and for the best value.  Our branches, supported by our centralized Distribution Centre in Edmonton, Alberta, stock over 25,000 stock keeping units sourced from over 2,000 suppliers.  This infrastructure enables us to provide our customers with the products they need on a same day or overnight basis.  Our centralized inventory and procurement capabilities allow us to leverage our scale to enable industry leading hub and spoke purchasing, logistics and project execution capabilities. The branches are also supported by services provided by the Company's corporate office in Calgary, Alberta including sales, marketing, product expertise, logistics, invoicing, credit and collection, and other business services.

The Company's common shares trade on the TSX ("CFT") and NASDAQ ("CFK") stock exchanges.  Schlumberger Limited ("Schlumberger"), a major oilfield service company based in Paris, France, indirectly owns approximately 56% of the Company's shares.

Business Strategy

The Canadian oilfield equipment supply industry is highly competitive and fragmented.  There are approximately 230 oilfield supply stores in Canada which generate annual estimated sales of $2 billion to $3 billion.  CE Franklin competes with three other large oilfield product distributors and with numerous local and regional distributors as well as specialty equipment distributors and manufacturers.  The oilfield 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.

Oilfield equipment distributors compete based on price and level of service.  Service includes the ability to consistently provide required products 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 oilfield 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 ("MRO") requirements.  MRO demand tends to be relatively stable over time and predictable in terms of product and service requirements and typically comprises 40% to 50% of the Company's annual sales.  Capital project demand fluctuates over time with oil and gas commodity prices, which directly impacts 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 to 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 multi-site service capability, conducting larger capital projects, and requiring more sophisticated billing and project management services than do smaller customers.  The Company has entered into numerous alliances with larger customers where the scale and repeat nature of business enables efficiencies which are shared with the customer through lower profit margins.

Barriers to entry in the oilfield 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 requires multi-location branch operations, increased financial, procurement, product expertise and breadth of product lines, information systems and process capability, which significantly increases the barriers to entry.

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 oilfield and specialty equipment distributors for large alliance customers who are seeking multi-location, one stop shopping, and more comprehensive service.

The Company is pursuing the following strategies to grow 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, multi-location 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, oilfield engine maintenance, well optimization and onsite 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 our existing supply chain infrastructure, product, and major project expertise.
  
  
• Increase the resourcing of customer project sales quotation and order fulfillment services provided by our Distribution Centre to augment local branch capacity to address seasonal and project driven fluctuations in customer demand.  By doing so, we aim to increase our capacity flexibility and improve operating efficiency while providing consistent customer service.

Business Outlook

Oil and gas industry activity in 2012 is expected to remain at 2011 levels for the remainder of the year.  Natural gas prices remain depressed as North American production capacity and inventory levels continue to exceed demand.  Natural gas capital expenditure activity is focused on liquid rich gas plays and the Company is well positioned to service customers pursuing these gas plays.  Conventional and heavy oil economics are attractive at current price levels leading to continuing activity in on these plays.  Activity is especially strong in southeast Saskatchewan.  Oil sands project announcements continue at current oil price levels. Approximately 50% to 60% of the Company's total revenues are driven by our customers' capital expenditure requirements. CE Franklin's revenues are expected to increase modestly in 2012 through organic growth as the oil and gas industry activity levels remain relatively consistent with 2011 levels.

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 oilfield 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 strategic 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.

First Quarter Results

Net earnings for the first quarter of 2012, were $7.9 million, an increase of $4.5 million (132%) from the first quarter of 2011.  Revenues were $160.3 million, an increase of $22.6 million (16%) from the first quarter of 2011. Despite well completions decreasing by 26% compared to the first quarter of 2011, both the capital project business and maintenance repair and operating ("MRO") revenues grew by $7.3 million and $15.1 million respectively year over year. The increase in capital projects revenue was driven by higher sales to oil and oilsands projects.  Increased MRO activity came from all areas of the business.  Spring break up arrived earlier than normal and dampened activity levels late in the quarter.  Gross profits increased by $7.1 million (32%) due to the increase in revenues and improved gross profit margins year over year. Average gross profit margins improved sequentially compared to the fourth quarter of 2011 and improved over the first quarter 2011 due to improved supply chain costs and increased volume rebate income arising from increased purchasing levels. Selling, general and administrative expenses increased by $0.8 million (5%) to $17.8 million for the quarter as compensation and operating costs have increased in response to higher revenue levels. The weighted average number of shares outstanding during the first quarter was consistent with the prior year period as the rise in share price during the last year has limited the activity occurring under the normal course issuer bid program. Net earnings per share (basic) was $0.46 in the first quarter of 2012, compared to net earnings of $0.19 per share in the first quarter of 2011.

Revenues

Revenues for the quarter ended March 31, 2012, were $160.3 million, an increase of 16% from the quarter ended March 31, 2011.

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 oilfield 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.  Well completion, rig count and commodity price information for the three and three month periods ended March 31, 2012 and 2011 are provided in the table below.

Average statistics are shown except for well completions.

Sources: Oil and Gas prices - First Energy Capital Corp.; Rig count data - CAODC; Well completion data - Daily Oil Bulletin

Revenues from capital project related products were $83.5 million in the first quarter of 2012, an increase of 10% ($7.5 million) from the first quarter of 2011 due to increased oil and oil sands based sales. Total well completions decreased by 26% in the first quarter of 2012.  Gas well completions comprised 21% of the total wells completed in western Canada in the first quarter of 2012 compared to 43% in the first quarter 2011.  The average working rig count increased by 2% compared to the prior year period. Spot gas prices ended the first quarter at $2.14 per GJ (AECO) a decrease of 43% from first quarter 2011 average prices.  Oil prices ended the first quarter at $94.49 per bbl (Synthetic Crude) a decrease of 5% from the first quarter 2011 average. Depressed gas prices are expected to continue to negatively impact gas drilling and well completion activity over the remainder of 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.  Activity related to oil and oilsands activity remains strong and the Company is well positioned to support customers who are pursuing oil plays and more particularly tight oil plays.  Spring break up arrived in late March which dampened activity levels late in the quarter.

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 March 31, 2012 increased by $15.1 million (24%) to $76.8 million compared to the quarter ended March 31, 2011 and comprised 48% of the Company's total revenues (2011 - 45%) as both oil and gas MRO activities were strong in the quarter.

The Company's strategy is to grow profitability by focusing on its core western Canadian oilfield 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 these initiatives to date are provided below:

Revenues from oilfield products to conventional western Canada oil and gas end use applications were $120.3 million for the first quarter of 2012, backing out tubular product sales, year over year oilfield revenue was up 19.4%. This increase was driven by oil related capital projects and strong MRO demand.

Revenues from oil sands end use applications were $12.1 million in the first quarter, an increase of $2.1 million (21%) from the first quarter of 2011 reflecting the timing of project revenues. The Company continues to position its major project execution capability and the Fort McMurray branch to penetrate this emerging market for capital projects and MRO products.

Production service revenues were $7.8 million in the first quarter of 2012, a 53% increase from the $5.1 million of revenues in the first quarter of 2011, reflecting improved oil production economics resulting in increased customer maintenance activities.

Gross profit was $29.4 million in the first quarter of 2012, an increase of $7.1 million (32%) from the first quarter of 2011 due to increased revenues and average gross profit margins compared to the prior year period. Gross profit margins for the quarter were improved due to improved supply chain costs and recognition of higher volume rebate income due to higher purchasing levels.  Increased pipe flanges and fittings gross profit composition was due to improved gross profit margins.  Other gross profit composition categories were impacted by having more sales to our larger lower margin customers.  The decrease in tubular gross profit composition reflects larger lower margin sales and the disposal of surplus tubular inventory.

SG&A costs increased $0.8 million (5%) in the first quarter of 2012 from the prior year period and represented 11% of revenues compared to 12% in the prior year period. The $0.8 million increase in expenses was attributable to higher incentive and selling costs reflecting the improved performance of the business year over year.

Depreciation Expense

Depreciation expense of $0.6 million in the first quarter of 2012 was comparable to the first quarter of 2011.

Interest Expense

Interest expense was minimal in the first quarter of 2012 and was lower than the prior year due to lower borrowing levels.

Foreign Exchange and other

Foreign exchange and other in the quarter was a loss of $0.3 million as the Canadian dollar strengthened which increased the translation loss from US denominated net working capital assets.  The Company recognized a $0.3 million unrealized foreign exchange loss on $11.6 million of foreign currency forward contracts it had outstanding at quarter end.  As at March 31, 2012, a one percent change in the Canadian dollar relative to the US dollar would decrease or increase the Company's annual net income by approximately $0.1 million.

Income Tax Expense

The Company's effective tax rate for the first quarter of 2012 was 25.5% down from a 26.5% effective rate in the first quarter 2011. The current effective tax rate is lower than the prior year due to lower statutory rates.

Summary of Quarterly Financial Data

The selected quarterly financial data below is presented in Canadian dollars and in accordance with IFRS.  This information is derived from the Company's unaudited quarterly financial statements.

The Company's sales levels are affected by weather conditions.  As warm weather returns in the spring each year, the winter's frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until they have dried out.  In addition, many exploration and production areas in northern Canada are accessible only in the winter months when the ground is frozen.  As a result, the first and fourth quarters typically represent the busiest time for oil and gas industry activity and the highest oilfield sales activity for the Company.  Oilfield sales levels drop dramatically during the second quarter until such time as roads have dried and road bans have been lifted. This typically results in a significant reduction in earnings during the second quarter, as the decline in sales typically outpaces the decline in SG&A costs as the majority of the Company's SG&A costs are fixed in nature.  Net working capital (defined as current assets less cash and cash equivalents, accounts payable and accrued liabilities, current taxes payable, note payable and other current liabilities) and borrowing levels follow similar seasonal patterns as sales.

Liquidity and Capital Resources

The Company's primary internal source of liquidity is cash flow from operating activities before changes in non-cash net working capital balances.  Cash flow from operating activities and the Company's $60.0 million revolving term credit facility are used to finance the Company's net working capital, capital expenditures and acquisitions.

As at March 31, 2012, the Company had $3.6 million of cash on hand and had no long term debt. Cash decreased by $12.2 million from December 31, 2011 as the Company generated $9.7 million of cashflow from operating activities, before net changes in non-cash working capital balances. Net working capital increased by $22.0 million in the quarter.  Capital expenditures in the quarter amounted to $0.3 million.  Nominal activity occurred under the Company's Normal Course Issuer bid ("NCIB") program.  Subsequent to quarter end, the Company terminated its NCIB program for this year.

As at March 31, 2011, the Company had $3.2 million of cash and cash equivalents and no borrowings under its revolving term credit facility, a net decrease of $9.4 million from December 31, 2010.  Borrowing levels have decreased due to the Company generating $4.4 million in cash flow from operating activities, before net changes in non-cash working capital balances of a $5.6 million reduction in net working capital.  This was offset by $0.5 million in capital and other expenditures and $0.2 million for the purchase of shares to resource share unit plan obligations and the repurchase of shares under the NCIB program.

Net working capital was $137.8 million at March 31, 2012, an increase of $21.0 million from December 31, 2011. Accounts receivable at March 31, 2012 was $103.9 million, an increase of $5.7 million (5.8%) from December 31, 2011, due to the 4% increase in first quarter sales compared to the fourth quarter of 2011.  Days sales outstanding in accounts receivable ("DSO") at the end of the first quarter of 2012 was 52 days which is consistent with where the fourth quarter of 2011 ended.  DSO is calculated using average sales per day for the quarter compared to the period end customer accounts receivable balance.  Inventory at March 31, 2012 was $113.1 million, up $1.4 million (1.3%) from December 31, 2011.  Inventory turns at the end of the first quarter of 2012 were 4.6 turns were consistent with the fourth quarter of 2011.  Inventory turns are calculated using cost of goods sold for the quarter on an annualized basis, compared to the period end inventory balance.  Accounts payable and accrued liabilities at March 31, 2012 were $79.9 million, a decrease of $13.7 million (15%) compared to the fourth quarter of 2011.

Capital expenditures in Q1 2012 were $0.3 million, an increase of $0.2 million (49%) from Q4 2011 expenditures. Expenditures in 2012 were directed towards facility expansion and maintenance, business system expansion and vehicles and operating equipment.  The majority of the expenditures in Q1 2012 were directed towards similar items as they were in 2011. Capital expenditures in 2012 are anticipated to be in the $4.0 million to $5.0 million range and will be directed towards business system, branch facility, vehicle and operating equipment upgrades and replacements.

In July 2011, the Company renewed its $60.0 million revolving term credit facility that matures in July 2014 (the "Credit Facility").   Borrowings under the Credit Facility bear interest based on floating interest rates and are secured by a general security agreement covering all assets of the Company.  The maximum amount available under the Credit Facility is subject to a borrowing base formula applied to accounts receivable and inventories. The Credit Facility requires the Company to maintain the ratio of its debt to debt plus equity at less than 40%.  As at December 31, 2011, this ratio was 0%.  The Company must also maintain coverage of its net operating cash flow as defined in the Credit Facility agreement over interest expense for the trailing twelve month period of greater than 1.25 times.  As at March 31, 2012, this ratio was 51.3 times.  The Credit Facility contains certain other covenants with which the Company is in compliance.  As at March 31, 2012, the Company had no borrowings under the facility and had available undrawn borrowing capacity of $60.0 million under the Credit Facility.

Contractual Obligations

There have been no material changes in off-balance sheet contractual commitments since December 31, 2011.

Capital Stock

As at March 31, 2012 and 2011, the following shares and securities convertible into shares were outstanding:

The weighted average number of shares outstanding during the first quarter of 2012 was 17.4 million, which was consistent with the prior year period as the rise in the Company's share price during the last year has limited the activity occurring under the normal course issuer bid program. The diluted weighted average number of shares outstanding was 18.1 million, which is also consistent with the prior year quarter.

The Company has established an independent trust to purchase common shares of the Company on the open market to resource share unit plan obligations. During the three month period ended March 31, 2012, nil common shares were purchased by the trust (March 31, 2011 - 25,000 common shares at an average cost of $8.75 per share). As at March 31, 2012, the trust held 566,277 shares (March 31, 2011 - 462,753).

On December 20, 2011, the Company announced the renewal of the NCIB effective January 3, 2012, to purchase up to 850,000 common shares through the facilities of NASDAQ, representing approximately 5% of its outstanding common shares.  During the three month period ended March 31, 2012, the Company purchased 8,625 shares at an average cost of $8.11 (March 31, 2011: 3,102 shares purchased at an average cost of $7.56).

Subsequent to the quarter end, the Company has cancelled its NCIB program.  At the time the program was cancelled, the Company had acquired 9,225 shares at an average cost of $8.59 per share.

Critical Accounting Estimates

There have been no material changes to critical accounting estimates since December 31, 2011. The Company is not aware of any environmental or asset retirement obligations that could have a material impact on its operations.

Subsequent Events

Subsequent to March 31, 2012, the Company announced that the Board of Directors and the Special Committee of the Board of Directors have decided it is in the best interest of CE Franklin and all shareholders to formally commence a strategic review process.  Further to the announcement of a Strategic Review Process, the Company adopted a Shareholders' Rights Plan to ensure that, in the context of a bid for control of CE Franklin, the Board of Directors would have sufficient time to consider the bid and conduct the Strategic Review Process.  Additionally, the Shareholders' Rights Plan gives shareholders an equal opportunity to participate in such a bid; and gives them adequate time to properly assess the bid.  The Shareholders' Rights Plan is not intended to and will not prevent a sale of CE Franklin.

Controls and Procedures

Internal control over financial reporting ("ICFR") is designed to provide reasonable assurance regarding the reliability of the Company's financial reporting and its compliance with IFRS in its financial statements. The President and Chief Executive Officer and the Vice President and Chief Financial Officer of the Company have evaluated whether there were changes to its ICFR during the three months ended March 31, 2012 that have materially affected or are reasonably likely to materially affect the ICFR. No such changes were identified through their evaluation.

Risk Factors

The Company is exposed to certain business and market risks including risks arising from transactions that are entered into the normal course of business, which are primarily related to interest rate changes and fluctuations in foreign exchange rates. During the reporting period, no events or transactions since the year ended December 31, 2011 have occurred that would materially change the business and market risk information disclosed in the Company's Form 20F.

Forward Looking Statements

The information in the MD&A may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, that address activities, events, outcomes and other matters that CE Franklin plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates or anticipates (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements are based on management's current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this MD&A, including those in under the caption "Risk Factors".

Forward-looking statements appear in a number of places and include statements with respect to, among other things:

• forecasted oil and gas industry activity levels in 2012 and beyond;
  
  
• planned capital expenditures and working capital and availability of capital resources to fund capital expenditures and working capital;
  
  
• the Company's future financial condition or results of operations and future revenues and expenses;
  
  
• the outcome of the Company's strategic review process
  
  
• the Company's business strategy and other plans and objectives for future operations;
  
  
• fluctuations in worldwide prices and demand for oil and gas;
  
  
• fluctuations in the demand for the Company's products and services.

Should one or more of the risks or uncertainties described above or elsewhere in this MD&A occur, or should underlying assumptions prove incorrect, the Company's actual results and plans could differ materially from those expressed in any forward-looking statements.

All forward-looking statements expressed or implied, included in this MD&A and attributable to CE Franklin are qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that CE Franklin or persons acting on its behalf might issue. CE Franklin does not undertake any obligation to update any forward-looking statements to reflect events or circumstance after the date of filing this MD&A, except as required by law.

Additional Information

Additional information relating to CE Franklin, including its first quarter 2012 Management Discussion and Analysis and interim consolidated financial statements and its Form 20-F / Annual Information Form, is available under the Company's profile on the SEDAR website at www.sedar.com and at www.cefranklin.com.

CE Franklin Ltd.

Notes to Condensed Interim Consolidated Financial Statements - Unaudited

(Tabular amounts in thousands of Canadian dollars, except share and per share amounts)

1. General information

CE Franklin Ltd. (the "Company") is headquartered and domiciled in Calgary, Alberta, Canada. The Company is an indirect subsidiary of Schlumberger Limited, a global energy services company. The address of the Company's registered office is 1800, 635 8^th Ave SW, Calgary, Alberta, Canada and it is incorporated under the Alberta Business Corporations Act. The Company is a distributor of pipe, valves, flanges, fittings, production equipment, tubular products and other general industrial supplies primarily to the oil and gas industry through its 39 branches situated in towns and cities that serve oil and gas fields of the Western Canadian sedimentary basin. In addition, the Company distributes similar products to the oil sands, refining and petrochemical industries and non-oilfield related industries such as forestry and mining.

2. Basis of preparation and accounting policies

Basis of preparation

These condensed interim consolidated financial statements for the three months ended March 31, 2012 have been prepared in accordance with IAS 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB").  These condensed interim consolidated financial statements should be read in conjunction with the annual financial statements for the year ended December 31, 2011, which have been prepared in accordance with International Financial Reporting Standards ("IFRS").

Accounting policies

The accounting policies adopted are consistent with those of the previous financial year.

3. Cash and cash equivalents

Cash is held at a major Canadian chartered bank.

4. Accounts receivable

A substantial portion of the Company's accounts receivable balance is with customers within the oil and gas industry and is subject to normal industry credit risks. Concentration of credit risk in trade receivables is limited as the Company's customer base is large and diversified. The Company follows a program of credit evaluations of customers and limits the amount of credit extended when deemed necessary.

The Company has established procedures in place to review and collect outstanding receivables. Significant outstanding and overdue balances are reviewed on a regular basis and resulting actions are put in place on a timely basis. Appropriate provisions are made for debts that may be impaired on a timely basis.

The Company maintains an allowance for possible credit losses that are charged to selling, general and administrative expenses by performing an analysis of specific accounts.

5. Inventories

The Company maintains net realizable value allowances against slow moving, obsolete and damaged inventories that are charged to cost of goods sold on the statement of earnings. These allowances are included in the inventory value disclosed above. Movement of the allowance for net realizable value is as follows:

6. Taxation

The difference between the income tax provision recorded and the provision obtained by applying the combined federal and provincial statutory rates is as follows:

As at March 31, 2012, income taxes payable was $1.6 million (December 31, 2011 - $1.7 million payable). Income tax expense is based on management's best estimate of the weighted average annual income tax rate expected for the full financial year.

Deductible temporary differences are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized.

7. Accounts payable and accrued liabilities

8. Note payable

In July of 2011, the Company renewed its $60.0 million revolving term credit facility that matures in July 2014.  Borrowings under the credit facility bear interest based on floating interest rates and are secured by a general security agreement covering all assets of the Company. The maximum amount available under the credit facility is subject to a borrowing base formula applied to accounts receivable and inventories. The credit facility requires that the Company maintains the ratio of its debt to debt plus equity at less than 40%. As at March 31, 2012, this ratio was nil (December 31, 2011 - nil). The Company must also maintain coverage of its net operating cash flow as defined in the credit facility agreement, over interest expense for the trailing twelve month period, at greater than 1.25 times. As at March 31, 2012, this ratio was 51.3 times (December 31, 2011 - 34.5 times).  The credit facility contains certain other covenants, with which the Company is in compliance and has been for the comparative periods. As at March 31, 2012, the Company had borrowed nil and had available undrawn borrowing capacity of $60.0 million under the credit facility. In management's opinion, the Company's available borrowing capacity under its Credit Facility and ongoing cash flow from operations, are sufficient to resource its ongoing obligations.

The JEN Supply note payable is unsecured and bears interest at the floating Canadian bank prime rate and is repayable in November 2012.

9. Capital management

The Company's primary source of capital is its shareholders' equity and cash flow from operating activities before net changes in non-cash working capital balances. The Company augments these capital sources with a $60 million, revolving bank term loan facility maturing in July 2014 (see Note 8) which is used to finance its net working capital and general corporate requirements. The Company's objective is to maintain adequate capital resources to sustain current operations including meeting seasonal demands of the business and the economic cycle.  The Company's capital is summarised as follows:

Net working capital is defined as current assets less cash and cash equivalents, accounts payable and accrued liabilities, current taxes payable, note payable and other current liabilities.

10. Related party transactions

Schlumberger indirectly owns approximately 56% of the Company's outstanding shares. The Company is the exclusive distributor in Canada of downhole pump production equipment manufactured by Wilson Supply, a division of Schlumberger. Purchases of such equipment conducted in the normal course on commercial terms were as follows:

11. Capital Stock

a) The Company has authorized an unlimited number of common shares with no par value. As at March 31, 2012, the Company had 17.5 million common shares, 0.7 million stock options and 0.7 million share units outstanding.

b) The Board of Directors may grant options to purchase common shares to substantially all employees, officers and directors and to persons or corporations who provide management or consulting services to the Company.  The exercise period and the vesting schedule after the grant date are not to exceed 10 years.

Option activity for each of the three month periods ended March 31 was as follows:

Stock based compensation expense recorded for the three month period ended March 31, 2012 was $2,000 (2011 - $67,000) and is included in selling, general and administrative expenses on the consolidated statement of earnings and comprehensive income.  No options were granted during the three month period ended March 31, 2012. Options vest one third or one fourth per year from the date of grant.

c) Share Unit Plans

The Company has Restricted Share Unit ("RSU"), Performance Share Unit ("PSU") and Deferred Share Unit ("DSU") plans (collectively the "Share Unit Plans"), whereby RSUs, PSUs and DSUs are granted entitling the participant, at the Company's option, to receive either a common share or cash equivalent in exchange for a vested unit. For the PSU plan the number of units granted is dependent on the Company meeting certain return on net asset ("RONA") performance thresholds during the year of grant. The multiplier within the plan ranges from 0% - 200% dependent on performance. RSU and PSU grants vest one third per year over the three year period following the date of the grant. DSUs vest on the date of grant and can only be redeemed when the Director resigns from the Board.  Compensation expense related to the units granted is recognized over the vesting period based on the fair value of the units at the date of the grant and is recorded to contributed surplus.  The contributed surplus balance is reduced as the vested units are exchanged for either common shares or cash. During the three month period ended March 31, 2012 the fair value of the RSU, PSU and DSU units granted was $1,660,000 (2011 - $1,830,000) and $383,000 of compensation expense was recorded (2011 - $358,000).

The Company has established an independent trust to purchase common shares of the Company on the open-market to satisfy Share Unit Plan obligations. The Company's intention is to settle all share based obligations with shares delivered from the trust. The trust is considered to be a special interest entity and is consolidated in the Company's financial statements with the cost of the shares held in trust reported as a reduction to capital stock.  For the three month period ended March 31, 2012, nil common shares were purchased by the trust (2011 - 25,000 common shares at an average cost of $8.75 per share).  As at March 31, 2012, the trust held 566,277 shares (2011 - 462,753).

d) Normal Course Issuer Bid ("NCIB")

On December 20, 2011, the Company announced the renewal of the NCIB effective January 3, 2012, to purchase up to 850,000 common shares through the facilities of NASDAQ, representing approximately 5% of its outstanding common shares.  During the three month period ended March 31, 2012, the Company purchased 8,625 shares at an average cost of $8.11 (2011: 3,102 shares purchased at an average cost of $7.56).

Subsequent to the quarter end, the Company has cancelled its NCIB program.  At the time the program was cancelled, the Company had acquired 9,225 shares at an average cost of $8.59 per share.

12. Earnings per share

Basic

Basic earnings per share is calculated by dividing the net income attributable to shareholders by the weighted average number of ordinary shares in issue during the year.

Dilutive

Diluted earnings per share are calculated using the treasury stock method, as if RSUs, PSUs, DSUs and stock options were exercised at the beginning of the year and funds received were used to purchase the Company's common shares on the open market at the average price for the year.

13. Financial instruments

a) Fair values

The Company's financial instruments recognized on the consolidated statements of financial position consist of accounts receivable, accounts payable and accrued liabilities and note payable. The fair values of these financial instruments approximate their carrying amounts due to their short-term maturity.

b) Credit Risk is described in Note 4.

c) Market Risk and Risk Management

The Company's long term debt bears interest based on floating interest rates. As a result the Company is exposed to market risk from changes in the Canadian prime interest rate which can impact its borrowing costs. Based on the Company's borrowing levels as at March 31, 2012, a change of one percent in interest rates would decrease or increase the Company's annual net income by nil.

From time to time the Company enters into foreign exchange forward contracts to manage its foreign exchange market risk by fixing the value of its liabilities and future commitments. The Company is exposed to possible losses in the event of non-performance by counterparties. The Company manages this credit risk by entering into agreements with counterparties that are substantially all investment grade financial institutions. The Company's foreign exchange risk arises principally from the settlement of United States dollar dominated net working capital balances as a result of product purchases denominated in United States dollars. As at March 31, 2012, the Company had contracted to purchase US$11.6 million at fixed exchange rates with terms not exceeding two months (December 31, 2011 - $18.3 million). The fair market values of the contracts were a loss of $0.3 million at March 31, 2012 (a gain of $0.2 million at December 31, 2011). The Company recorded on these contracts an unrealized loss of $0.3 million for the three months ended March 31, 2012, which has been recorded in foreign exchange loss and other in the condensed interim consolidated statements of earnings and comprehensive income.  As at March 31, 2012, a one percent change in the Canadian dollar relative to the US dollar would decrease or increase the Company's annual net income by $0.1 million.

14. Selling, general and administrative ("SG&A") Costs

Selling, general and administrative costs for the three month period ended March 31 are as follows:

15. Segmented reporting

The Company distributes oilfield products principally through its network of 39 branches located in western Canada primarily to oil and gas industry customers.  Accordingly, the Company has determined that it operates through a single operating segment and geographic jurisdiction.

16. Seasonality

The Company's sales levels are affected by weather conditions. As warm weather returns in the spring each year, the winter's frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until they have dried out. In addition, many exploration and production areas in northern Canada are accessible only in the winter months when the ground is frozen. As a result, the first and fourth quarters typically represent the busiest time for oil and gas industry activity and the highest sales activity for the Company. Revenue levels drop dramatically during the second quarter until such time as roads have dried and road bans have been lifted. This typically results in a significant reduction in earnings during the second quarter, as the decline in revenues typically outpaces the decline in SG&A costs as the majority of the Company's SG&A costs are fixed in nature. Net working capital (defined as current assets less cash and cash equivalents, accounts payable and accrued liabilities, income taxes payable and other current liabilities) and bank revolving loan borrowing levels follow similar seasonal patterns as revenues.

17. Subsequent events

Subsequent to March 31, 2012, the Company announced that the Board of Directors and the Special Committee of the Board of Directors have decided it is in the best interest of CE Franklin and all shareholders to formally commence a strategic review process.  Further to the announcement of a Strategic Review Process, the Company adopted a Shareholders' Rights Plan to ensure that, in the context of a bid for control of CE Franklin, the Board of Directors would have sufficient time to consider the bid and conduct the Strategic Review Process.  Additionally, the Shareholders' Rights Plan gives shareholders an equal opportunity to participate in such a bid; and gives them adequate time to properly assess the bid.  The Shareholders' Rights Plan is not intended to and will not prevent a sale of CE Franklin.

SOURCE CE Franklin Ltd.