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Trinidad Energy Services Income Trust announces fourth quarter and year end results - December 31, 2006

    TSX SYMBOL: TDG.UN

    CALGARY, March 1 /CNW/ - The following is management's discussion and
analysis ("MD&A") concerning the operating and financial results for the three
and twelve months ended December 31, 2006 and its outlook based on information
available as at February 20, 2007. The MD&A is based on the Trinidad Energy
Services Income Trust (the "Trust" or "Trinidad") consolidated financial
statements for the year ended December 31, 2006 which were prepared in
accordance with Canadian generally accepted accounting principles. The
following discussion should be read in conjunction with the consolidated
financial statements and attached notes contained in this report. Additional
information is also available on the Trust's website(www.trinidaddrilling.com)
and all previous public filings, including the most recently filed Annual
Report and Annual Information Form, which are available through SEDAR
(www.sedar.com).FINANCIAL HIGHLIGHTS

    For the years ended December 31,
    (thousands except unit
     and per unit data)                       2006         2005         2004
    -------------------------------------------------------------------------
    Revenue                                579,855      288,332      138,477
    Gross margin(1)                        269,584      120,415       56,827
    EBITDA(1)                              210,319       91,116       42,803
      Per unit (diluted)                      2.48         1.52         1.14
    EBITDA before unit based
     compensation(1)                       217,424       94,319       42,973
      Per unit (diluted)                      2.57         1.57         1.15
    Funds flow before change in
     non-cash working capital(1)           196,924       87,299       38,906
      Per unit (diluted)                      2.33         1.45         1.04
    Distributions paid and declared        105,475       51,905       23,698
    Distributions paid and declared
     per unit (basic)                         1.27         0.88         0.64
    Payout ratio(2)                             54%          59%          61%
    Net earnings                           123,706       47,427       20,790
      Per unit (basic)                        1.49         0.81         0.56
      Per unit (diluted)                      1.46         0.79         0.55
    Net earnings before unit
     based compensation                    130,811       50,630       20,960
      Per unit (diluted)                      1.55         0.84         0.56
    Units outstanding - basic
     (weighted average)(3)              83,078,833   58,850,122   36,833,388
    Units outstanding - diluted
     (weighted average)(3)              84,644,439   60,134,317   37,513,167

    (1) Readers are cautioned that gross margin, EBITDA and funds flow before
        change in non-cash working capital and the related per unit
        information do not have a standardized meaning prescribed by GAAP and
        therefore may not be comparable to similar measures presented by
        other issuers; however, the Trust does compute gross margin, EBITDA
        and funds flow before change in non-cash working capital on a
        consistent basis for each reporting period. EBITDA refers to earnings
        of the Trust before interest, taxes, depreciation and amortization
        and gain or loss on investment in long-term assets and funds flow
        before change in non-cash working capital refers to the amount of
        cash that is expected to be available for distribution to
        unitholders. Funds flow before change in non-cash working capital has
        replaced the term cash flow before change in non-cash working capital
        as shown in previous filings.
    (2) Payout ratio is calculated as distributions paid and declared divided
        by funds flow before changes in non-cash working capital.
    (3) Basic and diluted units outstanding include trust units to be issued
        upon conversion of exchangeable shares.



    OPERATING HIGHLIGHTS

    For the years ended December 31,          2006         2005         2004
    -------------------------------------------------------------------------
    Operating days - drilling
      Canada                                12,531       12,298        7,829
      United States                          7,046          272            -
    Rate per drilling day (CDN $)
      Canada                                24,191       20,783       16,922
      United States                         23,724       22,782            -
    Utilization rate - drilling
      Canada                                    62%          64%          66%
      United States                             84%          85%           -
    CAODC industry average                      55%          59%          53%
    Number of drilling rigs
      Canada                                    60           54           51
      United States                             31           17            -
    Utilization rate for service rigs           62%          61%          54%
    Number of service rigs                      18           16            8
    Number of coring and surface casing rigs    17           18            -FORWARD-LOOKING STATEMENTS

    The MD&A contains certain forward-looking statements relating to the
Trust's plans, strategies, objectives, expectations and intentions.
Expressions such as "anticipate", "expect", "project", "believe", "estimate",
and "forecast" should be used to identify these forward-looking statements.
The Trust believes that the expressions reflected in those forward-looking
statements are reasonable; however, such statements are subject to a number of
known and unknown risks, uncertainties and other factors that may cause actual
results to differ materially from those anticipated in our forward-looking
statements. These statements speak only as of the date of the MD&A and the
Trust does not intend, and does not assume any obligation, to update these
forward-looking statements.

    NON-GAAP MEASURES

    This MD&A contains references to the term "funds flow before change in
non-cash working capital" to refer to the amount of cash that is expected to
be available for distribution to unitholders, the term "EBITDA" to refer to
earnings of the Trust before interest, taxes, depreciation and amortization
and gain or loss on investment in long-term assets and the term "Gross Margin"
to refer to revenue less operating expenses, which the Trust believes are
measures followed by the investment community and therefore provide useful
information. The terms "funds flow before change in non-cash working capital"
and "EBITDA" are not measures recognized by Generally Accepted Accounting
Principles ("GAAP") and do not have standardized meanings prescribed by GAAP
and accordingly may not be comparable to similar measures presented by other
companies. However, the Trust computes "funds flow before change in non-cash
working capital" and "EBITDA" on a consistent basis for each reporting period.

    OVERVIEW

    In 2005 Trinidad's operations were primarily focused in the deeper
drilling sector of the Western Canadian Sedimentary Basin. In order to
increase the stability of the overall funds flow the Trust began the process
of strategically diversifying its operations into the US. This commenced with
the announcement of the Trust's commitment to construct an additional 29
drilling rigs of which 17 were to be deployed in the US, all backed by
long-term take-or-pay contracts. These long-term contracts along with the
acquisition of Cheyenne Drilling at the end of 2005 created a stable drilling
base in the US. Throughout 2006 an additional 10 rigs were released into the
US market under the rig construction program and Cheyenne Drilling deployed
two rigs that were under construction at the time of acquisition and two
inactive rigs were refurbished and placed into operations. This significantly
increased the rig count in the US from 17 at the end of 2005 to 31 at the end
of 2006, an increase of 82.4% in a market which typically operates at
utilization rates of 85%. Additionally, the fully functional drilling fleet in
the US for the entire year produced significantly higher revenues and funds
flow throughout the period.
    The second dramatic change in the Trust's operations throughout the year
was the acquisition of Mastco Derrick Services Ltd. ("Mastco"), a company with
the expertise to design, manufacture, sell and refurbish drilling rigs and
related equipment. This acquisition provided Trinidad with increased
flexibility over the current rig construction program providing an improved
ability to control the delivery schedule of its rigs. As a result of this, six
Canadian rigs were completed and put into operations throughout 2006 and the
remainder are expected to be delivered in the first and second quarter of
2007. The integration of Mastco into the Trust's operations also improves the
Trust's ability to complete required repairs and maintenance and
recertifications.
    Activity levels slowed in the Canadian market throughout 2006 as a result
of declines in commodity prices and concerns over high storage levels.
Trinidad has been able to mitigate the impact of these reductions through a
focus on longer term contracts and its US diversification which resulted in
overall utilization levels exceeding industry averages throughout the year.
Furthermore, the Trust continues to focus its efforts on the deeper drilling
market which is less impacted by seasonal fluctuations and commodity price
volatility. Despite a slower market the Trust has continued to grow in both
revenue and funds flow due to increases in the Trust's drilling capacity and
increased day rates across the market.RESULTS FROM OPERATIONS

    Canadian Drilling Operations

    For the years ended December 31,
    (thousands)                               2006         2005     % Change
    -------------------------------------------------------------------------
    Revenue                                364,278      282,938        28.7
    Operating expense                      196,665      164,701        19.4
                                     ----------------------------------------
    Gross margin                           167,613      118,237        41.8
                                     ----------------------------------------
    Gross margin percentage                   46.0%        41.8%

    Operating days - drilling               12,531       12,298         1.9
    Rate per drilling day (CDN $)           24,191       20,783        16.4
    Utilization rate - drilling                 62%          64%       (3.1)
    CAODC industry average                      55%          59%       (6.8)
    Number of drilling rigs                     60           54        11.1

    Utilization rate - well servicing           62%          61%        1.6
    Number of service rigs                      18           16        12.5
    Number of coring and surface rigs           17           18        (5.6)Reduced activity levels throughout the Canadian drilling sector continued
to be an issue as commodity prices declined from record highs in 2005 to more
stable levels in 2006. These weakening conditions affected the overall
utilization across the sector with reductions in the utilization rates from
59% in 2005 to 55% in 2006, a level more consistent with usual seasonal
patterns. Despite the reduction in overall utilization, Trinidad was able to
minimize the impact of this slow down by focusing on the deeper drilling
market which is less impacted during softer market conditions and execution of
long-term contracts with oil and gas producers. This allowed the Trust to
continue to exceed industry utilization levels by 12.7% despite slight
reductions year-over-year. As a result overall revenues in the Canadian
drilling market continued to grow and increased by 28.7% to $364.3 million in
2006.
    The acquisition of Mastco in the first quarter of 2006 facilitated the
expansion of the Trust's Canadian drilling fleet from 54 rigs at the end of
2005 to 60 rigs at the end of 2006. The expansion of the rig fleet and
increases in day rates contributed to overall growth in revenue throughout the
period. The acquisition of Summit Energy Services in the third quarter of 2005
continues to provide additional depth in the well servicing sector increasing
overall revenue and utilization levels throughout the period. Finally, the
increased involvement of the surface and coring operations in the oil sands
projects throughout 2006 generated revenue growth.
    Operating expenses in the Trust's Canadian drilling operations increased
by $32.0 million, from $164.7 million in 2005 to $196.7 million in 2006.
Consolidated gross margin percentages also increased from 41.8% to 46.0% as
increased depth capacity of the Trust's fleet throughout 2006 produced
increased work at higher margins. Furthermore the execution of long-term
contracts has allowed for increased growth in margin levels. Throughout 2005
several of the Trust's well servicing rigs were relocated from Lloydminster
where they were predominately focused on maintenance and workover services to
Grande Prairie where they focused on higher margin completions work. This
relocation allowed the Trust to benefit from higher margin work throughout
2006 positively impacting margins throughout the period. Finally, the surface
casing and coring division's involvement in oil sands projects generated more
revenue at higher margins in 2006.United States Drilling Operations

    For the years ended December 31,
    (thousands)                               2006         2005     % Change
    -------------------------------------------------------------------------
    Revenue                                166,498        5,394      2,986.7
    Operating expense                       77,676        3,216      2,315.3
                                     ----------------------------------------
    Gross margin                            88,822        2,178      3,978.1
                                     ----------------------------------------
    Gross margin percentage                   53.3%        40.4%

    Operating days - drilling                7,046          272      2,490.4
    Rate per drilling day (CDN $)           23,724       22,782          4.1
    Utilization rate - drilling                 84%          85%        (1.2)
    Number of drilling rigs                     31           17         82.4Growth of the US drilling operations throughout the 2006 fiscal year was
instrumental in achieving stability of the Trust's funds flow throughout the
year and increasing the capability of the Trust to meet the needs of oil and
gas producers on a more comprehensive basis. The strategic decision to expand
geographically into a region that is uninterrupted by the seasonal conditions
present in the Canadian marketplace resulted in utilization levels in the US
marketplace of 84% through the year on an expanded drilling fleet which
totaled 31 rigs at year-end. In 2005 the Trust announced its intent to
construct a total of 29 drilling rigs, of which 17 were to be deployed into
the US market and backed by long-term take-or-pay contracts. By the end of the
2006 fiscal year, 11 of these rigs had been put into operations expanding the
drilling capacity and significantly increasing revenues throughout the period.
Furthermore, the acquisition of Cheyenne Drilling at the end of 2005 provided
the Trust with 10 days of revenue on a fleet of 16 rigs. The Trust reaped the
benefits of having this fully functional drilling fleet operating throughout
the entire year in 2006 and expanded the fleet by an additional four rigs, two
of which were under construction and two that required refurbishment at the
time of acquisition. The combined impact of these two factors resulted in
tremendous growth in revenue to $166.5 million in 2006 from $5.4 million in
2005.
    Operating expenses grew as a result of the overall growth in revenue
throughout the period from $3.2 million in 2005 to $77.7 million in 2006.
Furthermore, the US operations increased gross margin by 31.9% from 40.4% in
2005 to 53.3% in 2006. As the 2005 fiscal year was predominately a year of
growth and construction in the US marketplace the resulting increases in
margins throughout 2006 are due to improved operational efficiency and
expanding knowledge in the US and are more indicative of the future outlook in
this market. In addition, the execution of the rig build program, which is
backed by long-term take-or-pay contracts, promoted stability in utilization
rates and revenues throughout the year.Construction Operations
    For the years ended December 31,
    (thousands)                               2006         2005     % Change
    -------------------------------------------------------------------------
    Revenue                                111,128            -            -
    Operating expense                       97,979            -            -
                                     ----------------------------------------
    Gross margin                            13,149            -            -
                                     ----------------------------------------
    Gross margin percentage                   11.8%           -The acquisition of Mastco was an instrumental factor in the deployment of
six rigs since March 2006 and placed the Trust in a favourable position to
deploy the remaining four Canadian rigs committed under the current rig
construction program. Throughout 2006 Mastco concentrated its operations on
the completion of Trinidad's rig construction program and completed much of
the recertification work required on the Trust's current fleet. As a result,
Mastco recognized inter-segment revenue and costs of $62.0 million with the
Canadian and US drilling operations. Additionally, revenues of $49.1 million
were generated on sales to external customers completed throughout the year.
Costs of $35.9 million on these sales generated a gross margin of 26.9%
throughout the period.GENERAL AND ADMINISTRATIVE EXPENSE

    For the years ended December 31,
    (thousands)                               2006         2005     % Change
    -------------------------------------------------------------------------
    General and administrative expenses     51,627       26,183         97.2
    % of revenue                               8.9%         9.1%General and administrative expenses increased to $51.6 million from
$26.2 million as a result of the Trust's growth over the past year. Increases
in the general and administrative expenses resulted from Trinidad's growth and
expansion into the US marketplace and the diversification of its Canadian
operations. However, despite these overall increases, the Trust continues to
focus on maintaining conservative expenditure levels to ensure accretive
growth for unitholders by creating internal efficiencies, centralizing certain
required functions and integrating its management team. This focus has enabled
overall reductions in general and administrative expenses as a percentage of
revenue from 9.1% in 2005 to 8.9% in 2006.INTEREST

    For the years ended December 31,
    (thousands)                               2006         2005     % Change
    -------------------------------------------------------------------------
    Interest                                20,724        5,600        270.1In April 2006 the Trust closed a new debt agreement which increased the
principal available from $250.0 million to a debt facility with total Canadian
dollar equivalent capacity of approximately $495.7 million. This new debt
facility encompasses both US and Canadian term and revolving facilities which
bear interest at the LIBOR and BA rates, respectively, plus a spread. Upon
closure of the new debt facility the entire $125.0 million (USD) balance was
drawn on the US term loan and $175.0 million on the Canadian term and
revolving facilities increasing the overall debt levels of the Trust. This new
debt facility was used throughout the year to fund the execution of the
Trust's commitment to construct an additional 29 drilling rigs, of which 15
were released in the current year and four were released in 2005.
Additionally, the Trust funded approximately $93.2 million of the capital
requirements on the remaining 10 rigs expected to be released in the first and
second quarter of 2007 and $33.8 million on the additional five rigs announced
January 2007. The increased debt levels of the Trust from $105.5 million at
the end of 2005 to $391.5 million at the end of 2006 resulted in higher
interest expense throughout the year. Excess cash throughout the period, which
was not utilized to fund capital expenditures, was invested in short term
investments which generated interest income of approximately $1.9 million
during the year.
    Furthermore, throughout 2005 the Trust paid interest at a fixed borrowing
rate. With the inception of the new debt facility Trinidad is obligated to pay
interest at a floating BA or LIBOR rate for both the Canadian and US
facilities, respectively. This increased the Trust's overall exposure to
fluctuations in the floating rate. In order to mitigate this risk Trinidad
entered into an interest rate swap at the beginning of the third quarter on
50% of the outstanding Canadian and US term facilities. As a result changes in
the structure of the debt facilities impacted the overall interest expense
incurred throughout the period.UNIT BASED COMPENSATION

    For the years ended December 31,
    (thousands)                               2006         2005     % Change
    -------------------------------------------------------------------------
    Unit based compensation                  7,105        3,203        121.8The Trust has established a Trust Unit Incentive Plan to assist
directors, officers, employees and consultants of the Trust and its affiliates
to participate in the growth and development of the Trust and uses the fair
value method to calculate compensation expense associated with rights granted
under the Plan. This compensation expense is recognized into earnings over the
vesting period of the rights granted with a corresponding increase in
contributed surplus. As a result of applying the fair value method, unit based
compensation increased from $3.2 million in 2005 to $7.1 million in 2006, an
increase of $3.9 million. Increases are a result of the continuing growth of
the Trust and three additional option grants completed in the year.FOREIGN EXCHANGE (GAIN) LOSS

    For the years ended December 31,
    (thousands)                               2006         2005     % Change
    -------------------------------------------------------------------------
    Foreign exchange (gain) loss               533          (87)       712.6In the third quarter of 2005, the commencement of operations through the
release of the first newly constructed drilling rig in the United States
resulted in a revaluation of the US operations into Canadian currency for the
purposes of financial reporting. The acquisition of Cheyenne Drilling and
continued deployment of drilling rigs in the United States has reduced the US
reliance on the Canadian operations, resulting in the US operations being
considered a self-sustaining operation effective January 1, 2006. Therefore,
upon consolidation of the US operations, gains and losses due to fluctuations
in the foreign currency exchange rates are deferred on the balance sheet as a
component of equity; however, gains and losses in the Canadian entity on US
denominated balances continue to be recognized in the income statement. For
the year ended 2006, the Trust recognized a loss of $0.5 million in comparison
with a gain of $0.1 million in 2005 which was attributable to fluctuations in
the Canadian and US currency rates. The Trust has mitigated its overall
exposure to currency fluctuations through the increased financial independence
of the US operations as a result of the US debt facility which was closed in
April 2006 and through utilizing funds flows generated from the US market to
fund the ongoing operations.DEPRECIATION AND AMORTIZATION

    For the years ended December 31,
    (thousands)                               2006         2005     % Change
    -------------------------------------------------------------------------
    Depreciation                            50,983       27,939         82.5
    Amortization                             1,218          284        328.9
    (Gain) loss on sale of assets           (1,879)         263        814.4Depreciation increased 82.5% on year-to-date basis from $27.9 million in
2005 to $51.0 million in 2006. Changes in the composition of Trinidad's asset
base through acquisitions and the current rig construction program have
resulted in the addition of drilling rigs with increased drilling depth,
increasing the capital cost of the Trust's asset base. This increased the per
day depreciation rates by $381 per drilling day to $2,604 in 2006 from $2,223
in 2005. Increased rates per drilling day and increases in the number of
drilling days from 12,570 in 2005 to 19,577 in 2006 produced higher
depreciation in the current year. This increase has been offset as a result of
management re-assessing the useful life of the drilling and well servicing
rigs as of January 1, 2006 and increasing the useful life of its drilling rigs
from 3,300 drilling days (10% salvage value) to 4,200 drilling days (10%
salvage value) and its well servicing rigs from 15 years (20% salvage value)
to 24,000 hours (20% salvage value) to be more reflective of the actual useful
life of the assets.
    Amortization expense increased from $0.3 million in 2005 to $1.2 million
in 2006 as a result of the Trust closing its new debt agreement. Previously
deferred financing costs of $0.8 million at the end of 2005 associated with
the old facility were expensed in 2006 and the financing costs related to the
new debt facility were capitalized and amortized into income throughout the
period.
    Throughout the year Trinidad disposed of one of its drilling rigs for
proceeds of $5.4 million which resulted in a one time gain of $2.0 million
being recognized into earnings. This gain was offset through several smaller
dispositions throughout the year netting to a gain of $1.9 million in 2006.INCOME TAXES

    For the years ended December 31,
    (thousands)                               2006         2005     % Change
    -------------------------------------------------------------------------
    Current income tax                        (388)       1,420       (127.3)
    Future income tax                       15,955        8,183         95.0In the second quarter the Canadian government passed the 2006 Federal
Budget which enacted several tax reductions for corporations, specifically a
reduction in general corporate tax rates from 21.0% to 19.0% phased in from
2008 to 2010, the elimination of the federal large corporation tax effective
January 1, 2006 and the elimination of the corporate surtax effective
January 1, 2008. Additionally, the Alberta government also substantively
enacted a reduction in corporate tax rates from 11.5% to 10.0% effective
April 1, 2006. Despite increases in the Trust's capitalization, the recovery
position in 2006 resulted from the reversal of previously booked federal large
corporation tax as well as realization of the tax reductions that were
substantively enacted.
    Future income tax expenses increased 95.0% from $8.2 million in 2005 to
$16.0 million in 2006. The increase in future income tax expense resulted from
higher depreciation rates for tax purposes which increased the taxable
temporary difference between the accounting value and the tax value on the
Trust's capital assets. This increase was offset by lower future income tax
rates as a result of the Federal Budget changes and further reductions to the
Trust's taxable income from increases in monthly distributions to unitholders.
    On December 21, 2006, the Minister of Finance released for comment draft
legislation concerning the taxation of certain publicly traded trusts. The
legislation reflects proposals originally announced by the Minister on
October 31, 2006. Under the proposed legislation, Income Trusts will be taxed
on a basis similar to corporations, where distributions made from the Trust to
unitholders will be taxed at the Trust level. Under the proposed plan, income
distributions will first be taxed at the Trust level at a special rate
estimated to be 31.5%, and for taxable Canadian residents distributions will
be treated as dividends from a Canadian corporation and will be eligible for
the dividend tax credit. The government is proposing a four-year transition
period for existing Trusts and as such Trinidad will not be subject to the
proposed measures until it's 2011 taxation year. It is not known at this time
if or when the proposal will be enacted by Parliament.
    We encourage our unitholders to read the full transcript of the
government's plan at www.fin.gc.ca/news06/06-061e.html and to consult their
personal financial and tax advisors regarding the potential tax consequences.
Unitholders may also express their views directly to the Minister of Finance,
whose contact information is available at www.fin.gc.ca/admin/contract-e.html.NET EARNINGS AND FUNDS FLOW

    For the years ended December 31,
    (thousands)                               2006         2005     % Change
    -------------------------------------------------------------------------
    Net earnings                           123,706       47,427        160.8
      Per unit (diluted)                      1.46         0.79         84.8
    Funds flow from operations             196,924       87,299        125.6
      Per unit (diluted)                      2.33         1.45         60.7Trinidad increased consolidated net earnings by 160.8% from $47.4 million
to $123.7 million achieved through the diversification of the Trust's
operations in both Canada and the US. Despite lower industry wide utilization
levels in Canada, stabilization of net income was obtained through the Trust's
expansion into the US market. This provided overall stability to annualized
funds flow and net earnings through its growth into a market which is
uninterrupted by the seasonal conditions that are present in the Canadian
operations. This growth in net income reflects the expansion of Trinidad's
fleet through its current rig construction program. The acquisition of Mastco
in the first quarter of 2006 placed Trinidad in a favourable position to
execute on its rig construction program resulting in the Trust releasing six
Canadian rigs throughout the year. The further deployment of US rigs committed
under the current rig construction program continues to generate increased
revenues. Throughout the period the Trust's ongoing focus on delivering
superior performance to its customers has allowed us to exceed industry
utilization levels. Trinidad's ability to execute on market opportunities is
expanding the Trust's overall operations to ensure greater future stability of
net income and funds flow. Higher operating margins and conservative general
and administrative expenditures also contributed to net earnings, offset by
increased interest and depreciation expense that were triggered through the
growth of the Trust's operations.
    Funds flow from operations before change in non-cash working capital for
the year increased from $87.3 million ($1.45 per unit (diluted)) in 2005 to
$196.9 million ($2.33 per unit (diluted)) in 2006 as a result of significant
growth in revenues and increases in gross margin throughout the period. The
Trust continues to follow an investment strategy designed to ensure accretive
growth for unitholders, including the expansion into the US market as well as
diversification of the Trust's asset base which contributed to the overall
growth in funds flow throughout the period.FOURTH QUARTER ANALYSIS

    ---------------------------------------------------------------
                                                2006
    (millions except per
     unit data)                   Q4        Q3        Q2        Q1
    ---------------------------------------------------------------
    Financial Highlights

    Revenue                    161.9     150.6     104.5     162.9
    Gross margin(1)             74.9      66.9      43.1      84.7

    Net earnings (loss)         31.3      31.6      20.8      40.0
    Depreciation and
     amortization               15.4      14.0       9.7      13.1
    (Gain) loss on assets        0.1      (2.0)        -         -
    Unit based compensation      1.8       0.7       0.8       3.8
    Future income tax expense
     (recovery)                  6.2       4.6      (8.7)     13.9
    Unrealized foreign
     exchange loss (gain)       (0.1)        -       0.2      (0.2)
    Other                          -       0.1      (0.3)      0.1
                            ---------------------------------------
    Funds flow before change
     in non-cash working
     capital(1)                 54.7      49.0      22.5      70.7

    Earnings (loss) per unit
     (diluted)                  0.37      0.38      0.24      0.48
    Funds flow before change
     in non-cash working
     capital per unit
     (diluted)(1)               0.65      0.57      0.26      0.84

    Operating Highlights

    Operating days - drilling
      Canada                   3,163     3,358     1,826     4,184
      United States            2,105     1,891     1,603     1,447
    Rate per drilling day
     (CDN $)
      Canada                  26,328    23,083    23,927    23,579
      United States           24,621    24,042    24,089    21,596
    Utilization rate -
     drilling
      Canada                      61%       64%       36%       86%
      United States               85%       85%       82%       85%
    CAODC industry average        47%       57%       34%       81%
    Number of drilling rigs
      Canada                      60        59        57        56
      United States               31        26        22        21
    Utilization for service rigs  64%       68%       31%       85%
    Number of service rigs        18        18        17        17
    Number of coring and
     surface casing rigs          17        17        17        17
    ---------------------------------------------------------------


    -------------------------------------------------------------------------
                                                2005                    2004
    (millions except per
     unit data)                   Q4        Q3        Q2        Q1        Q4
    -------------------------------------------------------------------------
    Financial Highlights

    Revenue                    106.4      75.3      32.5      74.1      58.8
    Gross margin(1)             46.4      31.8       7.8      34.5      26.8

    Net earnings (loss)         19.4      13.8      (1.8)     16.0      15.1
    Depreciation and
     amortization                9.3       8.0       3.4       7.5       5.5
    (Gain) loss on assets        0.2       0.1         -         -       0.5
    Unit based compensation      0.6       0.5       2.0       0.1      (4.8)
    Future income tax expense
     (recovery)                  5.5       1.7      (4.0)      5.0       3.5
    Unrealized foreign
     exchange loss (gain)          -         -         -         -         -
    Other                          -         -         -         -         -
                            -------------------------------------------------
    Funds flow before change
     in non-cash working
     capital(1)                 35.0      24.1      (0.4)     28.6      19.8

    Earnings (loss) per unit
     (diluted)                  0.29      0.21     (0.03)     0.31      0.33
    Funds flow before change
     in non-cash working
     capital per unit
     (diluted)(1)               0.51      0.37     (0.01)     0.56      0.43

    Operating Highlights

    Operating days - drilling
      Canada                   3,795     3,487     1,472     3,544     3,011
      United States              235        37         -         -         -
    Rate per drilling day
     (CDN $)
      Canada                  23,280    19,196    19,448    20,121    18,942
      United States           19,245    20,122         -         -         -
    Utilization rate -
     drilling
      Canada                      78%       73%       31%       76%       76%
      United States               83%      100%        -         -         -
    CAODC industry average        71%       63%       32%       71%       62%
    Number of drilling rigs
      Canada                      54        52        52        52        51
      United States               17         1         -         -         -
    Utilization for service rigs  67%       61%       41%       69%       61%
    Number of service rigs        16        16         9         9         8
    Number of coring and
     surface casing rigs          17        18        18         -         -
    -------------------------------------------------------------------------
    (1) Readers are cautioned that gross margin and funds flow before change
        in non-cash working capital and per unit information do not have a
        standardized meaning prescribed by GAAP; however, the Trust does
        compute gross margin and funds flow before change in non-cash working
        capital and the per unit information on a consistent basis for each
        reporting period. Funds flow before change in non-cash working
        capital has replaced the term cash flow before change in non-cash
        working capital as shown in previous filings.Throughout the fourth quarter of 2006, reduction in activity levels seen
earlier in the year throughout the drilling industry continued to be present
as the overall market softened due to declines in commodity prices from the
comparable quarter in 2005. This resulted in a reduction in utilization rates
across the industry from 71% in the fourth quarter of 2005 to 47% in 2006.
Throughout this period of interim instability Trinidad continued to exceed
industry utilization by 29.8% despite slight decreases from the third quarter
2006. A continued focus on long-term contracts and the deeper drilling market
shielded the Trust from some of the market turbulence throughout this period.
Additionally, in the Canadian drilling market, two of the rigs that were
completed at the end of the prior quarter were put into operation and the
completion of one more rig increased overall revenue quarter-over-quarter. The
US drilling operations continued to provide increased stability to revenues
and funds flow throughout the fourth quarter, maintaining utilization rates of
85% at drilling rates of $24,621 per day. As the US operations are not subject
to the seasonal conditions and have less susceptibility to the fluctuations in
the Canadian market, this has been a significant factor in the growth of
revenue and funds flow throughout the year. These factors resulted in
increased revenue of $11.3 million from $150.6 million in the third quarter to
$161.9 million in the fourth quarter of 2006; and increased revenue on a
quarter-over-quarter basis from $106.4 million in 2005 to $161.9 million in
2006.
    Consolidated gross margin increased for the fourth quarter of 2006 to
$74.9 million from $46.4 million in 2005 and gross margin percentages
increased to 46.3% from 43.6% in 2005, an increase of 6.2%. The increased
contribution of the US operations, which currently generates higher margins
than the Canadian market, resulted in the increases quarter-over-quarter.
    Net earnings in the fourth quarter of 2006 increased by 61.3% from
$19.4 million in 2005 to $31.3 million due to the significant growth of the
Trust's operations and increases in revenue and gross margins as operations
have been expanded. This increase was offset by increases in depreciation and
amortization of 65.6% from $9.3 million in the fourth quarter of 2005 to
$15.4 million in 2006 and increase in general and administrative expenses of
$4.4 million to $13.8 million in 2006. Interest expense for the quarter also
increased to $7.0 million in 2006 from $1.6 million in 2005 as a result of
advances which were made on the debt facility throughout the quarter as
Trinidad executed on its build commitment.LIQUIDITY AND CAPITAL RESOURCES

    For the years ended December 31,
    (thousands)                               2006         2005         2004
    -------------------------------------------------------------------------
    Working capital                         58,246       45,289       11,884

    Bank overdraft                               -            -        1,988
    Operating line of credit                     -            -        8,000
    Current portion of long-term debt        3,232        9,494        6,482
    Long-term debt                         388,276       95,956       60,909
                                     ----------------------------------------
    Total debt                             391,508      105,450       77,379
                                     ----------------------------------------
    Total debt as a percentage
     of assets                                31.4%        12.7%        20.8%

    Net debt(1)                            330,030       50,667       49,025
    Net debt as a percentage of assets(1)     26.5%         6.1%        13.2%

    Total assets                         1,245,633       833,316     372,454
    Total long-term liabilities            434,065       125,344      79,001
    Total long-term liabilities as a
     percentage of assets                     34.8%         15.0%       21.2%

    Unitholders' equity                    698,092       641,430     255,055
    Total debt to unitholders' equity         56.1%         16.4%       30.3%
    Net debt to unitholders' equity(1)        47.3%          7.9%       19.2%

    (1) Readers are cautioned that net debt does not have a standardized
        meaning prescribed by GAAP and therefore may not be comparable to
        similar measures presented by other issuers; however, the Trust does
        compute net debt on a consistent basis for each reporting period.
        Net debt refers to the Trust's long-term debt less it's working
        capital position and is indicative of the Trust's overall
        indebtedness.Effective April 18, 2006, the Trust closed a new syndicated loan
agreement in both Canada and the US that increased the principal available
from $250.0 million to a facility comprised of a $250.0 million Canadian
revolver, a $100.0 million Canadian five-year term facility and a
$125.0 million US five-year term facility, representing a total debt facility
of approximately $495.7 million. On closing, the Trust drew down on both the
$125.0 million US term facility and $175.0 million of the Canadian term and
revolving facilities. The debt drawn on the new agreement was used to repay
amounts previously drawn under the prior debt facility and the remainder was
retained for the execution of the Trust's rig construction program. As a
result of the draw down on the new debt facility and the further execution of
our rig construction program total debt increased by $286.1 million from the
prior year of which approximately $54.0 million was drawn in the fourth
quarter of 2006. These advances, along with funds flow from operations, have
been used to fund capital additions of $111.3 million throughout the quarter
and $357.9 million year-to-date. Expected costs to complete the current rig
construction program are estimated to be $44.8 million and will be funded
through total cash available under the debt facilities of approximately
$104.2 million, cash on hand and funds flow from operations.
    Effective June 2005 Trinidad closed an equity issuance to fund the
capital requirements on the rig construction program for net proceeds of
$118.6 million. The proceeds from this issuance were used to repay debt
facilities that were previously drawn, reducing the overall debt levels of the
Trust. Throughout 2005, as the Trust executed its rig construction program,
advances were made on the debt facility to fund the capital requirements of
the rig construction program of which only $82.5 million of the $401.0 million
total costs of construction were paid, resulting in abnormally low debt levels
at the end of 2005. In 2006, as Trinidad executed on the rig build program,
advances on the debt facility increased both total debt as a percentage of
assets and net debt as a percentage of assets. Despite the total growth in
debt from $105.5 million to $391.5 million debt as a percentage of assets only
increased from 12.7% to 31.4%. Internally generated funds flow resulting from
the deployment of additional rigs throughout 2006 in both Canada and the US
has been utilized to further advance the rig construction program. As the
Trust continues to deploy additional rigs throughout the early part of 2007,
the additional funds generated will be utilized to complete both the remaining
obligations under the current rig construction program as well as complete the
additional five rigs announced in January 2007.
    Working capital increased by $13.0 million throughout the year from
$45.3 million to $58.2 million. This increase is primarily a result of
increases in accounts receivable of $55.2 million from the prior year, offset
by an increase in accounts payable and accrued trust unit distributions of
$41.6 million due to the expansion of the Trust's activities. Additionally
with the acquisition of Mastco, working capital was increased through the
inventory levels being maintained on the Trust's construction operations of
$7.5 million. Despite reductions in market activity the Trust continues to
exceed industry utilization and is in a favourable working capital position
moving into 2007.
    Unitholders' equity increased as a result of the 1.5 million trust units
($24.7 million) that were issued to the former shareholders of Mastco and net
earnings, net of distributions paid, of $19.0 million. Additionally proceeds
on options and rights exercised throughout the period of $8.3 million
increased overall unitholders' equity throughout the period. Effective
September 14, 2006, Trinidad announced its intent to acquire for cancellation
up to 10% (7,336,882 trust units) of the Trust's publicly traded units by way
of a Normal Course Issuer Bid ("NCIB") commencing September 18, 2006 and
extending to September 17, 2007. During the year the Trust repurchased 66,500
units at a cost of $0.9 million which were cancelled in the year. Purchases
under the NCIB are at the discretion of management and will be made with
internal funds flow generated throughout the year.
    The Trust has several capital and operating lease agreements on buildings
and equipment. The future lease obligations for the next five years are
summarized below:(thousands)
    -------------------------------------------------------------------------
    2007                                                               3,024
    2008                                                               2,774
    2009                                                               2,412
    2010                                                               2,052
    2011                                                               7,154In 2005 and early 2006, Trinidad announced its intent to expand its
existing drilling fleet through the construction of 29 new diesel electric
drilling rigs which will be deployed in both Canada and the US. This
construction program has enabled the Trust to actively pursue growth
opportunities in both markets and provide accretive growth to its unitholders.
All of the rigs are backed by take-or-pay contracts which provide for
committed drilling days and drilling rates over the next three to five years.
Furthermore, the cost of construction on five of the rigs has been partially
financed through customer contributions, to be returned based on drilling days
over the term of the contract. Total capital costs of construction are
expected to be $401.0 million, of which approximately $356.2 million has been
paid as at December 31, 2006. Four of these rigs were completed and deployed
in 2005 and an additional 15 throughout 2006 with the remainder scheduled to
be delivered in the first and second quarter of 2007. The rig construction
program continues to be a major focus of the Trust and the acquisition of
Mastco at the end of the first quarter of 2006 positioned Trinidad favorably
to execute on its rig construction program and increased Trinidad's influence
over the ability to meet delivery schedules.
    On January 26, 2007, Trinidad announced the construction of an additional
five new customer backed rigs to the rig construction program. All five rigs
will be operating in the US, each backed by take-or-pay contracts, providing
committed drilling days and drilling rates over the next three years. Total
capital costs of construction are estimated to be $80.0 million which is being
funding through Trinidad's recently expanded credit facility and internal cash
flow. Approximately $33.8 million has been paid as at February 20, 2007.-------------------------------------------------------------------------
    UNITHOLDERS' CAPITAL

    For the years ended December 31,
    (thousands)                                            2006         2005
    -------------------------------------------------------------------------
    Unitholders' capital                                669,584      621,972
    Exchangeable shares                                   5,777       19,602
    -------------------------------------------------------------------------Unitholders' capital increased from the 2005 year-end by $47.6 million,
with the issuance of an additional 4.1 million trust units. This increase
resulted from the conversion of 347,100 Initial Series exchangeable shares
($2.7 million) to 403,332 trust units, 1,048,817 Series C exchangeable shares
($11.1 million) to 1,102,298 trust units and the conversion of 1,138,287
options and rights ($8.3 million) into trust units. Furthermore, the expansion
of the Trust's operations through the acquisition of Mastco also increased
unitholders' capital through the issuance of 1.5 million trust units
($24.7 million). This acquisition has improved the Trust's operational
flexibility by enhancing its ability to deliver on its current rig
construction program, complete future rig recertifications and execute on
ongoing maintenance programs. Under the Trust's Normal Course Issuer Bid
program, the Trust purchased and cancelled 66,500 units at a cost of
$0.9 million for the year ended December 31, 2006. The excess of the purchase
price over the carrying amount of the units purchased of $0.4 million is
recorded as reduction of accumulated earnings. Unitholders' capital on
February 20, 2007 was $670.7 million (83,092,336 units).-------------------------------------------------------------------------
    DISTRIBUTIONS          Three months ended         Twelve months ended
                               December 31,               December 31,
    (thousands except
     unit and per unit
     data - Unaudited)        2006      2005         2006            2005
    -------------------------------------------------------------------------
    Cash flow from
     operating activities   32,584    18,476   152,478          54,219
    Net change in non-cash
     operating working
     capital                22,116    16,485    44,446          33,080
                          ---------------------------------------------------
    Funds flow before
     change in non-cash
     working capital        54,700    34,961   196,924   100%   87,299   100%
    Distributions paid
     & declared            (28,629)  (17,216) (105,475)   54%  (51,905)   59%
                          ---------------------------------------------------
    Funds retained for
     growth, debt reduction
     & future distribution  26,071    17,745    91,449    46%   35,394    41%

    Funds flow before
     change in non-cash
     working capital per
     unit (basic(1))          0.65      0.53      2.37            1.48
    Distributions paid
     & declared per unit     (0.34)    (0.26)    (1.27)          (0.88)
                          ---------------------------------------------------
    Funds retained per unit   0.31      0.27      1.10            0.60

    Quarter ending
     annualized
     distribution per unit    1.38      1.02
    -------------------------------------------------------------------------
    (1) Includes trust units to be issued upon conversion of exchangeable
        shares.During the year, Trinidad distributed $105.5 million, an increase of
$53.6 million or 103.2%, from the comparative quarter in the prior year. The
Trust's focused strategy of identifying accretive acquisitions while
sustaining the distributable funds flow from its current operations continues
to provide opportunities for increased distributions to unitholders. This
strategy has allowed the Trust to increase its annualized distribution levels
twice throughout 2006 from $1.02 per unit at the beginning of the year to
$1.38 per unit as at December 31, 2006. The Trust manages its distributions
based on a payout ratio goal of up to 75%, and the remainder is retained for
future growth opportunities, debt repayment, or incremental distributions to
unitholders.

    CRITICAL ACCOUNTING ESTIMATES

    The preparation of the consolidated financial statements requires that
certain estimates and judgements be made with regard to the reported amount of
revenues and expenses and the carrying values of assets and liabilities. These
estimates are based on historical experience and management judgement.
Anticipating future events involves uncertainty and consequently the estimates
used by management in the preparation of the consolidated financial statements
may change as future events unfold, additional experience is acquired or the
Trust's operating environment changes.

    Depreciation

    The accounting estimate that has the greatest impact on the Trust's
financial results is depreciation. Depreciation of the Trust's property and
equipment incorporates estimates of useful lives and residual values. These
estimates may change as more experience is obtained or as general market
conditions change impacting the operation of the Trust's capital assets.
    Effective January 1, 2006, the Trust re-assessed the useful life of its
drilling and well servicing rigs for purposes of determining depreciation
expense. As a result of this evaluation the Trust has increased the useful
life of its drilling rigs from 3,300 drilling days (10% salvage value) to
4,200 drilling days (10% salvage value). This change in estimate has been
applied prospectively and resulted in a reduction of depreciation expense of
$9.1 million for the year ended December 31, 2006. In addition, the Trust has
changed its policy for depreciating its well servicing rigs from 15 years (20%
salvage value) to 24,000 hours (20% salvage value) to be more reflective of
the useful life of the assets. This change in policy has been applied
retroactively. The impact on prior years was immaterial for restatement and
resulted in an increase of $0.4 million in depreciation expense for its well
servicing rigs for the year ended December 31, 2006.
    The acquisition of Mastco in the second quarter diversified the Trust's
operations providing it with the capability to design, manufacture, sell and
refurbish drilling rigs and related equipment. As a result the Trust's asset
base has been diversified to include rig construction and related equipment,
creating an additional asset class for the Trust. This rig construction and
related equipment has been assigned a useful life of five to 20 years and will
be depreciated on a straight-line basis (with a 10% salvage value).

    Unit based compensation

    Compensation expense associated with rights at grant date are estimates
based on various assumptions such as volatility, annual distribution yield,
risk free interest rate and expected life using the Black-Scholes methodology
to produce an estimate of the fair value of such compensation.

    Allowance for doubtful accounts receivable

    The Trust performs credit evaluations of its customers and grants credit
based on past payment history, financial conditions and anticipated industry
conditions. Customer payments are regularly monitored and a provision for
doubtful accounts is established based on specific situations and overall
industry conditions. The Trust's history of bad debt losses has been minimal
and generally limited to specific customer circumstances; however, given the
cyclical nature of the oil and gas industry, the credit risks can change
suddenly and without notice.

    Goodwill

    In accordance with Canadian Generally Accepted Accounting Principles, the
Trust performs an annual goodwill impairment test in the first quarter of each
fiscal year. This test was performed and no goodwill impairment exists.

    NEW ACCOUNTING POLICIES

    Foreign currency translation

    Effective January 1, 2006, the Trust changed from the temporal method of
foreign currency translation to the current rate method to account for the
Trust's US operations. Based on events since December 31, 2005, Trinidad
Drilling US is now considered a self-sustaining operation; hence the revenues
and expenses of the subsidiary are translated at the average exchange rate for
the period while assets and liabilities are translated at the current exchange
rate in effect at the balance sheet date. Gains or losses resulting from these
translation adjustments are included in the cumulative translation account in
unitholders' equity. The change in accounting policy has been applied
prospectively and resulted in a foreign exchange loss of $2.1 million being
deferred and recorded in the cumulative translation account as at January 1,
2006.

    Derivative financial instruments

    The Trust has entered into contracts to manage economic exposure to
market risks relating to interest rates. The Trust is impacted by interest
rate changes based on the amount of floating rate debt outstanding. Derivative
financial instruments are not used for trading or speculative purposes.
    The Trust formally documents all relationships between hedging
instruments and the hedged items, the risk management objective and the method
for assessing the effectiveness of the hedge. The effectiveness of the hedge
is assessed both at inception of the hedge and throughout its term. If the
derivative is deemed effective, and qualifies for hedge accounting, gains and
losses are deferred until settlement of the derivative contract. If a
derivative does not qualify for hedge accounting, gains and losses resulting
from fluctuations in the fair value of the derivative are recognized into
income in the period that they occur.

    DISCLOSURE CONTROLS & PROCEDURES

    Disclosure controls and procedures are designed to provide reasonable
assurance that all information required to be disclosed by the Trust is
recorded, processed, summarized and reported to senior management, including
the CEO and CFO, in an appropriate manner to allow timely decisions regarding
required disclosure.
    Trinidad Energy Services Income Trust has evaluated the effectiveness of
the design and operation of disclosure controls and procedures, under the
supervision of the CEO and the CFO. Internal controls over financial reporting
are designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with Canadian GAAP. Based on the evaluation, the Trust
has concluded that the disclosure controls and procedures and the design of
internal controls over financial reporting, as defined under Multilateral
instrument 52-109, Certification of Disclosures in Annual and Interim Filings
were effective as of the end of the period covered by this report.
    The business process controls of Mastco have not been assessed at the
process level as at December 31, 2006. In light of the short time period
between the date of acquisition and the reporting date, a complete assessment
over the design of internal controls was not feasible and as a result have
relied on management review to assess the accuracy of the financial statements
at each reporting date. Management is in the process of evaluating the design
effectiveness of the process level controls at Mastco. There have been no
changes in the Trust's internal controls over financial reporting during the
year ended December 31, 2006 that have materially affected or are reasonably
likely to materially affect the internal controls over financial reporting.

    OUTLOOK

    Trinidad will continue to develop its key competitive strengths: deeper
drilling focus, modern rig fleet, and investment in both technology and
personnel. With these initiatives effective throughout 2006 and 2007, Trinidad
is favourably positioned to address the recent adjustment in customer drilling
programs, as the primary decline has been focused on shallow gas drilling.
Approximately 80% of Trinidad's drilling rigs, including the current rig
construction program, are tailored to the medium and deeper drilling market
with depths in excess of 2,000 metres. The focus on longer term contracts at
fixed day rates and utilization levels has stabilized operational performance
throughout the period. The current fleet will allow the Trust to effectively
capitalize on the busy first quarter of 2007 and continue to deliver strong
utilization performance. The US market has delivered exceptional results for
2006 and this is expected to remain stable as the US drilling industry is not
affected by seasonal conditions and has been less impacted by the recent
fluctuation in commodity prices. As the US operations become an even stronger
force in 2007, the benefits to the stability and growth of the Trust's overall
funds flow will surpass that of 2006, allowing the Trust to further optimize
unitholders' return in the coming year.
    With the acquisition of Mastco, Trinidad has diversified its operations
by integrating its current rig fleet with the expertise of a company that
designs, manufactures, sells and refurbishes drilling rigs and related
equipment. This provides Trinidad with increased flexibility over the current
rig construction program and enhances the overall ability of the Trust to
control the development of new rig designs and investment in technology. These
benefits will allow Trinidad to complete one of the larger build programs
undertaken in the Canadian drilling industry by the second quarter of 2007.
    We are focused on continuing to add to our distribution capabilities by
accretively growing our business and continuing to be the market leader. All
future capital investments will continue to be evaluated based on return on
capital and focused on low risk operating environments.
    Trinidad Energy Services Income Trust is a growth-oriented oil and
natural gas services provider based in Calgary, Alberta. Focusing on deeper
drilling, modern rig fleets, in-house design and technology-based advancement,
Trinidad has positioned itself as a premium service provider. Trinidad's
growth is driven by chasing and capturing new horizons - advancing
technologies, offering new services, entering new markets and performing
strategic acquisitions. With the completion of the current rig construction
programs, the Trust will have 106 drilling rigs ranging in depths from 1,000 -
6,500 metres. In addition to its drilling rigs, Trinidad has 18 service rigs
that have been completely retrofitted or are new within the past five years
and 17 pre-set and coring rigs. Trinidad is focused on providing modern,
reliable, expertly designed equipment operated by well-trained and experienced
personnel. Trinidad's drilling fleet is one of the most adaptable and
competitive in the industry."signed"    Michael E. Heier            "signed"   Brent J. Conway
    -----------------------------           -----------------------------
    Chairman of the Board                   Chief Financial Officer
    Chief Executive Officer


    The Toronto Stock Exchange has neither approved nor disapproved the
    information contained herein.



    -------------------------------------------------------------------------
    CONSOLIDATED BALANCE SHEETS
    As at December 31,
    (thousands)
                                                           2006         2005
    -------------------------------------------------------------------------

    Assets
    Current assets
    Cash and cash equivalents                             9,413       11,749
    Accounts receivable                                 151,990       96,764
    Inventory                                             7,451            -
    Prepaid expenses                                      2,868        2,092
    Future income taxes (note 6)                              -        1,226
                                                    -------------------------
                                                        171,722      111,831

    Deposit on capital assets                            42,172       73,859
    Capital assets (note 4)                             903,111      567,387
    Goodwill                                            123,483       79,429
    Other long-term assets                                5,145          810
                                                    -------------------------
                                                      1,245,633      833,316
                                                    -------------------------

    Liabilities
    Current liabilities
    Accounts payable and accrued liabilities             88,083       49,275
    Accrued trust distributions                           9,543        6,707
    Current portion of deferred revenue                   9,090        1,066
    Current portion of long-term debt (note 5)            3,232        9,494
    Future income taxes (note 6)                          3,528            -
                                                    -------------------------
                                                        113,476       66,542

    Deferred revenue                                      7,070          388
    Long-term debt (note 5)                             388,276       95,956
    Future income taxes (note 6)                         38,719       29,000
                                                    -------------------------
                                                        547,541      191,886
    Unitholders' equity
    Unitholders' capital (note 7)                       669,584      621,972
    Exchangeable shares (note 8)                          5,777       19,602
    Contributed surplus (note 7)                         11,722        5,949
    Cumulative translation adjustment                      (750)           -
    Accumulated trust distributions                    (189,984)     (84,509)
    Accumulated earnings                                201,743       78,416
                                                    -------------------------
                                                        698,092      641,430
                                                    -------------------------
                                                      1,245,633      833,316
                                                    -------------------------

    (See Notes to the Consolidated Financial Statements)

    Commitments (note 11)



    -------------------------------------------------------------------------
    CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED EARNINGS
    For the years ended December 31,
    (thousands except unit and per unit data)
                                                           2006         2005
    -------------------------------------------------------------------------

    Revenue
    Oilfield services                                   577,199      287,612
    Other                                                 2,656          720
                                                    -------------------------
                                                        579,855      288,332
                                                    -------------------------

    Expenses
    Operating                                           310,271      167,917
    General and administrative                           51,627       26,183
    Interest                                             20,724        5,600
    Unit based compensation                               7,105        3,203
    Foreign exchange (gain) loss                            533          (87)
    Depreciation and amortization                        52,201       28,223
    (Gain) loss on sale of assets                        (1,879)         263
                                                    -------------------------
                                                        440,582      231,302
                                                    -------------------------

    Earnings before income taxes                        139,273       57,030

    Income taxes (note 6)
      Current tax expense (recovery)                       (388)       1,420
      Future tax expense                                 15,955        8,183
                                                    -------------------------
                                                         15,567        9,603
                                                    -------------------------

    Net earnings                                        123,706       47,427

    Charges for normal course issuer bid (note 7)          (379)           -

    Accumulated earnings - beginning of year             78,416       30,989
                                                    -------------------------
    Accumulated earnings - end of year                  201,743       78,416
                                                    -------------------------

    Earnings per unit
      Basic                                                1.49         0.81
      Diluted                                              1.46         0.79

    Weighted average number of trust units
      Basic                                          83,078,833   58,850,122
      Diluted                                        84,644,439   60,134,317


    (See Notes to the Consolidated Financial Statements)



    -------------------------------------------------------------------------
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    For the years ended December 31,
    (thousands)
                                                           2006         2005
    -------------------------------------------------------------------------

    Cash provided by (used in)
    Operating activities

    Net earnings for the year                           123,706       47,427
    Items not affecting cash
      Depreciation and amortization                      52,201       28,223
      (Gain) loss on assets                              (1,879)         263
      Unit based compensation                             7,105        3,203
      Future income tax expense                          15,955        8,183
      Unrealized foreign exchange loss (gain)              (164)           -
                                                    -------------------------
    Funds flow from operations before change in
     non-cash working capital                           196,924       87,299
    Net change in non-cash operating working capital    (44,446)     (33,080)
                                                    -------------------------
                                                        152,478       54,219
                                                    -------------------------

    Investing activities

    (Increase) decrease in deposits on capital assets    30,292      (46,480)
    Acquisition of Titan Surface Casing (note 3(a))           -      (11,300)
    Acquisition of Summit Energy Services (note 3(b))         -      (18,040)
    Acquisition of Cheyenne Drilling (note 3(c))              -     (176,287)
    Acquisition of Mastco Derrick Services (note 3(d))  (15,804)           -
    Purchase of capital assets                         (371,303)     (98,231)
    Proceeds from dispositions                            6,752        1,566
    Change in non-cash working capital - accounts
     payable and accrued liabilities                     12,166       16,061
                                                    -------------------------
                                                       (337,897)    (332,711)
                                                    -------------------------

    Financing activities

    Decrease in bank overdraft                                -       (1,988)
    Decrease in line of credit                                -       (8,000)
    Increase in long-term debt                          285,066       38,059
    Increase in deferred revenue                            195            -
    Net proceeds from unit issues (note 7)                8,272      310,499
    Purchased units (note 7)                               (916)           -
    Debt financing costs                                 (5,258)        (377)
    Trust unit distribution                            (105,475)     (51,905)
    Change in non-cash working capital item -
    accrued distributions                                 2,836        3,953
                                                    -------------------------
                                                        184,720      290,241
                                                    -------------------------

    Cash flow from operating, investing, and
     financing activities                                  (699)      11,749
    Effect of translation on foreign currency cash       (1,637)           -
                                                    -------------------------
    Increase  (decrease) in cash for the year            (2,336)      11,749

    Cash - beginning of year                             11,749            -
                                                    -------------------------
    Cash - end of year                                    9,413       11,749

    Interest paid                                        17,317        5,494
    Taxes paid                                            1,207          866

    (See Notes to the Consolidated Financial Statements)



    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

    1.  STRUCTURE OF THE TRUST

        Organization
        Trinidad Energy Services Income Trust ("Trust") is an unincorporated
        open-ended investment trust formed under the laws of the Province of
        Alberta. The Trust was formed by way of an arrangement ("the
        Arrangement") under the Business Corporations Act of Alberta pursuant
        to an arrangement agreement dated August 8, 2002 between the Trust,
        Trinidad Drilling Ltd. and Acquisition Corp., a wholly-owned
        subsidiary of the Trust. The Arrangement involved the exchange of
        Trinidad Drilling Ltd. securities on a one-to-one basis for trust
        units of the Trust. The effective date of the Trust indenture was
        September 17, 2002.

    2.  ACCOUNTING POLICIES AND ESTIMATES

        These consolidated financial statements are prepared by management,
        in accordance with Canadian Generally Accepted Accounting Principles.
        The preparation of financial statements in accordance with Canadian
        Generally Accepted Accounting Principles requires management to make
        estimates and assumptions. These estimates and assumptions affect
        the reported amounts of assets and liabilities, disclosure of
        contingent amounts and the reported amounts of revenues and expenses.
        Actual results could differ from these estimates.

        Principles of consolidation

        The consolidated financial statements include the accounts of the
        Trust and its subsidiaries, all of which are wholly-owned at
        December 31, 2006. Any reference to the Trust throughout these
        consolidated financial statements refers to the Trust and its
        subsidiaries. All intercompany transactions have been eliminated.

        Foreign currency translation

        Effective January 1, 2006, the Trust changed from the temporal method
        of foreign currency translation to the current rate method to account
        for the Trust's US operations. Revenues and expenses of the
        subsidiary are translated at the average exchange rate for the period
        while assets and liabilities are translated at the current exchange
        rate in effect at the balance sheet date. Gains or losses resulting
        from these translation adjustments are included in the cumulative
        translation account in unitholders' equity. The change in accounting
        policy has been applied prospectively and resulted in a foreign
        exchange loss of $2.1 million being deferred and recorded in the
        cumulative translation account as at January 1, 2006.

        Revenue recognition

        Revenue from contract drilling services are recognized based upon
        purchase orders or contracts with customers that specify fixed prices
        calculated on a daily or hourly base. Customer contracts do not
        include a provision for post-service delivery obligations. Revenue is
        recognized when services are performed and only when collectability
        is reasonably assured.

        Construction operations recognize revenue on a percentage of
        completion basis and only when collectability is reasonably assured.
        Losses are provided for in full when first determined.

        Deposits received on future contracts are recorded as deferred
        revenue and recognized as services are performed.

        Cash and cash equivalents

        Cash and cash equivalents consist of cash and short term investments
        with maturities of three months or less.

        Inventory

        Inventory consists of parts, materials and labour related to the
        construction, recertification and refurbishment of rigs and rig
        related equipment. Inventory is valued at the lower of cost
        (principally on the specific identification method) or net realizable
        value.

        Capital assets

        Capital assets are recorded at cost less accumulated amortization.
        Major renewals and improvements, which extend the future life of the
        asset, are capitalized, while repair and maintenance expenses are
        charged to operations as incurred. Disposals are removed at carrying
        costs less accumulated amortization with any resulting gain or loss
        reflected in operations. Any deposits or advances on the Trust's
        build programs are held as deposits on capital assets and any costs
        incurred internally on the construction of rig and rig related
        equipment are recorded as assets under construction. These costs will
        be held as deposit on capital assets or assets under construction
        until the related asset is ready for use at which time it will be
        capitalized.

        Depreciation is based on the estimated useful lives of the assets and
        is as follows:
        ---------------------------------------------------------------------
        Drilling rigs and related    4,200 drill days     Unit-of-production
         equipment                                        (10% salvage value)
        Drilling pipe and collars    1,300 drill days     Unit-of-production
        Well servicing rigs              24,000 hours     Unit-of-production
                                                          (20% salvage value)
        Construction equipment          5 to 20 years     Straight-line
        Buildings                            25 years     Straight-line
        Office furniture and other            5 years     Straight-line
         equipment
        Automotive equipment                  4 years     Straight-line
                                                          (10% salvage value)
        ---------------------------------------------------------------------

        Effective January 1, 2006, the Trust re-assessed the useful life of
        its drilling and well servicing rigs for purposes of determining
        depreciation expense. As a result of this evaluation the Trust has
        increased the useful life of its drilling rigs from 3,300 drilling
        days (10% salvage value) to 4,200 drilling days (10% salvage value).
        This change in estimate has been applied prospectively and resulted
        in a reduction of depreciation expense of $9.1 million for the year
        ended December 31, 2006. In addition, the Trust has changed its
        policy for depreciating its well servicing rigs from 15 years
        straight-line basis (20% salvage value) to 24,000 hours (20% salvage
        value) to be more reflective of the useful life of the assets. This
        change in policy has been applied retroactively. The impact on prior
        years was immaterial for restatement and resulted in an increase of
        $0.4 million in depreciation expense for its well servicing rigs for
        the year ended December 31, 2006.

        Goodwill

        Goodwill represents the excess of the purchase price over the fair
        values of the assets purchased. Goodwill is not subject to
        amortization, but is tested for impairment at least annually by
        applying a fair value based test. Any goodwill impairment will be
        recognized as an expense if the carrying amount of the goodwill
        exceeds its fair value.

        Deferred finance costs

        Costs associated with obtaining financing are deferred and amortized
        on a straight line basis over five years. The amortization is
        included in depreciation and amortization expense.

        Income tax

        The Trust follows the liability method of accounting for income tax.
        Under this method, income tax liabilities and assets are recognized
        for estimated tax consequences attributable to differences between
        the amounts reported in the financial statements and their respective
        tax basis, using substantively enacted income tax rates. The effect
        of a change in income tax rates on future tax liabilities and assets
        is recognized in income in the period that the change occurs.

        The Trust is a taxable entity under the Canadian Income Tax Act and
        is taxable only on the income that is not distributed or
        distributable to unitholders (note 6).

        Unit based compensation

        The Trust has established a Trust Unit Incentive Plan ("the Plan") to
        assist directors, officers, employees and consultants of the Trust
        and its affiliates to participate in the growth and development of
        the Trust.

        Compensation expense associated with rights granted under the Plan is
        deferred and recognized into earnings over the vesting period of the
        rights granted with a corresponding increase in contributed surplus.
        The Trust uses the fair value method using the Black-Scholes model to
        calculate compensation expense.

        Exchangeable shares

        Exchangeable shares which were issued by a subsidiary of the Trust
        are convertible into trust units based on an exchange ratio, which is
        adjusted monthly to reflect the distributions paid on the Trust
        units. These exchangeable shares are not transferable to third
        parties and can only be disposed of by exchanging them for trust
        units. As a result the exchangeable shares have been classified as
        part of unitholders' equity.

        Financial instruments

        The Trust's financial assets and liabilities consist of cash and cash
        equivalents, accounts receivable, accounts payable and accrued
        liabilities, deferred revenue and long-term debt. The fair value of
        these financial assets and liabilities approximate their carrying
        value, unless otherwise noted. It is management's opinion that the
        Trust is not exposed to significant interest or credit risks other
        than such risk relating to non-hedged floating rate debt.

        Derivative financial instruments

        The Trust utilizes derivative financial instruments to manage
        economic exposure to market risks relating to fluctuations in
        interest rates. The Trust is impacted by interest rate changes based
        on the amount of floating rate debt outstanding. Derivative financial
        instruments are not used for trading or speculative purposes.

        The Trust formally documents all relationships between hedging
        instruments and the hedged items, the risk management objective and
        the method for assessing the effectiveness of the hedge. The
        effectiveness of the hedge is assessed both at inception of the hedge
        and throughout its term. If the derivative is deemed effective, and
        qualifies for hedge accounting, gains and losses are deferred until
        settlement of the derivative contract. If a derivative does not
        qualify for hedge accounting, gains and losses resulting from
        fluctuations in the fair value of the derivative are recognized into
        income in the period that they occur.

        Earnings per unit

        Earnings per unit is calculated using the weighted-average number of
        units and exchangeable shares outstanding during the year. Diluted
        calculations have been completed using the treasury method.

    3.  ACQUISITIONS

        (a)  Acquisition of shares of Titan Surface Casing Ltd.

        On April 29, 2005 Trinidad Drilling, a subsidiary of the Trust,
        purchased all of the outstanding shares of Titan Surface Casing Ltd.
        ("Titan"), effective April 1, 2005, for consideration of
        $33.0 million. The acquisition was funded through the issuance of
        1,961,132 exchangeable shares with a value of $20.8 million, the
        issuance of 85,960 trust units with a value of $0.9 million and cash
        of $3.4 million. As part of the Titan acquisition, at the time of
        closing, Trinidad was obligated to repay the $3.8 million of long-
        term debt and $4.1 million of shareholder loans.

        The exchangeable shares can be converted (at the option of the
        holder) into trust units at any time.  The exchangeable shares are a
        new series of exchangeable shares which are not publicly traded and
        have an exchange ratio of 1:1 at the time of issuance. The
        exchangeable shares are exchangeable into trust units at any time up
        to five years after issuance, based on an exchange ratio that adjusts
        each time the Trust makes a distribution to its unitholders.

        The consideration paid for this acquisition has been allocated under
        the purchase method as follows:

        (thousands)                                                     2005
        ---------------------------------------------------------------------
        Purchase price allocated as follows:
          Working capital, net                                            13
          Other assets                                                    60
          Goodwill                                                    21,985
          Capital assets                                              12,450
          Future income taxes                                         (1,496)
                                                                 ------------
                                                                      33,012
                                                                 ------------

        Financed as follows:
          Trust units                                                    911
          Exchangeable shares                                         20,788
          Cash, net of working capital                                11,300
                                                                 ------------

                                                                      32,999
        Plus: working capital                                             13
                                                                 ------------
                                                                      33,012
                                                                 ------------

        Goodwill from this acquisition is not tax deductible.


        (b)  Acquisition of assets of Summit Energy Services Inc.

        On September 30, 2005 Trinidad Well Servicing, a subsidiary of the
        Trust, purchased substantially all of the well servicing assets of
        Summit Energy Services Inc. for consideration of $18.0 million.  The
        acquisition was funded through internal funds flow.

        The consideration paid for this acquisition has been allocated under
        the purchase method as follows:

        (thousands)                                                     2005
        ---------------------------------------------------------------------
        Capital assets                                                12,716
        Goodwill                                                       5,324
                                                                 ------------
                                                                      18,040
                                                                 ------------

        Financed as follows:
                                                                 ------------
          Internal funds flow                                         18,040
                                                                 ------------

        The total amount of goodwill arising from this acquisition that is
        tax deductible is $4.0 million.

    (c)  Acquisition of assets of Cheyenne Drilling LP

        On December 20, 2005 Trinidad Drilling LP, a subsidiary of the Trust,
        purchased substantially all of the assets of Cheyenne Drilling LP
        ("Cheyenne") for consideration of $231.4 million. The acquisition
        was funded through $175.9 million in cash proceeds raised through the
        issuance of 10,666,667 trust units for gross proceeds of
        $189.9 million and the issuance of 3,696,786 trust units at a price
        of $15.00 to the shareholders of Cheyenne.

        The consideration paid for this acquisition has been allocated under
        the purchase method as follows:


        (thousands)                                                     2005
        ---------------------------------------------------------------------

        Capital assets                                               189,425
        Goodwill                                                      42,314
                                                                 ------------
                                                                     231,739
                                                                 ------------

        Financed as follows:
          New equity raised net of issue costs                       176,287
          New equity issued to shareholders of Cheyenne               55,452
                                                                 ------------
                                                                     231,739
                                                                 ------------

        The total amount of goodwill arising from this acquisition that is
        tax deductible is $42.3 million.

        (d)  Amalgamation of Mastco Derrick Services Ltd.

        Effective March 16, 2006, the Trust amalgamated one of its wholly-
        owned subsidiaries with Mastco Derrick Services Ltd. ("Mastco") for
        consideration of $62.4 million less outstanding debts adjusted for
        net working capital. Mastco's purchase price is subject to a working
        capital adjustment which has not been finalized to date. The
        acquisition was funded through internal funds flow of $15.8 million
        and the issuance of 1,494,557 trust units with a value of
        $24.7 million.

        The consideration paid for this acquisition has been preliminarily
        allocated under the purchase method as follows:


        (thousands)                                                     2006
        ---------------------------------------------------------------------

        Purchase price allocated as follows:
          Working capital, net                                       (21,808)
          Other assets                                                   329
          Goodwill                                                    42,837
          Capital assets                                              17,148
          Future income taxes                                          2,018
                                                                 ------------
                                                                      40,524
                                                                 ------------

        Financed as follows:
          Trust units                                                 24,720
          Cash, net of working capital adjustment                     15,804
                                                                 ------------
                                                                      40,524
                                                                 ------------

        Goodwill from this acquisition is not tax deductible.

    4.  CAPITAL ASSETS

                                                      2006
        As at December 31,                         Accumulated      Net Book
        (thousands)                         Cost  Amortization         Value
        ---------------------------------------------------------------------

        Rigs and rig related equipment   860,144        96,674       763,470
        Automotive equipment and other
         equipment                        15,288         4,592        10,696
        Construction equipment               615            52           563
        Building                          23,234           938        22,296
        Land                              12,346             -        12,346
        Assets under construction         93,740             -        93,740
                                    -----------------------------------------
                                       1,005,367       102,256       903,111
                                    -----------------------------------------


                                                      2005
        As at December 31,                         Accumulated      Net Book
        (thousands)                         Cost  Amortization         Value
        ---------------------------------------------------------------------

        Rigs and rig related equipment   593,758        50,055       543,703
        Automotive equipment and other
         equipment                         8,064         2,041         6,023
        Construction equipment                 -             -             -
        Building                          11,156           133        11,023
        Land                               6,638             -         6,638
        Assets under construction              -             -             -
                                    -----------------------------------------
                                         619,616        52,229       567,387
                                    -----------------------------------------
    5.  LONG-TERM DEBT

        As at December 31,
        (thousands)                                        2006         2005
        ---------------------------------------------------------------------
        Credit facilities(a)                            382,037       95,080
        Building loans(b)                                 8,752        9,100
        Vehicle loans(c)                                    719        1,270
                                                    -------------------------
                                                        391,508      105,450
        Less: current portion of long-term debt          (3,232)      (9,494)
                                                    -------------------------
                                                        388,276       95,956
                                                    -------------------------

        a)  Effective April 18, 2006, the Trust closed a new syndicated loan
        facility to increase the principal available from $250.0 million to a
        facility comprised of a $250.0 million Canadian revolver and a
        $100.0 million Canadian five-year term facility. The Canadian
        revolving facility requires monthly interest payments and is
        renewable annually subject to the mutual consent of the lenders and
        the Trust. To the extent that the facility is not renewed the drawn
        down principal would be due 364 days later. The Canadian term loan
        requires monthly interest payments based on a spread over the one,
        two or three month BA rate and requires repayment based on
        one percent annual amortization and a balloon payment at its maturity
        date of May 1, 2011.

        A US subsidiary of the Trust closed a $125.0 million US dollar
        five-year term facility to fund the current US operations. This
        facility requires monthly interest payments based on a spread over
        the one, two or three month LIBOR rate and requires repayment based
        on one percent annual amortization and a balloon payment at its
        maturity date of May 1, 2011.

        The new facilities represent a combined Canadian dollar equivalent
        debt capacity of approximately $495.7 million and were structured by
        GE Energy Financial Services and syndicated by GE Capital Markets,
        Inc. The members of the syndicate group include major Canadian,
        United States and International financial institutions. This debt is
        secured by a general guarantee over the assets of the Trust.

        The effective interest rate on this facility was 7.6% for the
        year-ended.

        b)  On December 15, 2005, Trinidad entered into a $9.1 million
        non-revolving credit facility with GE Canada on properties held by
        the Trust. The facility requires monthly interest payments at a rate
        of 6.26% per annum, matures June 2011 and is secured by the
        respective properties.

        c)  The vehicle loans are payable over various periods from 24 months
        to 40 months at interest rates varying from 0% to 9%, and are secured
        by the related assets.

    6.  INCOME TAXES

        For the years ended December 31,
        (thousands)                                        2006         2005
        ---------------------------------------------------------------------
        Net income before tax                           139,273       57,834
        Corporate tax rate                                32.98%       34.16%
                                                    -------------------------
        Tax expense at statutory rate                    45,932       19,756
          Tax reduction arising from trust
           income distribution                          (26,765)     (12,656)
          Non deductible expenses                         2,156        1,136
          Statutory and other rate differences           (1,656)           -
          Effect of change in expected tax rate          (2,912)        (344)
          Large corporation tax expense                    (388)       1,334
          Other                                            (800)         377
                                                    -------------------------
        Total tax expense                                15,567        9,603
                                                    -------------------------

        The liability and asset for future income taxes on the Trust's
        balance sheet is comprised of the following temporary differences:


        As at December 31,
        (thousands)                                        2006         2005
        ---------------------------------------------------------------------
        Loss carry forward                                2,057        1,226
        Unbilled revenue                                 (5,585)           -
                                                    -------------------------
        Future tax liability                             (3,528)       1,226
                                                    -------------------------

        Loss carry forward                               18,836        4,768
        Capital assets                                  (57,657)     (33,731)
        Financing costs                                     102          (37)
                                                    -------------------------
        Future tax liability                            (38,719)     (29,000)
                                                    -------------------------

        Loss carry forwards of $61.8 million have been recognized for income
        tax purposes of which $55.3 million have been recorded as a non-
        current future tax asset and are due to expire between 2025 and 2026.

        On December 21, 2006, the Minister of Finance released for comment
        draft legislation concerning the taxation of certain publicly traded
        trusts. The legislation reflects proposals originally announced by
        the Minister on October 31, 2006. Under the proposed legislation,
        income trusts will be taxed on a basis similar to corporations, where
        distributions made from the Trust to unitholders will be taxed at the
        Trust level. Under the proposed plan, income distributions will
        first be taxed at the Trust level at a special rate estimated to be
        31.5%, and for taxable Canadian residents distributions will be
        treated as dividends from a Canadian corporation and will be eligible
        for the dividend tax credit. The government is proposing a four-year
        transition period for existing trusts and as such Trinidad will not
        be subject to the proposed measures until its 2011 taxation year. It
        is not known at this time if or when the proposal will be enacted by
        Parliament.

    7.  UNITHOLDERS' CAPITAL AND CONTRIBUTED SURPLUS

        a) Unitholders' Capital

        Authorized
        Unlimited number of trust units, voting, participating

        For the years ended December 31,
        (thousands except unit data)    2006                    2005
        ---------------------------------------------------------------------
                              Number of     Amount    Number of     Amount
                                Units         $         Units         $
                             ------------------------------------------------

        Unitholders' capital
         - opening balance    78,909,976     621,972  45,898,116     222,815
        Trust units issued
         - for cash, net of
         issue costs                   -           -  24,590,144     308,522
        Trust units issued
         on acquisitions       1,494,557      24,720   3,782,746      56,363
        Trust units issued
         on conversion of
         exchangeable shares   1,505,630      13,825   4,158,022      31,986
        Trust units issued
         on exercise of
         options and rights    1,138,289       8,272     480,948       1,977
        Trust units
         repurchased under
         normal course issuer
         bid                     (66,500)       (537)          -           -
        Contributed surplus
         transferred on
         exercised options
         and rights                    -       1,332           -         309
                             ------------------------------------------------
        Unitholders' capital
         - ending balance     82,981,952     669,584  78,909,976     621,972
                             ------------------------------------------------

        Effective September 14, 2006 Trinidad announced its intent to acquire
        for cancellation up to 10% (7,336,882 trust units) of the Trust's
        publicly traded units by way of a normal course issuer bid ("NCIB")
        commencing September 18, 2006 and extending to September 17, 2007.
        During the year ended December 31, 2006 the Trust purchased
        66,500 units at a cost of $0.9 million. The excess of the purchase
        price over the carrying amount of the units purchased and cancelled
        is recorded as a reduction of accumulated earnings.

        The per unit trust amounts were calculated on the weighted average
        number of units outstanding of 83,078,833 (2005 - 58,850,122). In
        the current year the calculated additional diluted units are
        1,565,606 (2005 - 1,284,195) due to the dilutive impact of employee
        and director rights and options.

        b) Contributed surplus

        For the years ended December 31,
        (thousands)                                        2006         2005
        ---------------------------------------------------------------------
        Contributed surplus - opening balance             5,949        3,055
        Unit based compensation expense                   7,105        3,203
        Contributed surplus transferred on exercise
         of rights                                       (1,332)        (309)
                                                    -------------------------
        Contributed surplus - ending balance             11,722        5,949
                                                    -------------------------

    8.  EXCHANGEABLE SHARES

        A subsidiary of the Trust has issued the following exchangeable
        shares:

        For the years ended December 31,
        (thousands except unit data)    2006                    2005
        ---------------------------------------------------------------------
                               Number of     Amount    Number of     Amount
                                Shares         $        Shares         $
                             ------------------------------------------------
        Exchangeable shares
         - opening balance     2,007,883      19,602   3,948,718      30,800
        Exchangeable shares
         issued, Series C
         - Titan purchase              -           -   1,961,132      20,788
        Exchangeable shares
         exchanged, Initial
         Series                 (347,100)     (2,707) (1,707,162)    (13,316)
        Exchangeable shares
         exchanged, Series B           -           -  (1,641,026)    (12,800)
        Exchangeable shares
         exchanged, Series C  (1,048,817)    (11,118)   (553,779)     (5,870)
                             ------------------------------------------------
        Exchangeable shares
         - ending balance        611,966       5,777   2,007,883      19,602
                             ------------------------------------------------

        The exchange ratio for the 253,430 initial series exchangeable shares
        is 1.23871 and the trust units issuable upon conversion are 313,926.
        All Series B exchangeable shares were converted in the prior year.
        The exchange ratio for the 358,536 Series C exchangeable shares is
        1.13161 and the trust units issuable upon conversion are 405,722.

    9.  UNIT OPTION AND RIGHTS PLAN

        Unit Option Plan

        The Trust Unit Option Plan provides for unit options to assist
        directors, officers, employees and consultants of the Trust and its
        affiliates to participate in the growth and development of the Trust.

        All options issued shall vest in equal proportions over a period of
        three years from the date of grant (unless otherwise determined by
        the Board of Directors at the time of issue) and, shall be
        exercisable for a period of five years from the date of grant. The
        options will have an exercise price not exceeding the closing trading
        price for the units on the Toronto Stock Exchange on the date
        immediately preceding the date of grant and not less than the price
        permitted by applicable securities law.

        The following summarizes the unit options that are outstanding under
        the Unit Option Plan as at December 31, 2006 and 2005 and the changes
        during these periods:

        For the years ended
        December 31,                    2006                    2005
        ---------------------------------------------------------------------
                                            Weighted                Weighted
                                             Average                 Average
                               Number of    Exercise   Number of    Exercise
                                 Options       Price     Options       Price
                             ------------------------------------------------
        Outstanding
         - beginning
         of period                19,850        2.25     107,729        1.97
        Granted during
         the period                    -           -           -           -
        Exercised during
         the period              (19,850)       2.25     (87,879)       1.91
        Forfeited during
         the period                    -           -           -           -
                             ------------------------------------------------
        Outstanding - end
         of period                     -           -      19,850        2.25
                             ------------------------------------------------

        All outstanding options at the beginning of the period were exercised
        during the year; hence there are no unit options outstanding as of
        December 31, 2006.

        For options granted in 2002, the Trust has elected to disclose the
        pro forma results as if the amended accounting standard had been
        applied retroactively. On May 24, 2002, the Trust issued 172,000
        options under the Unit Option Plan at an exercise price of $1.58.
        The Trust recognized no compensation expense in respect of the
        options granted under its Unit Option Plan. The estimated fair value
        of these options, computed using the Black-Scholes model was
        approximately $120,000. If the Trust applied the fair value method
        of accounting for stock based compensation, the estimated fair value
        of $120,000 would be recognized as additional compensation expense
        over the vesting period of the options. The pro forma effect of
        applying this method of accounting would have no impact for the 2006
        fiscal year (2005 - $15,781). There would be no effect on the basic
        and diluted earnings per trust unit.

        Trust Unit Rights Incentive Plan

        On May 2, 2003 the Trust established the Trust Unit Rights Incentive
        Plan for unit rights to assist directors, officers, employees and
        consultants of the Trust and its affiliates to participate in the
        growth and development of the Trust. The Trust Unit Rights Incentive
        Plan restricts the number of rights reserved for issuance such that
        it does not exceed 10% of the trust units outstanding.

        Rights granted vest 50% immediately and 25% on the first and second
        anniversary from the date of grant (unless otherwise determined by
        the Board of Directors at the time of issuance) and, shall be
        exercisable for a period of five years from the date of grant. The
        rights will have an exercise price not exceeding the closing trading
        price for the units on the Toronto Stock Exchange on the date
        immediately preceding the date of grant and not less than the price
        permitted by applicable securities law. The exercise price of rights
        may be adjusted downwards at the option of the rights holder from
        time to time by the amount, if any, that the distributions to
        unitholders in any calendar quarter exceed 2% (8% annually) of the
        Trust's net book value of capital assets.

        The following summarizes the unit rights that are outstanding under
        the Trust Unit Rights Incentive Plan as at December 31, 2006 and 2005
        and the changes during these periods:

        For the years ended
        December 31,                    2006                    2005
        ---------------------------------------------------------------------
                                            Weighted                Weighted
                                             Average                 Average
                               Number of    Exercise   Number of    Exercise
                                  Rights       Price      Rights       Price
                             ------------------------------------------------
        Outstanding
         - beginning
         of period             5,746,326        9.64   3,928,738        7.62
        Granted during
         the period            3,890,818       15.13   2,257,724       12.22
        Exercised during
         the period           (1,118,437)       7.36    (393,069)       4.60
        Forfeited during
         the period             (271,868)      13.09     (47,067)       6.34
                             ------------------------------------------------
        Outstanding
         - end of period       8,246,839       12.43   5,746,326        9.64
                             ------------------------------------------------

        The range of exercise prices for the unit rights outstanding at
        December 31, 2006 is as follows:

        ---------------------------------------------------------------------
                            Total Rights Outstanding      Exercisable Rights
                                               Weighted
                                    Weighted    Average             Weighted
                                     Average  Remaining              Average
        Range of                    Exercise       Life             Exercise
        Exercise Prices     Number     Price     (years)    Number     Price
        ---------------------------------------------------------------------
        $2.78 - $4.00       31,250      2.78       1.34     31,250      2.78
        $4.01 - $6.00      252,537      5.30       1.86    252,537      5.30
        $6.01 - $9.00      889,662      8.36       2.46    889,662      8.36
        $9.01 - $12.50   3,358,262     11.23       3.23  2,663,757     10.97
        $12.51 - $16.83  3,715,128     15.06       4.41  1,460,505     15.46
        ---------------------------------------------------------------------
        $2.78 - $16.83   8,246,839     12.43       3.63  5,297,711     11.47
        ---------------------------------------------------------------------

        The Trust uses the Black-Scholes option-pricing model to determine
        the estimated fair value of the unit rights issued subsequent to
        January 1, 2003. The per unit weighted average fair value of stock
        options granted during the year ended December 31, 2006 was $2.15
        (2005 - $1.70).  For the year ended December 31, 2006 the Trust
        recognized compensation expense included in the calculation of net
        earnings of $7.1 million (2005 - $3.2 million) using the following
        weighted average assumptions:

        For the years ended December 31,                   2006         2005
        ---------------------------------------------------------------------
        Expected volatility                                35.3%        37.1%
        Annual distribution yield                           8.4%         8.5%
        Risk free interest rate                             3.5%         3.3%
        Expected life (years)                               3.3          3.5
        ---------------------------------------------------------------------

    10. FINANCIAL INSTRUMENTS

        Effective July 1, 2006, Trinidad entered into two interest rate swap
        agreements to hedge the floating interest rates on fifty percent of
        the outstanding balances of the Canadian and US term debt facilities.
        These interest rate swaps mature concurrently with the long-term debt
        facility on May 1, 2011 allowing the Trust to mitigate its risk of
        interest rate fluctuations over the term of the debt agreement.

        Fifty percent of the outstanding balance of the Canadian term
        facility swapped interest based on a spread over the one month BA for
        a fixed interest rate of 5.362%. Simultaneously the Trust hedged
        fifty percent of the US term facility swapping interest based on a
        spread over the one, two or three month LIBOR for fixed interest of
        6.108%.

        The effectiveness of the interest rate swaps were evaluated and found
        to be effective. As such the Trust has applied hedge accounting. For
        the year ended December 31, 2006, a loss of $0.5 million was recorded
        in interest expense.

    11. COMMITMENTS

        The Trust has several capital and operating lease agreements on
        buildings and equipment. The future lease obligations for the next
        five years are summarized below:

        (thousands)
        ---------------------------------------------------------------------
        2007                                                           3,024
        2008                                                           2,774
        2009                                                           2,412
        2010                                                           2,052
        2011                                                           7,154

        In 2005 and early 2006, Trinidad announced its intent to expand its
        existing drilling fleet through the construction of 29 new diesel
        electric drilling rigs which will be deployed in both Canada and the
        United States. This construction program has enabled the Trust to
        actively pursue growth opportunities in the market and provide
        accretive growth to its unitholders. All of the rigs are backed by
        take-or-pay contracts which provide for committed drilling days and
        drilling rates over the next three to five years. Furthermore, the
        cost of construction on five of the rigs has been partially financed
        through customer contributions, to be returned based on drilling days
        over the term of the contract. Total capital costs of construction
        are expected to be $401.0 million, of which approximately
        $356.2 million was paid as at December 31, 2006. Four of these rigs
        were completed and deployed in 2005 and an additional fifteen
        throughout 2006. The remaining rigs are scheduled to be delivered in
        the first and second quarter of 2007.

    12. SEGMENTED INFORMATION

        The acquisition of Cheyenne Drilling, which closed December 20, 2005,
        and the current rig construction program have diversified the Trust's
        operations from its primary geographic focus in Western Canada to
        include locations in the United States, including the Rocky Mountain
        region, Mid Continent region, and the Texas and Oklahoma regions.
        This acquisition added additional rigs of varying depths and
        capabilities to the current drilling fleet operating in the Canadian
        market complementing the current drilling operations. Despite the
        similarities in the assets acquired, the increased management depth
        in the United States and the varying conditions between the Canadian
        and United States market has resulted in management evaluating the
        Trust's drilling operations performance on a geographically segmented
        basis. In addition, the acquisition of Mastco further broadened the
        operations of the Trust to include the capability to design,
        manufacture, sell and refurbish drilling rigs, and related equipment.
        The unique characteristics of this subsidiary from the Trust's core
        drilling operations have resulted in management's separate evaluation
        of its results. Transactions between the segments are recorded at
        cost and have been eliminated upon consolidation.

        ---------------------------------------------------------------------
        For the
        year ended                  United                Inter-
        December 31,   Canadian     States  Construc-    segment
        2006          Drillings   Drilling       tion    Elimin-
        (thousands)  Operations Operations Operations     ations       Total
        ---------------------------------------------------------------------
        Revenue         364,278    166,498    111,128    (62,049)    579,855
        Operating
         expense        196,665     77,676     97,979    (62,049)    310,271
                       ------------------------------------------------------
        Gross margin    167,613     88,822     13,149          -     269,584

        Interest         12,151      8,424        149          -      20,724
        Depreciation
         and
         amortization    30,749     20,994        458          -      52,201
        (Gain) loss on
         assets          (1,852)       (27)         -          -      (1,879)
                       ------------------------------------------------------
        Income before
         corporate
         items          126,565     59,431     12,542          -     198,538
        General and
         administrative                                               51,627
        Unit based
         compensation                                                  7,105
        Foreign exchange
         (gain) loss                                                     533
        Income taxes                                                  15,567
                       ------------------------------------------------------
        Net earnings                                                 123,706
                       ------------------------------------------------------

        Capital
         expenditures
         (including
         acquisitions
         and deposits)  158,517    199,358         74          -     357,949
        Total assets    680,591    528,872     36,170          -   1,245,633
        Goodwill         38,155     42,491     42,837          -     123,483
        ---------------------------------------------------------------------


        ---------------------------------------------------------------------
        For the
        year ended                  United                Inter-
        December 31,   Canadian     States  Construc-    segment
        2005          Drillings   Drilling       tion    Elimin-
        (thousands)  Operations Operations Operations     ations       Total
        ---------------------------------------------------------------------
        Revenue         282,938      5,394          -          -     288,332
        Operating
         expense        164,701      3,216          -          -     167,917
                       ------------------------------------------------------
        Gross margin    118,237      2,178          -          -     120,415

        Interest          5,600          -          -          -       5,600
        Depreciation
         and
         amortization    27,255        968          -          -      28,223
        (Gain) loss
         on assets          263          -          -          -         263
                       ------------------------------------------------------
        Income before
         corporate
         items           85,119      1,210          -          -      86,329
        General and
         administrative                                               26,183
        Unit based compensation                                        3,203
        Foreign exchange (gain) loss                                     (87)
        Income taxes                                                   9,603
                       ------------------------------------------------------
        Net earnings                                                  47,427
                       ------------------------------------------------------

        Capital
         expenditures
         (including
         acquisitions
         and deposits)  135,859    293,069          -          -     428,928
        Total assets    558,665    274,651          -          -     833,316
        Goodwill         37,115     42,314          -          -      79,429
        ---------------------------------------------------------------------

    13. SUBSEQUENT EVENT

        On January 26, 2007, Trinidad announced the construction of an
        additional 5 new customer backed rigs to the rig construction
        program. All five rigs will be operating in the United States, each
        backed by take-or-pay contracts, providing committed drilling days
        and drilling rates over the next three years. Total capital costs of
        construction are estimated to be $80 million to be funded through
        Trinidad's recently expanded credit facility and internal cash flow.
        Approximately $33.8 million has been paid as at February 20, 2007.

    14. COMPARATIVE FIGURES

        Certain of the comparative figures have been reclassified to conform
        to current year's presentation. Such reclassification did not impact
        previously reported net income or retained earnings.
For further information:
For further information: Michael Heier, Chairman & Chief Executive
Officer or Brent Conway, Chief Financial Officer at: Phone: (403) 265-6525,
Fax: (403) 265-4168; E-mail: twood@trinidaddrilling.com