President's Message

Dear Fellow Unitholder:

Unitholders who requested our 2007 financial information received our 2007 Financial Report, filed at the end of March.

To briefly recap our 2007 financial results, revenue increased 4% to $65.9 million with consistent activity levels year over year and moderately higher daywork prices associated with the new equipment brought on line in 2007. Net earnings decreased 63% to $6.0 million reflecting the initial recording of future income tax and higher costs associated with our growth.

Despite the reduction in overall drilling activity in 2007, Stoneham maintained industry-leading operational performance. With the completion of six new rigs during 2007, our overall operating days were consistent year over year as our increased capacity helped to offset lower rig utilization. With long-term contracts, ability to deliver consistent performance, and a bias to deeper capacity equipment, we were able to maintain an average rig utilization rate that was 46% higher than the industry average.

As a result of the downturn in natural gas drilling activity, we reduced our distribution rate in the fourth quarter to allow us to appropriately manage and maintain flexibility with our balance sheet. We also finalized a syndicated banking agreement and increased our credit facility to $75 million to fund the rig construction program and our new Leduc operations centre. While we will keep a close watch on utilization rates, these measures should allow us to maintain distributions at an appropriate level through the current downturn.

Market Environment

In the three years since our initial public offering, the contract drilling industry in western Canada has faced a number of challenges.

High activity levels experienced in 2005 and 2006 led to rapid growth, rising costs, and shortages of experienced personnel. Robust market conditions created unprecedented demand for drilling rigs, prompting aggressive rig construction programs that increased the total number of rigs available in western Canada by 25% in three years.

However, the overheated contract drilling market started to cool toward the end of 2006 as exploration and production (E&P) companies began to cut back drilling programs in response to a softening demand for natural gas. Despite record world oil prices, the industry slowdown continued through 2007 as lower natural gas prices and higher costs reduced producers’ margins on certain projects making them uneconomic. In western Canada, nearly three quarters of drilling activity is targeted towards natural gas. The average benchmark (AECO) prices for natural gas in 2006 and 2007 were $6.51 and $6.45 per MMBtu, respectively, well below the 2005 average of $8.73 per MMBtu. Reduced activity levels, combined with an increase in available rigs, caused Canadian rig utilization rates in 2007 to be the lowest in five years.

Realities such as these are a normal part of doing business in a cyclical industry. We believe that by remaining focused on our core values and beliefs, with an unwavering commitment to safety, efficiency, and customer service, we will continue to deliver quality and value through the cyclical highs and lows. By employing this disciplined approach, we have consistently achieved operating results that have surpassed the industry average. As well, we have continued to deliver solid returns to our unitholders, with distributions since inception amounting to $38.5 million or $4.79 per trust unit.

Growth of our Rig Fleet

Our fleet ranges in age from brand new to seven years old, making it one of the most efficient fleets in the industry. Our newest rigs are an evolution of our existing rig design, with increased capacity that enhances the overall flexibility and versatility of our fleet. We have incorporated many design elements that improve the operating characteristics of our rigs, including the ability to move in fewer loads and prepare for drilling operations in a shorter period of time. These performance characteristics provide cost savings to our clients, while affording them increased operating flexibility. Our superior operational performance means our rigs are always in high demand. We will continue to stimulate innovation and implement technological advancements to improve operating efficiencies.

We marked the end of our current rig construction program with the deployment of Rig 20 in the fourth quarter of 2007 and Rigs 17 and 18 in the first quarter of 2008. The nine-rig construction program was driven by the needs of our customers for deeper capacity and more agile equipment. All but three of our rigs are currently employed under long term contracts. The Stoneham fleet has grown to 19 rigs from 6 rigs at the end of 2004. The pace of our future growth will be subject to client needs and market conditions, as well as the need to provide stable and sustainable cash distributions and satisfactory returns to our unitholders.

To support our growth and maintain our commitment to quality, we have built a new operations centre in Leduc, Alberta. We moved into the new facility on March 31, 2008, consolidating our shops, yard storage and operations personnel into one facility.

Stoneham Enters the U.S. Market

In January 2008, we formed a U.S. subsidiary, Stoneham Drilling Corporation. We have entered into a one-year contract with the U.S. arm of an existing Canadian client and have deployed two rigs to the Anadarko Basin in Oklahoma. Rigs 17 and 18 were both mobilized in the first quarter of 2008. Our deepest capacity rigs, Rigs 17 and 18, feature AC electric drives with a rated depth capacity of 5,500 metres. As has been our experience in Canada, we expect these rigs will significantly outperform older style rigs that continue to operate in the basin today. This opportunity to differentiate Stoneham will enable us to build a platform for growth, and may allow us to deploy additional rigs to the U.S. in the future. This strategic move into the United States complements our Canadian operations and will enhance operational stability, especially in times of fluctuating commodity prices and during the traditionally slow second quarter when spring break-up inhibits drilling activity in much of western Canada. Seasonal fluctuations generally do not occur in the United States.

Outlook

With excess oilfield equipment in western Canada, the CAODC forecast for 2008 (updated April 16, 2008) is that average industry utilization will drop to 34% on muted activity levels that will see 28% fewer wells drilled than in 2007. This forecast was based on an average AECO natural gas price of $6.50 per Mcf and an average WTI oil price of US$80 per barrel. Through the first quarter, natural gas prices strengthened considerably; however, overall Canadian drilling activity remained at a slightly slower pace than last year. The industry average rig utilization rate was 55.9%, down from 58.8% in the first quarter of 2007, while Stoneham’s utilization rose to 77.1% from 72.0% a year ago.

To date in 2008, we have seen conservative drilling budgets for E&P companies due to weak natural gas prices in 2007, a strong Canadian dollar that makes our natural resources more expensive to develop and produce, and continued uncertainty regarding the potential impact of Alberta’s new royalty regime on future cash flows. However, there are signs that natural gas markets are beginning to strengthen, which could lead to increased demand for contract drilling services in the last half of 2008. Natural gas storage levels are down and future imports of liquefied natural gas (LNG) to the United States are uncertain because of growing LNG demand in Europe and Asia. As well, the Government of Alberta recently introduced two new, five-year deep resource royalty programs designed to encourage the continued development of deep, high-cost oil and gas reserves. These programs will be implemented with the new royalty framework on January 1, 2009.

Activity levels to date in the second quarter have been higher than the same period in 2007 and, provided that most rigs are able to return to work in early to mid June, we expect our Canadian rig utilization in the second quarter to be higher than last year. As well, this activity will be augmented by activity from our two rigs operating in the U.S.

As conventional oil and gas reserves are produced, remaining reserves require costly and deep drilling in increasingly remote locations. Substantial potential exists at depths of 2,000 to 5,500 metres and numerous E&P companies are currently pursuing active drilling programs targeting large oil and natural gas reserves at these depths. Stoneham’s rigs are designed to meet the challenges of deeper drilling. In 2007, Stoneham ranked second in the industry for deep drilling in western Canada, with an average well-depth of 2,481 metres. The robust characteristics of our equipment position us as a contractor of choice as the demand for deeper drilling continues. Going forward, our strong client relationships – earned through consistently high operational and safety performance – will continue to support strong utilization rates. We have worked hard to build relationships with a core group of E&P companies that maintain high operating standards and year-round drilling programs through all phases of the economic cycle; 85% of our fleet is under long-term contract with these preferred customers.

Acknowledgments

Our success is very much the result of a team effort. I would like to thank our employees for sharing Stoneham’s values and beliefs. I’m pleased to report that our strong safety record improved in 2007, even with the need to hire and train new crews to deploy five additional drilling rigs. We will continue to foster a safe, substance free and rewarding work environment. Good governance adds value and enhances our operational performance and I would like to acknowledge the directors of Stoneham Administration Inc. and Stoneham Drilling Inc. Our directors bring a long-term perspective to strategic decision making that reflects sound business judgement and years of industry experience. Collectively, management and directors own approximately 23% of Stoneham’s units, which clearly aligns our interests with the interests of our unitholders.

Stoneham is an operationally-engineered, service-focused organization, and we pride ourselves on providing quality, performance, and value to our clients. I am grateful to our clients for their ongoing confidence in us. We will continue to hone our ability to understand each of our client’s specific needs and respond with innovative, practical, and cost-effective solutions to meet those needs.

In closing, I would like to thank our unitholders for their continued support. They have my assurance that we will continue to explore the options available to us as an income trust as we approach 2011. Regardless of our corporate structure, our contract drilling business will remain our key focus and fundamentally solid. We look forward to maintaining a satisfying long-term investment relationship with attractive returns.

Yours truly,