INDUSTRY OVERVIEW

Demand for Garneau’s coating products has historically been correlated to drilling activity in Western Canada. Drilling results in Western Canada were 17,043 wells for 2008 compared to 18,600 wells for 2007, approximately an 8.0% decrease. This decrease in drilling activity was caused by soft commodity prices and an oversupply of inventory. Alberta was especially hit hard as a result of the Government’s new Royalty Program.

Industry drilling forecasts project a further decrease to a total of 13,500 wells to be drilled for the 2009 year. This will result in a continuation of the slowdown in petroleum industry activity during 2009. Since November 2008, the world’s rapid decline into recession has reduced demand for all commodities including oil and gas. This has triggered a dramatic deterioration in commodity prices for oil and natural gas, leading to a significant reduction in related field activity in Canada.

On a provincial basis for 2009, PSAC (Public Service Alliance Canada) estimates 8,455 wells will be drilled in Alberta which is a 27.0% decrease over 2008 drilling levels for the Province of Alberta.

Domestic fabrication activity decreased during 2007 through 2008 as decreased demand for oilfield drilling service and equipment resulted in projects declining throughout the 2007 and 2008 year. The softening in new project quoting requirements experienced throughout 2007 has continued through 2008. International fabrication opportunities continue to exist for the Corporation.

Overall, the 2007 and 2008 slowdown has continued through the Corporation for the first quarter of 2009, with increased activity projected for third quarter of 2009. This forecast is contingent upon strong, stable commodity prices and the Corporation’s ability to meet its lenders (the “Bank”) demand for repayment.

OUTLOOK

The year 2008 has been an extremely challenging year for Garneau.

We have made some significant advancement on the new Reelpipe® (flexible pipe) product offering with the first products being manufactured and these are currently being tested to ensure that they meet or exceed government regulations. This new product was press released during quarter four 2008 and numerous customers are waiting with anticipation for our commercialization of Reelpipe®.

Garneau made a strategic decision to suspend the Pipe Distribution business, this was based on the severe shortage of pipe and increased price of steel.

The Corporation has engaged a third party as a strategic partner to look at alternatives.

Although these initiatives are projected to have positive long term impacts on operating performance, the market slowdown and the Corporation’s inability to generate sufficient working capital in the short term are hampering its ability to reach these longer term objectives, without alternative financing.

Glen R. Garneau
President and CEO
Garneau Inc.