INDUSTRY OVERVIEW

Demand for Garneau’s small diameter coating products has historically been correlated to drilling activity. As projected, drilling results in 2007 decreased from 2006 actuals. Oil and gas drilling activity slightly exceeded 18,600 wells for 2007, a 19% decrease over the 2006 year. Activity lagged behind 2006 results primarily from decreased gas well drilling caused by soft commodity prices and an over supply of inventory.

Industry drilling forecasts project a further decrease to a total of 14,500 wells to be drilled for the 2008 year. This will result in a continuation of the slowdown in petroleum industry activity during 2008. Initial first quarter 2008 coating activity is below the 2007 results as client activity remains curtailed.

Domestic manufacturing activity decreased during 2007 as decreased demand for oilfield drilling service and equipment resulted in projects declining throughout the 2007 year. The softening in new project quoting requirements experienced throughout 2007 is projected to continue into 2008.

International manufacturing opportunities continue to exist with the Corporation’s main focus being market penetration into the United States coating industry.

Overall, the 2007 slowdown is forecasted to continue for the Corporation for the first and second quarter of 2008, with increased activity projected for the third and fourth quarters. This forecast is contingent upon strong, stable commodity prices.

STRATEGIC DIRECTION

Senior Management has concentrated in 2007 on getting Garneau “Back to Business” with several strategic initiatives now underway that are expected to assist the Corporation in future growth plans.

Camrose Upgrades

The Camrose upgrade program continued during 2007 with production line one upgrades completed in September 2007. These upgrades are expected to help improve efficiencies and increase capacity in the plant. Line two upgrades are being delayed until industry activity improves.

Distribution of Oil Country Tubular Goods and Line Pipe Products

The Corporation announced major expansion plans in August 2007 wherein the Corporation is proposing to expand its Pipeline business segment into the distribution of oil country tubular goods and line pipe products.
This expansion will enable Garneau to offer tubular and line pipe procurement and inventory management to its clients, in addition to the existing coating services provided from its 65,000 sq ft Camrose facility.

CCSI Joint Venture

The Corporation signed a joint venture agreement in the third quarter of 2006 to develop cold weather joint coating applications and equipment for future large diameter projects in Northern Canada. Initial trials and work on this joint venture commenced in January 2007. Continued research and development for this Joint Venture was delayed in 2007 due to the industry slowdown, however, is expected to recommence in 2008.
Several other strategic initiatives are being considered to assist the corporation in achieving internal growth.

OUTLOOK 2008

The PSAC January press release projects 14,500 wells to be drilled in 2008, a 22% decrease from 2007 actual results of 18,606 wells. This projected decrease will result in continued soft activity levels for small diameter coating requirements which will have a negative impact on our 2008 coating operations.

The termination of the ShawCor agreement resulted in the Corporation getting back to business in 2008 with a refreshed aggressive attitude expected to be incorporated into our future strategic initiatives. This is partially reflected in our $5 million Camrose plant capital program announced in the fourth quarter of 2006. This capital program will include significant improvements to both Camrose coating lines to help improve efficiencies and increase capacity, together with an overhaul of yard equipment and further land improvements to help improve yard efficiency. The first stage of improvement to the Camrose plant is complete and the second phase has been placed on hold until such time as the market rebounds from the current slowdown.

Furthermore, the Corporation announced major expansion plans to begin in August 2008 wherein the Corporation is proposing to expand its Pipeline business segment into the distribution of oil country tubular goods and line pipe products.

This expansion will enable Garneau to offer tubular and line pipe procurement and inventory management to its clients, in addition to the existing coating services provided fromits 65,000 sq ft Camrose facility. Increasedmarketing efforts and infrastructure realignment procedures are underway to support this aggressive initiative. The expansion will not require significant changes to the plant or yard infrastructure in the Camrose operation. Negotiation for initial supply of tubular products is complete and authorized bank credit lines have been increased to support this new strategic initiative. The tubular and line pipe industry in Western Canada is estimated to exceed over $1.5 billion dollars annually in recent years and Garneau is anticipating that it can successfully penetrate the existing market based on the Corporation’s ability to offer consolidated “one stop shopping” for these services. This announcement marks a major step in Garneau’s commitment to providing the oil and gas industry with additional value added services and further reflects Garneau’s commitment to increasing corporate growth and long term profitability for our shareholders.

Although these strategic initiatives are projected to have a positive long term impact on operating performance, the market slowdown experienced over the past year is expected to continue into 2008. This continued soft market will negatively impact 2008 operating results of the Corporation. A focus on cost controls will continue during this slowdown.

Glen R. Garneau
President and CEO
Garneau Inc.