MANAGEMENT S DISCUSSION AND ANALYSIS

Transcription

1 MANAGEMENT S DISCUSSION AND ANALYSIS The Management s Discussion and Analysis ( MD&A ) should be read in conjunction with the unaudited interim condensed financial statements for the three and six months ended June 30, 2012 and 2011 and the audited consolidated financial statements and MD&A for the year ended December 31, They should also be read in combination with Toromont Industries Ltd. ( Toromont ) Management Information Circular relating to an arrangement involving Toromont., its shareholders, Enerflex Ltd. ( Enerflex or the Company ) and Canada Inc. ( Information Circular or Arrangement ) dated April 11, The interim condensed financial statements reported herein have been prepared in accordance with International Financial Reporting Standards ( IFRS ) and are presented in Canadian dollars unless otherwise stated. IFRS has been adopted in Canada as Generally Accepted Accounting Principles ( GAAP ) and as a result, GAAP and IFRS are used interchangeably within this MD&A. The MD&A has been prepared taking into consideration information that is available up to August 9, 2012 and focuses on information and key statistics from the interim condensed financial statements, and pertains to known risks and uncertainties relating to the oil and gas service sector. This discussion should not be considered all inclusive, as it excludes possible future changes that may occur in general economic, political and environmental conditions. Additionally, other elements may or may not occur which could affect industry conditions and/or Enerflex in the future. Additional information relating to the Company, including the Annual Information Form and Information Circular, is available on SEDAR at FORWARD LOOKING STATEMENTS This MD&A contains forward looking statements. Certain statements containing words such as anticipate, could, expect, seek, may, intend, will, believe and similar expressions, statements that are based on current expectations and estimates about the markets in which the Company operates and statements of the Company s belief, intentions and expectations about development, results and events which will or may occur in the future constitute forward looking statements and are based on certain assumptions and analyses made by the Company derived from its experience and perceptions. All statements, other than statements of historical fact contained in this MD&A are forward looking statements, including, without limitation: statements with respect to anticipated financial performance; future capital expenditures, including the amount and nature thereof; bookings and backlog; oil and gas prices and demand; other development trends of the oil and gas industry; business prospects and strategy; expansion and growth of the business and operations, including market share and position in the energy service markets; the ability to raise capital; expectations regarding future dividends; expectations and implications of changes in government regulation, laws and income taxes; and other such matters. In addition, other written or oral statements which constitute forward looking statements may be made from time to time by and on behalf of the Company. Such forward looking statements are subject to important risks, uncertainties, and assumptions which are difficult to predict and which may affect the Company s operations, including, without limitation: the impact of general economic conditions; industry conditions, including the adoption of new environmental, taxation and other laws and regulations

2 and changes in how they are interpreted and enforced; volatility of oil and gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations, including future dividends to shareholders of the Company; increased competition; the lack of availability of qualified personnel or management; labour unrest; political unrest; fluctuations in foreign exchange or interest rates; stock market volatility; opportunities available to or pursued by the Company and other factors, many of which are beyond its control. As such, actual results, performance, or achievements could differ materially from those expressed in, or implied by, these forward looking statements and accordingly, no assurance can be given that any of the events anticipated by the forward looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceeds or dividends the Company and its shareholders, will derive there from. The forward looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The forwardlooking statements included in this MD&A are made as of the date of this MD&A and other than as required by law, the Company disclaims any intention or obligation to update or revise any forwardlooking statements, whether as a result of new information, future events or otherwise. THE COMPANY Enerflex was formed after the acquisition of Enerflex Systems Income Fund ( ESIF ) by Toromont and subsequent integration of ESIF s products and services with Toromont s existing Natural Gas Compression and Processing business. In January 2010, the operations of Toromont Energy Systems Inc., a subsidiary of Toromont, were combined with the operations of ESIF to form Enerflex. Enerflex began independent operations on June 1, 2011 pursuant to the Arrangement with Toromont which received all necessary regulatory approvals. The transaction was implemented by way of a plan of arrangement whereby Toromont shareholders received one share of Enerflex for each common share of Toromont, creating two independent public companies Toromont and Enerflex. Enerflex s shares began trading on the Toronto Stock Exchange ( TSX ) on June 3, 2011 under the symbol EFX. Enerflex is a single source supplier for natural gas compression, oil and gas processing, refrigeration systems and power generation equipment plus in house engineering and mechanical services expertise. The Company s broad in house resources provide the capability to engineer, design, manufacture, construct, commission and service hydrocarbon handling systems. Enerflex s expertise encompasses field production facilities, compression and natural gas processing plants, CO 2 processing plants, refrigeration systems and power generators serving the natural gas production industry. Enerflex operates three business segments: Canada and Northern U.S., Southern U.S. and South America and International. The International business segment includes operations in the Middle East and North Africa ( MENA ) and Australia. Each regional business segment has three main product lines; Engineered Systems, Service and Rentals. The Engineered Systems product line includes engineering, fabrication and assembly of standard and custom designed compression packages, production and processing equipment and facilities and power generation systems. The Service product line includes support services, labour and parts sales to the oil and gas industry. Enerflex, through wholly owned Gas Drive subsidiaries, is the authorized distributor

3 and service provider, on behalf of GE s Gas Engines, of Waukesha gas fuelled engines and parts in Canada, the northern United States including Alaska, Australia, Indonesia and Papua New Guinea, and of Jenbacher engines and parts in Canada. The Company is also the exclusive authorized distributor for Altronic, a leading manufacturer of electric ignition and control systems in Canada, Australia, Papua New Guinea and New Zealand. Outside of Gas Drive s designated distribution/service areas, in the Southern United States, in South America and in the MENA region, after market service continues to be provided by Enerflex Service. The Rentals product line includes a variety of rental and leasing alternatives for natural gas compression, power generation and processing equipment. The rental fleet is primarily deployed in Western Canada and the Northern U.S. Expansion in international markets is conducted on a selective basis to minimize the risk of these newer markets. Headquartered in Calgary, Canada, Enerflex has approximately 3,200 employees worldwide. Enerflex, its subsidiaries, interests in affiliates and joint ventures operate in Canada, the United States, Argentina, Colombia, Australia, the United Kingdom, Russia, the United Arab Emirates, Oman, Egypt, Bahrain and Indonesia. OVERVIEW The oil and natural gas service sector in the Canada and Northern U.S. segment has a distinct seasonal trend in activity levels which results from well site access and drilling pattern adjustments to take advantage of weather conditions. Generally, Enerflex s Engineered Systems product line has experienced higher revenues in the fourth quarter of each year while the Service and Rentals product line revenues are generally more stable throughout the year. Rentals revenues are also impacted by both the Company s and its customer s capital investment decisions. The Southern U.S. and South America and International segments are not significantly impacted by seasonal variations. Variations from these trends in all regional segments generally occur when hydrocarbon energy fundamentals are either improving or deteriorating. During the first half of 2012, Enerflex recorded strong bookings in the Southern U.S. and South America segment, while bookings in the Canada and Northern U.S. segment were $15.9 million lower than in the first half of 2011 as a result of weak natural gas prices in North America, and the corresponding reduction in activity levels by natural gas producers. International bookings were $8.7 million lower in the first half of 2012, compared to the same period last year, primarily due to timing of project tendering and awards. Project tendering, bid evaluation and contract award have longer lead times in the International region due to projects being larger in scale and scope. Manufacturing activity levels for the Engineered Systems product line have increased in all regions as backlog at the start of 2012 was $986.1 million, compared to $643.6 million at the start of Service activity levels have decreased in the first half of 2012 in Canada and the Northern U.S. as a result of lower natural gas prices. In response to low natural gas prices, natural gas producers in Canada and the Northern U.S. have curtailed or shut in dry gas production. This

4 has negatively impacted revenues from the Service product line in the first six months of As a result Enerflex reorganized the Service business and recorded a $1.5 million restructuring charge during the second quarter of Service activity levels increased in the International segment as a result of new service contracts in the MENA region and increased parts sales and overhaul activity levels in Australia related to Coal Seam Gas ( CSG ) to Liquefied Natural Gas ( LNG ) development. Southern U.S. and South America Service activity levels in the first half of 2012 were comparable to the same period in North American rental utilization levels have increased to 62.9% in the second quarter of 2012, compared to 59.2% in the same quarter of The increase in utilization is primarily due to the sale of idle rental units from the fleet, resulting in a decrease in the total horsepower available and a slight increase in the percentage of units rented. In the International segment, the MENA region continues to expand as key Service contracts and Engineered Systems projects such as the Oman Oil Company Exploration and Production LLC ( OOCEP ) contract commenced operations in this region. Update on Discontinued Operations The European Service and Combined Heat and Power ( CHP ) business, within the International segment, has been reported as a discontinued operation since the third quarter of In 2011, Enerflex recorded a total impairment of $54.0 million, consisting of non cash impairments of $46.0 million for goodwill, intangible assets, deferred tax assets and fair value adjustments, and anticipated cash transaction costs totalling $8.0 million. As discussed in previous public disclosures, Enerflex would consider a sale, partial sale, wind up or combination thereof of the Service and CHP business. Enerflex engaged in a process to sell this business as a turn key operation to third parties. This process was unsuccessful as offers received were not considered fair and reasonable, resulting in the termination of the sale process. Enerflex will now seek alternatives which could include a partial sale and wind up of the Service and CHP business, between now and the end of As a result of the possibility that parts of the Service and CHP business could be wound up, Enerflex recorded additional reorganization costs during the second quarter of 2012 totaling $5.9 million to reflect anticipated termination payments to employees, lessors and vendors under the applicable laws in the Netherlands. The process is subject to and shall be conducted in accordance with Dutch information and consultation rules. Finally, during the second quarter of 2012, Enerflex entered into an agreement to sell its 50% Joint Venture interest in Presson Descon International Limited ( PDIL ) to its joint venture partner, Descon Engineering Limited. OUTLOOK FOR MARKETS Enerflex entered 2012 with a significantly stronger backlog than the prior year. Bookings during 2011, including the large International contract in the Sultanate of Oman, received during the fourth quarter of 2011, resulted in backlog for Engineered Systems of approximately $1.0 billion to start 2012.

5 The Canada and Northern U.S. segment experienced a downturn in activity levels during the first six months of 2012 as a result of weak natural gas prices. Natural gas prices dropped below $2.00/mcf during the first six months of 2012 and remained weak throughout the second quarter. North America experienced a very mild winter, which increased storage levels well above the five year average. This created uncertainty for producers and capital spending directed at dry gas exploration and production was reduced in this region during In addition, producers announced that they will curtail dry gas production as a result of the weak natural gas prices. This negatively impacted Enerflex s Engineered Systems, Service and Rentals business during the current year. Enerflex expects this trend to continue into the latter part of 2012 for this region, unless there is significant improvement in natural gas fundamentals. The Southern U.S. and South America segment experienced improved bookings and backlog during the first six months of 2012, compared to the same period in Strong activity in liquids rich U.S. gas basins gave rise to new orders for compression and processing equipment for this region. These liquids rich resource basins can achieve superior returns for producers despite low natural gas prices due to the higher value that could be realized for the natural gas liquids ( NGL ). Enerflex s U.S. business is heavily weighted to activity in liquids rich resource basins and as long as the frac spread (the differential between NGL prices and natural gas prices) remains high, the Company expects activity levels to remain strong in this region. NGL prices have weakened in the second quarter of 2012; however Enerflex has not experienced a corresponding drop in inquiry levels and capital spending from producers in response to weaker prices at this time. The International segment continues to hold considerable long term opportunity and benefited from strong bookings and backlog during the twelve months of Bookings in the first six months of 2012 were $111.2 million, which is slightly lower than the $119.9 million during the same period in Activity in this segment is driven by increased activity in the natural gas industry in both Australia and the MENA region. In Australia, there are numerous LNG projects in various stages of development with the potential for additional phases to be developed in the future. In the MENA region, Enerflex adopted a targeted approach to mitigate exposure to political unrest. The Company s primary areas of focus are Bahrain, Kuwait, Egypt, Oman and the United Arab Emirates. Enerflex commenced commercial activities on some key projects in the region during 2012 including the $228.0 million U.S. dollar gas processing plant awarded to the Company in the fourth quarter of Domestic demand for gas in this region remains strong and the Company is well positioned to compete for future projects in Oman and Bahrain for compression, processing equipment and after market service support. Project tendering, bid evaluation and contract award have longer lead times in the International region due to projects being larger in scale and scope.

6 FINANCIAL HIGHLIGHTS Three months ended June 30, Six months ended June 30, ($ Canadian thousands) Revenue Canada and Northern U.S. $ 126,824 $ 101,627 $ 277,470 $ 243,925 Southern U.S. and South America 102,754 62, , ,752 International 125,058 82, , ,323 Total revenue $ 354,636 $ 246,491 $ 710,367 $ 561,000 Gross margin 65,983 48, , ,685 Selling, general and administrative expenses 37,559 31,983 78,705 72,063 Operating income $ 28,424 $ 16,325 $ 49,595 $ 31,622 Loss (gain) on disposal of property, plant and equipment 324 (619) 324 (1,361) Equity earnings (446) (309) (873) (510) Earnings before finance costs and taxes $ 28,546 $ 17,253 $ 50,144 $ 33,493 Finance costs and income 1,597 1,603 2,974 3,940 Earnings before taxes $ 26,949 $ 15,650 $ 47,170 $ 29,553 Income tax expense 7,548 3,440 12,871 7,511 Gain on sale of discontinued operations 1,430 Loss from discontinued operations (7,649) (2,850) (8,403) (4,226) Net earnings $ 11,752 $ 9,360 $ 25,896 $ 19,246 Key Ratios Gross margin as a % of revenues 18.6% 19.6 % 18.1% 18.5 % Selling and administrative expenses as a % of revenues 10.6% 13.0 % 11.1% 12.8 % Operating income as a % of revenues 8.0% 6.6 % 7.0% 5.6 % Income taxes as a % of earnings before taxes 28.0% 22.0 % 27.3% 25.4%

7 NON GAAP MEASURES Three months ended June 30, Six months ended June 30, ($ Canadian thousands) EBITDA Earnings before finance costs and taxes $ 28,546 $ 17,253 $ 50,144 $ 33,493 Depreciation and amortization 9,604 10,356 19,393 21,235 EBITDA $ 38,150 $ 27,609 $ 69,537 $ 54,728 Cash flow Cash flow from operations $ 24,424 $ 17,067 $ 46,985 $ 33,878 Non cash working capital and other (26,738) 29,014 (27,683) 29,443 Cash flow (used in) provided by operations $ (2,314) $ 46,081 $ 19,302 $ 63,321 The success of the Company and its business unit strategies are measured using a number of key performance indicators, some of which are outlined below. These measures are also used by management in its assessment of relative investments in operations. Some of these key performance indicators are not measurements in accordance with GAAP. It is possible that these measures will not be comparable to similar measures prescribed by other companies. They should not be considered as an alternative to net income or any other measure of performance under GAAP. Earnings Before Interest, Taxes, Depreciation and Amortization ( EBITDA ) EBITDA provides the results generated by the Company s primary business activities prior to consideration of how those activities are financed, assets are amortized or how the results are taxed in various jurisdictions. Cash Flow Cash flow provides the amount of cash generated by the business (net of non cash working capital) and measures the Company s ability to finance capital programs and meet financial obligations. Operating Income and Operating Margin Operating income and margin assists the reader in understanding the net contributions made from the Company s core businesses after considering all SG&A expenses. Each operating segment assumes responsibility for its operating results as measured by, amongst other factors, operating income, which is defined as income before income taxes, interest income, interest expense, equity income or loss and gain or loss on sale of assets. Financing and related charges cannot be attributed to business segments on a meaningful basis that is comparable to other companies. Business segments and income tax jurisdictions are not synonymous, and it is believed that the allocation of income taxes distorts the historical comparability of the performance of business segments.

8 Bookings and Backlog Bookings and backlog are monitored by Enerflex as an indicator of future revenue and business activity levels for the Engineered Systems product line. Bookings are recorded in a period when a firm commitment or order is received from customers. Bookings increase backlog in the period that they are received. Revenue recognized on Engineered Systems products decrease backlog in the period that this revenue is recognized. As a result backlog is an indication of revenue to be recognized in future periods using percentage of completion accounting. FINANCIAL RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2012 During the second quarter of 2012, the Company generated $354.6 million in revenue, as compared to $246.5 million in the second quarter of The increase of $108.1 million was due to increased revenue in all three of Enerflex s segments. As compared to the three month period ended June 30, 2011: Canada and Northern U.S. segment revenues increased by $25.2 million as a result of higher Engineered Systems revenue of $30.8 million, arising from higher opening backlog for the second quarter of 2012, compared to the same period in Increased exploration of unconventional gas in the Montney and the Horn River shale plays throughout 2011 had a positive impact in this region. Service revenue during the second quarter of 2012 was $4.7 million lower compared to the same period in Natural gas producers in this region continued to curtail dry gas production in the second quarter of 2012 as a result of weak natural gas prices. This has negatively impacted Service revenue during the quarter and resulted in lower parts sales, overhaul work and service calls. Rental revenue was $0.9 million lower in the second quarter of 2012 despite higher utilization rates. This was due to fewer rental units sold during the quarter compared to the same period in 2011; Southern U.S. and South America segment revenues increased by $40.3 million, as a result of increased Engineered Systems revenue, which was partially offset by lower Service revenue during the second quarter of Engineered Systems revenue was $41.0 million higher during the second quarter of 2012, due to higher activity levels in liquids rich resource basins and revenue recognition associated with projects that were previously delayed. Service revenues were $0.7 million lower as a result of timing of service work being completed during the quarter. New branches, which were opened in close proximity to the Eagle Ford shale play, have resulted in higher activity levels in this and other liquids rich basins, which have remained strong throughout the second quarter of 2012; and International segment revenues increased by $42.6 million on account of increased revenue in Australia and the MENA region during the second quarter of 2012, which was partially offset by slightly lower International Production and Processing ( P&P ) revenues. Revenues in Australia during the second quarter of 2012 were higher due to increased activity in the development of CSG and construction projects in Western Australia. Revenues in the MENA region during the second quarter of 2012 were higher as a result of construction activities commencing on certain projects in the region. Revenues in the comparable quarter of 2011 for the MENA region included $7.0 million with respect to variation claims for a project that were approved during the quarter.

9 Gross Margin for the three months ended June 30, 2012 was $66.0 million or 18.6% of revenue as compared to $48.3 million or 19.6% of revenue for the three months ended June 30, The increase in gross margin of $17.7 million was primarily due to strong gross margin performance in the Southern U.S. and South America, and International segments, arising from higher margin projects in opening backlog, better plant utilization and improved project execution. This was partially offset by lower gross margin performance in the Canada and Northern U.S. segment, as a result of cost overruns and warranty claims on certain projects. Gross margin in the comparable quarter of 2011 includes $7.0 million with respect to variation claims for a project in the MENA region that were approved during the quarter. Selling, General and Administrative ( SG&A ) expenses were $37.6 million or 10.6% of revenue during the three months ended June 30, 2012, compared to $32.0 million or 13.0% of revenue in the same period of The increase in SG&A expenses during the quarter was primarily attributable to higher compensation costs, incentive costs, restructuring costs related to the Service business and a loss recorded on the sale of Enerflex s joint venture (PDIL) interest in Pakistan during the quarter. These increases were partially offset by lower occupancy costs arising from the sale and subleasing of non core facilities during Operating Income during the second quarter of 2012 was $28.4 million or 8.0 % of revenue compared to $16.3 million or 6.6% of revenue in the same period of The increase in operating income was due to the same factors contributing to the increased revenue and gross margin, which was partially offset by higher SG&A expenses. Finance Costs and Income totaled $1.6 million for the three months ended June 30, 2012, which was comparable to the same period of Finance costs in 2012 were lower than those in 2011 primarily on account of lower average borrowings and a lower effective interest rate. This was offset by lower finance income recognized on capital leases. Income Tax Expense totaled $7.5 million or 28.0% of earnings before tax for the three months ended June 30, 2012 compared with an expense of $3.4 million or 22.0% of earnings before tax in the same period of The increase in income tax expense was due to higher pre tax earnings and a higher effective tax rate. Enerflex s effective tax rate increased compared to the same period in 2011 as a result of increased earnings in higher tax jurisdictions in the Southern U.S. and South America segment. During the second quarter of 2011, the International segment had higher operating income within MENA, which is a low tax jurisdiction, arising from the approved variation claims mentioned above. Net Earnings from continuing operations for the second quarter of 2012 were $19.4 million or $0.25 cents per share, compared to $12.2 million or $0.16 cents per share in the same period of Loss from discontinued operations reflects the results of Enerflex Environmental Australia ( EEA ) during 2011 and Enerflex Europe ( EE ) during 2011 and These business units recorded a net loss from discontinued operations of $7.6 million ($0.10 cents per share) and $2.9 million ($0.04 cents per share) in the second quarter of 2012 and 2011 respectively. As discussed in the overview section, Enerflex recorded additional reorganization costs for the European Service and CHP operations during the second quarter of 2012.

10 SEGMENTED RESULTS Enerflex operates three business segments: Canada and Northern U.S., Southern U.S. and South America, and International, which operate as follows: 1. Canada and Northern U.S. is comprised of three divisions: Compression and Power, with business units operating in Canada and the Northern U.S., which provides custom and standard compression packages for reciprocating and screw compressor applications, Production and Processing which designs, manufactures, constructs and installs modular natural gas processing equipment, and Retrofit which operates from plants located in Calgary, Alberta and Casper, Wyoming; Service, which provides mechanical services and parts as the authorized Waukesha distributor to the oil and gas industries, focusing in Canada and the Northern U.S. Enerflex re branded its service business during the fourth quarter of 2011 as Gas Drive Global LP ( Gas Drive ) and was awarded new service territories within the U.S. All future parts sales and service revenue will be undertaken by this new wholly owned entity; and Rentals which provides natural gas and power generation compression equipment rentals in Canada and the Northern U.S. 2. Southern U.S. and South America is comprised of three divisions: Compression and Power, which provides custom and standard compression packages for reciprocating and screw compressor applications from facilities located in Houston, Texas; Production and Processing designs, manufactures, constructs and installs modular natural gas processing equipment; and Service which provides mechanical services and products to the oil and gas industries focusing on the Southern and Eastern U.S., as well as South America. 3. International is comprised of four divisions: Continuing Operations AustralAsia division, which provides process facility construction for gas and power facilities and compression package assembly. This division also provides mechanical service and parts, as the authorized Waukesha distributor for the oil and gas industry in this region; MENA, which provides engineering, procurement and construction services, as well as operating and maintenance services for gas compression and processing facilities in the region; and Production and Processing ( P&P ) designs, manufactures, constructs and installs modular natural gas processing equipment, and waste gas systems, for the natural gas, heavy oil Steam Assisted Gravity Drainage ( SAGD ) and heavy mining segments of the market.

11 Discontinued Operations Europe provides CHP generator products and mechanical service to the CHP product line. Enerflex has announced its intention to exit this business and as a result of this decision, the Europe division is reported as a discontinued operation. Each regional business segment has three main product lines: Engineered Systems product line includes engineering, fabrication and assembly of standard and custom designed compression packages, production and processing equipment and facilities, and power generation systems. The Engineered Systems product line tends to be more cyclical with respect to revenue, gross margin and earnings before interest and income taxes than Enerflex s other business segments. Revenues are derived primarily from the investments made in natural gas infrastructure by producers. The Service product line includes support services, labour and parts sales to the oil and gas industry. Enerflex, through wholly owned Gas Drive subsidiaries, is the authorized distributor and service provider, on behalf of GE s Gas Engines, of Waukesha gas fuelled engines and parts in Canada, the northern United States including Alaska, Australia, Indonesia and Papua New Guinea, and of Jenbacher engines and parts in Canada. The Company is also the exclusive authorized distributor for Altronic, a leading manufacturer of electric ignition and control systems in Canada, Australia, Papua New Guinea and New Zealand. Outside of Gas Drive s designated distribution/service areas, in the Southern United States, in South America and in the MENA region, after market service continues to be provided by Enerflex Service. Service revenues tend to be fairly stable as ongoing equipment maintenance is generally required to maintain the customer s natural gas production. Rentals revenue includes a variety of rental and leasing alternatives for natural gas compression, power generation and processing equipment. The rental fleet is primarily deployed in Western Canada and the Northern U.S. Expansion in international markets is conducted on a selective basis to minimize the risk of these newer markets. CANADA AND NORTHERN U.S. Three months ended June 30, ($ Canadian thousands) Segment revenue $ 146,970 $ 155,355 Intersegment revenue 1 (20,146) (53,728) Revenue $ 126,824 $ 101,627 Revenue Engineered Systems $ 77,919 $ 47,088 Revenue Service $ 41,834 $ 46,574 Revenue Rental $ 7,071 $ 7,965 Operating income $ 3,891 $ 9,720 Segment revenues as a % of total revenues 35.8% 41.2 % Service revenues as a % of segment revenues 33.0% 45.8 % Operating income as a % of segment revenues 3.1% 9.6 % 1 Intersegment revenue includes revenue on contracts relating to CSG projects in Queensland.

12 Canada and Northern U.S. revenues totaled $126.8 million in the second quarter of 2012 as compared to $101.6 million for the same period of The increase of $25.2 million was the result of higher Engineered Systems revenue due to higher opening backlog in the second quarter of 2012 compared to the same period in The Montney and Horn River were very active resource basins throughout 2011 resulting in strong bookings in the latter half of the year. This increase was partially offset by lower Service and Rental revenue. Service revenue was lower due to lower parts sales and overhaul revenue during the second quarter of Rental revenue was lower as a result of fewer sales of rental units during the second quarter of 2012 compared to the same period last year. Weak natural gas prices have resulted in dry gas production being curtailed by certain producers which in turn impacted activity levels in Enerflex s Service and Rental business in this region. Operating income decreased to $3.9 million in 2012 from $9.7 million in This $5.8 million decrease was due to weaker gross margin performance, resulting from cost overruns and warranty claims in Casper, Wyoming and higher SG&A expenses, related to the reorganization of Enerflex s service operations totaling $1.5 million during the second quarter of SOUTHERN U.S. AND SOUTH AMERICA Three months ended June 30, ($ Canadian thousands) Segment revenue $ 102,775 $ 62,642 Intersegment revenue (21) (229) Revenue $ 102,754 $ 62,413 Revenue Engineered Systems $ 91,056 $ 50,001 Revenue Service $ 11,698 $ 12,412 Operating income $ 12,944 $ 4,252 Segment revenues as a % of total revenues 29.0 % 25.3 % Service revenues as a % of segment revenues 11.4 % 19.9 % Operating income as a % of segment revenues 12.6 % 6.8 % Southern U.S. and South America revenues totaled $102.8 million in the second quarter of 2012 as compared to $62.4 million in the second quarter of The increase of $40.4 million was the result of higher opening backlog in Engineered Systems for the second quarter of 2012, compared to the same period in 2011 and revenue recognition on projects that were previously deferred from 2011 into the second quarter of This was partially offset by lower Service revenues in the second quarter of 2012, compared to the same period in 2011 arising from service jobs not completed and billed before the end of the quarter. Work in process for the Service business remains strong in this region as a result of activity levels in new branches that were opened to Service equipment located in the Eagle Ford and Permian resource basins. The liquids rich resource basins such as the Eagle Ford, Woodford and Permian have remained active in this segment in the second quarter of 2012 which has resulted in strong backlog levels. Operating income increased from $4.3 million in the second quarter of 2011 to $12.9 million in the second quarter of 2012, due to higher revenues and higher gross margin resulting from stronger plant utilization. These increases were partially offset by higher SG&A expenses compared to the same period in 2011.

13 INTERNATIONAL Three months ended June 30, ($ Canadian thousands) Segment revenue $ 126,531 $ 83,191 Intersegment revenue (1,473) (740) Revenue $ 125,058 $ 82,451 Revenue Engineered Systems $ 104,237 $ 66,487 Revenue Service $ 19,829 $ 7,179 Revenue Rental $ 992 $ 8,785 Operating (loss) income $ 11,589 $ 2,353 Segment revenues as a % of total revenues 35.3 % 33.4 % Service revenues as a % of segment revenues 15.9 % 8.7 % Operating (loss) income as a % of segment revenues 9.3 % 2.9 % Continuing Operations International revenues totaled $125.1 million in the second quarter of 2012, compared to $82.5 million in the same period of The increase of $42.6 million was due to higher activity levels in Australia for Engineered Systems and Service revenue related to CSG projects, and higher activity levels in the MENA region for Engineered Systems and Service revenues for gas processing and compression projects. This was partially offset by lower rental revenue in MENA. Revenue in the second quarter of 2011 included $7.0 million resulting from variation claims that were approved for a project during the quarter. Operating income for the second quarter of 2012 was $11.6 million, compared to operating income of $2.4 million in the second quarter of The $9.2 million increase in operating income was due to higher gross margins in backlog, stronger plant utilization and better project execution. This was partially offset by higher SG&A expenses related to higher compensation costs. In addition, operating income in the first quarter of 2011 included $7.0 million with respect to variation claims for a project that were approved during the quarter. Discontinued Operation Operating results for the International segment do not include the results for the discontinued operations of the EEA business, which was sold in the first quarter of 2011 for a gain of $1.4 million net of tax. During the third quarter of 2011, Enerflex announced its intention to exit the European Service and CHP operations via a sale, partial sale or closure of this business unit. As a result, this business unit has been reported as a discontinued operation since the third quarter of 2011 and has been excluded from the operating results of the International segment. This discontinued operation recorded a loss (net of tax) totaling $7.6 million in the second quarter of 2012 compared to a loss of $2.9 million in the same period a year ago. As disclosed in the Overview section, Enerflex recorded additional reorganization costs of $5.9 million during the second quarter of 2012.

14 BOOKINGS AND BACKLOG The Company records bookings and backlog when a firm commitment is received from customers for the Engineered Systems product line. Bookings represent new orders awarded to Enerflex during the period. Backlog represents unfulfilled orders at period end and is an indicator of future Engineered Systems revenue for the Company. Bookings Six months ended June 30, ($ Canadian thousands) Canada and Northern U.S. $ 137,774 $ 153,638 Southern U.S. and South America 240, ,499 International 111, ,860 Total bookings $ 489,566 $ 474,997 Backlog As at June 30, ($ Canadian thousands) Canada and Northern U.S. $ 135,850 $ 151,379 Southern U.S. and South America 330, ,225 International 454, ,727 Total backlog $ 921,201 $ 722,331 Backlog at June 30, 2012 was $921.2 million compared to $722.3 million at June 30, 2011, representing a 27.5% increase over the prior year. Backlog in the Canada and Northern U.S. segment was $15.5 million lower in 2012 due to lower activity in the Western Canadian Sedimentary resource basins as a result of weak natural gas prices. The Southern U.S. and South America backlog was $119.6 million higher during 2012 as a result of increased activity in the liquids rich shale resources in the Eagle Ford, Marcellus, Permian, Woodford and Bakken resource basins. The International backlog was $94.8 million higher in 2012, compared to the same period in 2011, arising from increased activity in Australia related to CSG exploration, and increased activity in the MENA region related to gas production for domestic use.

15 FINANCIAL RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2012 During the first six months of 2012, the Company generated $710.4 million in revenue compared to $561.0 million during the same period of The increase of $149.4 million was a result of increased revenues in all three of Enerflex s segments. As compared to the six month period ended June 30, 2011: Canada and Northern U.S. segment revenues increased by $33.5 million due to increased Engineered Systems product sales resulting from the higher opening backlog in 2012 compared to the same period in The higher product sales were primarily related to increased exploration of the Montney and Horn River unconventional resource basins, which resulted in strong bookings during the latter half of The increase in revenue was partially offset by lower Service and Rental revenue, arising from weak natural gas prices. Natural gas producers in this region have curtailed dry gas production in 2012 compared to the same period in This resulted in lower parts sales, overhaul revenue and service calls for the Company s Service business. In addition Rental revenue was lower as a result of fewer units sold during the first six months of 2012 compare to the same period in 2011; Southern U.S. and South America segment revenues increased by $63.9 million due to increased Engineered Systems revenue, partially offset by lower Service revenue. Engineered Systems revenue was higher as a result of higher activity levels in liquids rich resource basins and revenue recognition associated with projects that were previously delayed. Service revenues were slightly lower because of timing of service work being completed and billed to customers during the quarter. New branches, which were opened in close proximity to the Eagle Ford shale play, have resulted in higher activity levels in this and other liquids rich basins, which remained strong during the first six months of 2012; and International segment revenues increased by $52.0 million, which is attributable to increased revenues in Australia, MENA and International P&P. Revenues in Australia were higher in the first six months as a result of increased activity in the development of CSG and construction projects. Revenues in the MENA region were higher due to the commencement of construction activities on certain projects in the region. Revenues for the first six months of 2011 included $22.6 million related to a project completed on more favorable terms than originally anticipated and for variation claims that were approved during the period. Gross margin for the six months ended June 30, 2012 was $128.3 million or 18.1% of revenue as compared to $103.7 million or 18.5% of revenue for the six months ended June 30, 2011, an increase of $24.6 million. Contributing to the gross margin increase over the first six months of 2011 was strong gross margin performance in all regional segments as a result of higher gross margins in opening backlog, improved plant utilization and improved rental utilization rates. This was partially offset by costs incurred due to scope changes and warranty claims for projects in the Northern U.S., Australia and International P&P. Enerflex recognized the costs associated with the projects in Australia with no corresponding revenue until the variation claims that have been filed with respect to these projects are approved. If approved, revenue will be recognized in subsequent periods with respect to these projects. Finally, gross margin in the comparable

16 period of 2011 for the International segment includes $16.5 million for variation claims that were approved and for a project that was completed on more favorable terms than originally anticipated in the MENA region. Selling, General and Administrative expenses were $78.7 million or 11.1% of revenue during the six months ended June 30, 2012, compared to $72.1 million or 12.8% of revenue in the same period of The increase of $6.6 million in SG&A expenses was attributable to higher compensation, incentive and restructuring costs related to the Service business, and a loss recorded on the sale of Enerflex s joint venture (PDIL) interest in Pakistan during the quarter. These increases were partially offset by lower occupancy costs and depreciation and amortization costs resulting from the sale and subleasing of non core facilities during Operating Income for 2012 was $49.6 million or 7.0% of revenue as compared to operating income of $31.6 million or 5.6% of revenue in The increase in operating income in 2012 over 2011 was due to the same factors contributing to the increased gross margin partially offset by the increased SG&A expenses. Finance Costs and Income totaled $3.0 million for the six months ended June 30, 2012, compared with $3.9 million in the same period of 2011, a decrease of $0.9 million. Finance costs in 2012 were lower than those in 2011 primarily as a result of lower average borrowings and a lower effective interest rate. This was partially offset by lower finance income recognized on capital leases. Income Tax Expense totaled $12.9 million or 27.3% of pre tax income for the six months ended June 30, 2012 compared with $7.5 million or 25.4% of pre tax income during the same period of The increase in income taxes during the period was due to higher earnings before tax compared to the same period in Enerflex s effective tax rate increased compared to the same period in 2011 as a result of increased earnings in higher tax jurisdictions in the Southern U.S. and South America segment. During the first six months of 2011, the International segment had higher operating income within MENA, which is a low tax jurisdiction. Net Earnings from continuing operations in the first six months of 2012 were $34.3 million or $0.44 cents per share, compared to $22.0 million or $0.29 cents per share in the same period of Loss from discontinued operations reflects the results of EEA and Enerflex Europe. These business units recorded a net loss of $8.4 million ($0.11 cents per share) during the first six months of 2012, compared to $2.8 million ($0.04 cents per share), net of a $1.4 million gain on sale, in the first six months of 2012 and 2011, respectively.

17 CANADA AND NORTHERN U.S. Six months ended June 30, ($ Canadian thousands) Segment revenue $ 312,065 $ 298,913 Intersegment revenue 1 (34,595) (54,988) Revenue $ 277,470 $ 243,925 Revenue Engineered Systems $ 178,980 $ 140,024 Revenue Service $ 81,431 $ 85,799 Revenue Rental $ 17,059 $ 18,102 Operating income $ 16,558 $ 16,554 Segment revenues as a % of total revenues 39.1% 43.5 % Service revenues as a % of segment revenues 29.3% 35.2 % Operating income as a % of segment revenues 6.0% 6.8 % 1 Intersegment revenue includes revenue on contracts relating to CSG projects in Queensland. Revenues were $277.5 million for the first six months of 2012 compared to $243.9 million for the same period of The increase of $33.6 million was attributable to increased Engineered Systems revenues due to the higher opening backlog in 2012 compared to the same period in This increase was partially offset by lower Service and Rental revenue. Service revenue was lower on account of lower parts sales and overhaul revenue during the first six months of Rental revenue was lower as a result of fewer sales of rental units during the first six months of 2012 compared to the same period last year. Weak natural gas prices have resulted in dry gas production being curtailed by certain producers which is turn impacted activity levels in the Service and Rental product lines in this region. Operating income remained unchanged at $16.6 million in 2012, compared to the same period in Higher gross margins in opening backlog, and strong plant utilization were partially offset by cost overruns and warranty claims on certain projects and higher SG&A expenses. Enerflex recorded $1.5 million in reorganization costs related to the Service business during the period.

18 SOUTHERN U.S. AND SOUTH AMERICA Six months ended June 30, ($ Canadian thousands) Segment revenue $ 215,921 $ 152,117 Intersegment revenue (327) (365) Revenue $ 215,594 $ 151,752 Revenue Engineered Systems $ 194,354 $ 130,327 Revenue Service $ 21,240 $ 21,425 Operating income $ 22,713 $ 12,456 Segment revenues as a % of total revenues 30.3% 27.1 % Service revenues as a % of segment revenues 9.9% 14.1 % Operating income as a % of segment revenues 10.5% 8.2 % Southern U.S. and South America segment revenues totaled $215.6 million for the six months of 2012 as compared to $151.8 million in the same period of This increase of $63.8 million was the result of higher opening backlog in Engineered Systems for 2012, compared to the same period in 2011 and revenue recognition on projects that were previously deferred from 2011 to the first six months of This was partially offset by lower Service revenues in the first six months of 2012, compared to the same period in 2011, arising from service jobs that were not completed and billed before the end of the quarter. Work in process for the service business remains strong in this segment as a result of activity levels in new branches that were opened to service equipment located in the Eagle Ford and Permian resource basins. The liquids rich resource basins such as the Eagle Ford, Woodford and Permian have remained active in this segment in the first six months of 2012 which has given rise to strong backlog levels. Operating income increased from $12.5 million for the six months ended 2011 to $22.7 million in the same period of This was attributable to higher revenue, higher realized gross margins and strong plant utilization. This was partially offset by higher SG&A expenses in 2012 related to higher compensation, insurance and incentive costs compared to the same period in INTERNATIONAL Six months ended June 30, ($ Canadian thousands) Segment revenue $ 219,131 $ 168,214 Intersegment revenue (1,828) (2,891) Revenue $ 217,303 $ 165,323 Revenue Engineered Systems $ 181,137 $ 136,921 Revenue Service $ 34,232 $ 18,633 Revenue Rental $ 1,934 $ 9,769 Operating income $ 10,324 $ 2,612 Segment revenues as a % of total revenues 30.6% 29.5 % Service revenues as a % of segment revenues 15.8% 11.3 % Operating income as a % of segment revenues 4.8% 1.6 %

19 Continuing Operations International revenues totaled $217.3 million for the six months ended 2012, compared to $165.3 million during the same period of The increase of $52.0 million was due to higher activity levels in Australia for Engineered Systems and Service revenue related to CSG and construction projects, and higher activity levels in the MENA region for Engineered Systems and Service revenues related to gas processing and compression projects. This was partially offset by lower Rental revenue in the MENA region. Revenue in the first six months of 2011 included $22.6 million (a portion of which related to Rental activities) in variation claims that were approved during the period for a project in the MENA region. Operating income for the first six months of 2012 was $10.3 million, compared to $2.6 million for the same period of Operating income improved by $7.7 million over the same period last year arising from increased revenues and improved gross margin performance in Australia and International P&P. This was due to improved plant utilization, better project execution and higher gross margins in opening backlog. This was partially offset by lower gross margins in the MENA region. During the first six months of 2011 gross margin included $16.5 million for the approval of variation claims and the completion of a project on more favorable terms than originally anticipated in the MENA region. During the first six months of 2012 the International region incurred costs due to scope changes and warranty claims for projects in Australia and International P&P. Enerflex recognized the costs associated with these projects with no corresponding revenue until the variation claims that have been filed with respect to these projects are approved. If approved, this will result in revenue recognition in subsequent periods. Discontinued Operations Operating results for the International segment do not include the results for the discontinued operations of the EEA business, which was sold in the first quarter of 2011 for a gain of $1.4 million net of tax. During the fourth quarter of 2011, Enerflex announced its intention to exit the European Service and CHP operations via a sale, partial sale or closure of this business unit. As a result, this business unit has been reported as part of discontinued operations and excluded from the operating results of the International segment. These two discontinued operations recorded a loss before tax totaling $8.4 in the first six months of 2012 compared to a loss of $2.8 (net of a $1.4 million gain on the sale of EEA) in the same period a year ago. As disclosed in the overview section, Enerflex recorded additional reorganization costs of $5.9 million during the second quarter of 2012.

20 QUARTERLY SUMMARY Earnings per share basic 1,2 Earnings per share diluted 1,2 ($ Canadian thousands) Revenue 1 earnings 1 Net June 30, 2012 $ 354,636 $ 19,401 $ 0.25 $ 0.25 March 31, ,731 14, December 31, ,802 17, September 30, ,335 16, June 30, ,491 12, March 31, ,509 9, December 31, ,616 8, September 30, ,859 5, Amounts presented are from continuing operations. 2 Enerflex shares were issued pursuant to the Arrangement on June 1, 2011; as a result, per share amounts for comparative periods are based on Toromont s common shares at the time of initial exchange. FINANCIAL POSITION The following table outlines significant changes in the Consolidated Statement of Financial Position as at June 30, 2012 as compared to December 31, 2011: ($ Canadian millions) Increase (Decrease) Explanation Assets: Accounts receivable 60.2 The increase in accounts receivable is due to higher revenues and increased milestone billings to customers in the second quarter of Major projects in the MENA and Australia regions commenced operations in the second quarter. Activity levels in the Southern U.S. were also higher. Inventory 0.9 The increase is attributable to higher direct materials and replacement parts as a result of higher activity levels in the Southern U.S. and International regions. This was partially offset by lower work in process and equipment inventory. Property, plant and equipment 4.6 The increase is due to the expansion of the Houston manufacturing facility and the implementation of a new Enterprise Resource Planning ( ERP ) system in assets under construction, partially offset by depreciation charges. Rental equipment (5.4) The decrease is attributable to depreciation charges and the sale of equipment, partially offset by rental asset additions during the quarter.

21 Intangible assets 3.4 The increase is due to software additions which are related to the ERP system implementation, which became operational during This was partially offset by the amortization of intangible assets related to the ESIF acquisition. Goodwill 0.2 The increase is a result of a foreign exchange revaluation of goodwill allocated to the Southern U.S. and South America, and International segments. Liabilities: Accounts payable and accrued liabilities (4.9) The decrease is attributable to the payment of major equipment purchases and year end incentive bonuses that were accrued at December 31, Provisions 3.2 The increase is due to provisions for warranty claims incurred on certain projects. Deferred revenues 21.0 The increase is the result of higher bookings in the second quarter of 2012, which has resulted in progress billings exceeding revenue recognition in the Southern U.S. and South America, and International segments in Long term debt 29.0 The increase is due to drawings on the committed credit facility to fund working capital requirements for International projects. LIQUIDITY The Company s primary sources of liquidity and capital resources are: Cash generated from continuing operations; Bank financing and operating lines of credit; and Issuance and sale of debt and equity instruments. Statement of Cash Flows Three months ended June 30, Six months ended June 30, ($ Canadian thousands) Cash, beginning of period $ 87,967 $ 28,573 $ 81,200 $ 15,000 Cash provided by (used in): Operating activities (2,314) 46,081 19,302 63,321 Investing activities (11,168) 2,831 (20,060) 4,998 Financing activities 27,946 (23,289) 22,453 (28,812) Exchange rate changes on foreign currency cash (252) Cash, end of period $ 102,934 $ 54,255 $ 102,934 $ 54,255

22 Operating Activities For the three months ended June 30, 2012, cash used by operating activities was $2.3 million as compared to cash provided by operating activities of $46.1 million in the same period of The decrease of $48.4 million was due to increased activity in the International, and Southern U.S and South America segment, resulting in higher inventory and accounts receivable balances compared to the same period in This was partially offset by improved profitability in the period, when compared to the same period in For the six months ended June 30, 2012, cash provided by operating activities was $19.3 million as compared to $63.3 million in the same period of The decrease of $44.0 million was due to increased activity in the International, and Southern U.S and South America segments, resulting in higher inventory and accounts receivable balances compared to the same period in This was partially offset by improved profitability in the period, when compared to the same period in Investing Activities Cash used in investing activities was $11.2 million for the three months ended June 30, 2012, as compared to cash generated of $2.8 million during the same period of Capital expenditures for the three months ended June 30, 2012 increased by $1.9 million compared to the same period in 2011, as a result of increased expenditures related to the expansion of the Company s Houston manufacturing facility and the ERP conversion. Proceeds on the sale of assets and non core operations was $10.5 million lower in the second quarter of 2012 compared to the same period of the prior year. Cash used in investing activities was $20.1 million for the six months ended June 30, 2012, as compared to cash generated of $5.0 million during the same period of Capital expenditures for the six months ended June 30, 2012 increased by $9.4 million compared to the same period in 2011, as a result of increased expenditures related to the expansion of the Company s Houston manufacturing facility and the ERP conversion. Proceeds on the sale of assets and non core operations was $15.4 million lower during the first six months of 2012 compared to the same period of the prior year. Enerflex sold its EEA business unit during the first quarter of 2011 for $3.4 million as it was not considered a core operation. Financing Activities Cash provided by financing activities for the three months ended June 30, 2012 was $27.9 million, as compared to cash used in financing activities of $23.3 million in the same period of Enerflex paid dividends totaling $4.7 million and borrowed $32.4 million during the second quarter of 2012 to fund working capital requirements and expenditures related to large International projects. In the same period in 2011, Enerflex did not pay any dividends and repaid a note payable to Toromont upon completion of the spin out of Enerflex. Cash provided by financing activities for the six months ended June 30, 2012 was $22.5 million, as compared to cash used in financing activities of $28.8 million in the same period of Enerflex paid dividends totaling $9.3 million and borrowed $29.1 million during the second quarter of 2012 to fund working capital requirements and expenditures related to large International projects. In the same period in 2011, Enerflex did not pay any dividends and repaid a note payable to Toromont upon completion of the spin out of Enerflex.

23 The Company expects that continued cash flows from operations in 2012, together with cash and cash equivalents on hand and currently available credit facilities, will be more than sufficient to fund its requirements for investments in working capital and capital assets. RISK MANAGEMENT In the normal course of business, the Company is exposed to financial and operating risks that may potentially impact its operating results in any or all of its business segments. The Company employs risk management strategies with a view to mitigating these risks on a cost effective basis. Derivative financial agreements are used to manage exposure to fluctuations in exchange rates and interest rates. The Company does not enter into derivative financial agreements for speculative purposes. Foreign Currency Translation Exposure The following table shows the effect on net earnings before tax for the period ended June 30, 2012 of a 5% weakening of the Canadian dollar against the U.S. dollar and Australian dollar, everything else being equal. A 5% strengthening of the Canadian dollar would have an equal and opposite effect. This sensitivity analysis is provided as an indicative range in a volatile currency environment. Canadian dollar weakens by 5% USD AUD Earnings from foreign operations Net earnings before tax $ 1,720 $ 141 Financial instruments held in foreign operations Other comprehensive income $ 4,875 $ 3,884 Financial instruments held in Canadian operations Net earnings 648 Other comprehensive loss (1) Foreign Exchange Risk Enerflex mitigates the impact of exchange rate fluctuations by matching expected future U.S. dollar denominated cash inflows with U.S. dollar liabilities, principally through the use of foreign exchange contracts, bank debt, and accounts payable and by manufacturing U.S. dollar denominated contracts at plants located in the U.S. Enerflex does not hedge its exposure to investments in foreign subsidiaries. Exchange gains and losses on net investments in foreign subsidiaries are included in accumulated other comprehensive income. The AOCI at March 31, 2012 was $2.9 million which increased to $8.8 million at June 30, 2012, as a result of changes in the value of the Canadian dollar against the Euro, Australian dollar and U.S. dollar. The Canadian dollar depreciated by 2% against the U.S. dollar in the second quarter of 2012 versus an appreciation of 1% against the U.S. dollar during the same period of The Canadian dollar depreciated by 1% against the Australian dollar during the second quarter of 2012, versus a depreciation of 3% in the same period of The Canadian dollar appreciated against the Euro dollar by 3% during the second quarter of 2012, as compared to a depreciation of 2% in the same period of 2011.

24 Interest Rate Risk The Company s liabilities include long term debt that is subject to fluctuations in interest rates. The Company s Notes outstanding at June 30, 2012 include interest rates that are fixed and therefore the related interest expense will not be impacted by fluctuations in interest rates. The Company s Bank Facilities however, are subject to changes in market interest rates. For each 1% change in the rate of interest on the Bank Facilities, the change in interest expense would be approximately $0.6 million. All interest charges are recorded on the condensed statement of earnings in finance costs. Credit Risk The Company has accounts receivable from clients engaged in various industries including natural gas producers, natural gas transportation, agricultural, chemical and petrochemical processing and the generation and sale of electricity. These specific industries may be affected by economic factors that may impact accounts receivable. Enerflex has entered into a number of significant projects through to For the six months ended June 30, 2012, the Company had no individual customers which accounted for more than 10% of its revenue. CAPITAL RESOURCES On August 1, 2012, Enerflex had 77,600,081 shares outstanding. Enerflex has not established a formal dividend policy and the Board of Directors anticipates setting the quarterly dividends based on the availability of cash flow and anticipated market conditions, taking into consideration business opportunities and the need for growth capital. During the third quarter of 2012, the Company declared a dividend of $0.06 per share, payable on October 4, 2012, to shareholders of record on September 12, During the quarter, the Company reached an agreement with its lenders to amend certain terms and conditions on its syndicated revolving credit facilities ( Bank Facilities ). The amendments made to the Bank Facilities increase the amount available by $20.0 million to $345.0 million and extend the maturity date by one year to June 1, As previously agreed, the Bank Facilities may be extended annually on or before the anniversary date with the consent for the lenders. The weighted average interest rate on the Bank Facilities for the six months ended June 30, 2012 was 3.08% (June 30, 2011: 2.99%). During the quarter, the Company was able to reach an agreement to amend certain terms of its committed facility for the issuance of letters of credit (the Bi Lateral ), including extending the maturity date by one year to June 1, The amount available under the Bi Lateral remains unchanged at $50.0 million and as previously agreed the maturity date may be extended annually with the consent of the lender. At June 30, 2012, the Company was in compliance with the covenants on the Bank Facilities, the Bi Lateral, its committed facility with a U.S. lender, and it s Unsecured Notes ( Notes ). At June 30, 2012, the Company had $60.5 million cash drawings against the Bank Facilities (December 31, 2011 $31.3 million).

25 The composition of the June 30, 2012 borrowings on the Bank Facilities and the Notes was as follows: June 30, 2012 Drawings of Bank Facilities $ 60,482 Notes due June 22, ,500 Notes due June 22, ,000 Deferred transaction costs (2,983) $ 147,999 At June 30, 2012, the Canadian dollar equivalent principal payments which are due over the next five years are $111.0 million and thereafter, without considering renewal at similar terms, are $40.0 million. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS The preparation of the Company s interim condensed financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of revenues and expenses during the reporting period, as well as, assets and liabilities at the date of the interim condensed financial statements. On an ongoing basis, management reviews its estimates, particularly those related to revenue recognition for long term contracts, provisions for warranty, depreciation of property, plant and equipment and rental equipment, amortization of finite life intangible assets, allowances for doubtful accounts, impairment of non financial assets, impairment of goodwill, income taxes, assets held for sale and discontinued operations and the fair value of financial instruments. Changes in facts and circumstances may result in revised estimates, and actual results could differ from those estimates. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods. There have been no material changes to the critical accounting estimates as described in the Company s 2011 Annual Report. RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS Management is responsible for the information disclosed in this MD&A and the accompanying condensed financial statements, and has in place appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. In addition, the Company s Audit Committee, on behalf of the Board of Directors, provides an oversight role with respect to all public financial disclosures made by the Company, and has reviewed and approved this MD&A and the accompanying interim condensed financial statements. The Audit Committee is also responsible for determining that management fulfills its responsibilities in the financial control of operations, including disclosure controls and procedures ( DC&P ) and internal control over financial reporting ( ICFR ).

26 DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING The Chief Executive Officer and the Chief Financial Officer, together with other members of management, have designed the Company s DC&P to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries would have been known to them and by others within those entities. Additionally, they have designed ICFR to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reporting in accordance with IFRS. There have been no significant changes in the design of the Company s internal controls over financial reporting during the three month period ended June 30, 2012 that would materially affect, or is reasonably likely to materially affect, the Company s internal controls over financial reporting. While the Officers of the Company have designed the Company s disclosure controls and procedures and internal controls over financial reporting, they expect that these controls and procedures may not prevent all errors and fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. SUBSEQUENT EVENTS Subsequent to June 30, 2012, the Company declared a dividend of $0.06 per share, payable on October 4, 2012, to shareholders of record on September 12, 2012.

27 Interim Condensed Financial Statements (unaudited) INTERIM CONDENSED STATEMENTS OF FINANCIAL POSITION (All amounts in thousands of Canadian dollars) As at June 30, 2012 December 31, 2011 Assets Current assets Cash and cash equivalents $ 102,934 $ 81,200 Accounts receivable 314, ,482 Inventories (Note 5) 241, ,419 Income tax receivable 2,635 2,800 Derivative financial instruments 1,819 2,136 Other current assets 12,031 15,220 Total current assets 675, ,257 Property, plant and equipment (Note 6) 127, ,130 Rental equipment (Note 6) 96, ,908 Deferred tax assets 38,218 39,581 Other assets 6,980 8,167 Intangible assets (Note 6) 34,951 31,528 Goodwill 460, ,935 1,439,905 1,360,506 Assets held for sale (Note 3) 8,238 10,054 Total assets $ 1,448,143 $ 1,370,560 Liabilities and Shareholders Equity Current liabilities Accounts payable and accrued liabilities $ 149,088 $ 153,980 Provisions 16,186 12,953 Income taxes payable 2,767 2,410 Deferred revenues 255, ,756 Derivative financial instruments Total current liabilities 424, ,554 Long term debt (Note 7) 147, ,963 Deferred tax liability 614 Other liabilities , ,107 Liabilities related to assets held for sale (Note 3) 17,703 10,191 Total liabilities $ 591,095 $ 534,298 Guarantees, commitments and contingencies Shareholders Equity Share capital 211, ,409 Contributed surplus 655, ,536 Retained deficit (18,954) (35,540) Accumulated other comprehensive income 8,753 7,857 Total shareholders equity before non controlling interest 856, ,262 Non controlling interest 77 Total shareholders equity and non controlling interest 857, ,262 Total liabilities and shareholders equity $ 1,448,143 $ 1,370,560 See accompanying Notes to the Interim Condensed Financial Statements.

28 Interim Condensed Financial Statements (unaudited) INTERIM CONDENSED STATEMENTS OF EARNINGS (All amounts in thousands of Canadian dollars), except per share amounts Three Months Ended June 30, Six Months Ended June 30, Revenues $ 354,636 $ 246,491 $ 710,367 $ 561,000 Cost of goods sold 288, , , ,315 Gross margin 65,983 48, , ,685 Selling and administrative expenses 37,559 31,983 78,705 72,063 Operating income 28,424 16,325 49,595 31,622 Loss (gain) on disposal of property, plant and equipment 324 (619) 324 (1,361) Equity earnings from associates (446) (309) (873) (510) Earnings before finance costs and income taxes 28,546 17,253 50,144 33,493 Finance costs 1,880 2,072 3,612 4,692 Finance income (283) (469) (638) (752) Earnings before income taxes 26,949 15,650 47,170 29,553 Income taxes (Note 8) 7,548 3,440 12,871 7,511 Net earnings from continuing operations $ 19,401 $ 12,210 $ 34,299 $ 22,042 Gain on sale of discontinued operations (Note 4) 1,430 Loss from discontinued operations (Note 4) (7,649) (2,850) (8,403) (4,226) Net earnings $ 11,752 $ 9,360 $ 25,896 $ 19,246 Net earnings attributable to: Controlling interest $ 11,752 $ 9,681 $ 25,896 $ 19,562 Non controlling interest $ $ (321) $ $ (316) Earnings per share basic Continuing operations $ 0.25 $ 0.16 $ 0.44 $ 0.29 Discontinued operations $ (0.10) $ (0.04) $ (0.11) $ (0.04) Earnings per share diluted Continuing operations $ 0.25 $ 0.16 $ 0.44 $ 0.29 Discontinued operations $ (0.10) $ (0.04) $ (0.11) $ (0.04) Weighted average number of shares basic 77,588,855 77,214,913 77,538,676 77,214,913 Weighted average number of shares diluted 77,647,438 77,618,841 77,644,041 77,618,841 See accompanying Notes to the Interim Condensed Financial Statements.

29 Interim Condensed Financial Statements (unaudited) INTERIM CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (All amounts in thousands of Canadian dollars) Three Months Ended June 30, Six Months Ended June 30, Net earnings $ 11,752 $ 9,360 $ 25,896 $ 19,246 Other comprehensive income: Change in fair value of derivatives designated as cash flow hedges net of income tax (recovery) expense (2012: $(5); 2011: $283) Gain (loss) on derivatives designated as cash flow hedges transferred to net income in the current year, net of income tax expense (recovery) (2012: $77; 2011: $(133)) Unrealized gain on translation of financial statements of foreign operations See accompanying Notes to the Interim Condensed Financial Statements. (555) 139 (128) (426) 229 (342) 6,108 4, ,628 Other comprehensive income $ 5,826 $ 4,494 $ 896 $ 2,014 Total comprehensive income $ 17,578 $ 13,854 $ 26,792 $ 21,260

30 Interim Condensed Financial Statements (unaudited) INTERIM CONDENSED STATEMENTS OF CASH FLOWS (All amounts in thousands of Canadian dollars) Three months ended June 30, Six months ended June 30, Operating Activities Net earnings $ 11,752 $ 9,360 $ 25,896 $ 19,246 Items not requiring cash and cash equivalents: Depreciation and amortization 9,604 10,356 19,393 21,235 Equity earnings from associates (446) (309) (873) (510) Deferred income taxes 2,905 (1,787) 1,589 (2,327) Stock option expense (Note 9) (Gain) loss on sale of: Discontinued operations (Note 4) (2,471) Property, plant and equipment 324 (619) 364 (1,361) 24,424 17,067 46,985 33,878 Net change in non cash working capital and other (26,738) 29,014 (27,683) 29,443 Cash (used in) provided by operating activities $ (2,314) $ 46,081 $ 19,302 $ 63,321 Investing Activities Additions to: Rental equipment (Note 6) $ (2,932) $ (4,549) $ (5,277) $ (8,561) Property, plant and equipment (Note 6) (8,683) (5,143) (20,217) (7,539) Proceeds on disposal of: Rental equipment 176 1,256 3,214 3,231 Property, plant and equipment 35 9, ,122 Disposal of discontinued operations, net of cash (Note 4) 3,389 Change in other assets 242 2,091 2,060 2,672 (11,162) 3,147 (20,137) 5,314 Net change in non cash working capital and other (6) (316) 77 (316) Cash (used in) provided by investing activities $ (11,168) $ 2,831 $ (20,060) $ 4,998 Financing Activities Repayment of note payable $ $ (206,680) $ $ (215,000) Proceeds from long term debt 32, ,391 29, ,391 Dividends (4,654) (9,292) Stock option exercises 212 2,611 Equity from parent 2,797 Cash provided by (used in) financing activities $ 27,946 $ (23,289) $ 22,453 $ (28,812) Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies $ 503 $ 59 $ 39 $ (252) Increase in cash and cash equivalents 14,967 25,682 21,734 39,255 Cash and cash equivalents, beginning of period 87,967 28,573 81,200 15,000 Cash and cash equivalents, end of period $ 102,934 $ 54,255 $ 102,934 $ 54,255 Supplemental cash flow information (Note 11). See accompanying Notes to the Interim Condensed Financial Statements.

31 Interim Condensed Financial Statements (unaudited) INTERIM CONDENSED STATEMENTS OF CHANGES IN EQUITY (All amounts in thousands of Canadian dollars) Net investment Share capital Contributed surplus Retained deficit Foreign currency translation adjustments Hedging reserve Total accumulated other comprehensive (loss) income Noncontrolling interest Total At December 31, 2010 $ 849,977 $ $ $ $ (10,901) $ 56 $ (10,845) $ 396 $ 839,528 Net earnings 14,654 4,908 (316) 19,246 Owner's investment/ equity from parent (2,794) (2,794) Bifurcation transaction (861,837) 205, ,500 Other comprehensive (loss) income (2,772) 4,786 2,014 2,014 Effect of stock option plans Owner s investment/dividends (4,633) (4,633) At June 30, 2011 $ $ 205,369 $ 656,565 $ 275 $ (13,673) $ 4,842 $ (8,831) $ 80 $ 853,458 At December 31, 2011 $ $ 207,409 $ 656,536 $ (35,540) $ 6,881 $ 976 $ 7,857 $ $ 836,262 Net earnings 25,896 25,896 Non controlling Interest Other comprehensive (loss) income Effect of stock option plans 4,245 (1,018) 3,227 Dividends (9,310) (9,310) At June 30, 2012 $ $ 211,654 $ 655,518 $ (18,954) $ 7,676 $ 1,077 $ 8,753 $ 77 $ 857,048 See accompanying Notes to the Interim Condensed Financial Statements.

32 Notes to the Interim Condensed Financial Statements (unaudited) (All amounts in thousands of Canadian dollars, except per share amounts or as otherwise noted) Note 1. Nature and Description of the Company Enerflex Ltd. ( Enerflex or the Company ) was formed subsequent to the acquisition of Enerflex Systems Income Fund ( ESIF ) by Toromont Industries Ltd. ( Toromont ) and subsequent integration of Enerflex s products and services with Toromont s existing Natural Gas Compression and Processing business. Enerflex became a standalone public company with the June 1, 2011 spin out from Toromont. Headquartered in Calgary, the registered office is located at 904, 1331 Macleod Trail SE, Calgary, Canada. Enerflex has approximately 3,200 employees worldwide. Enerflex, its subsidiaries, affiliates and joint ventures operate in Canada, the United States, Argentina, Colombia, Australia, the United Kingdom, the United Arab Emirates ( UAE ), Oman, Egypt, Bahrain and Indonesia. Note 2. Summary of Significant Accounting Policies (a) Statement of Compliance These interim condensed financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting ( IAS 34 ) using accounting policies consistent with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). Certain prior year amounts have been reclassified to conform with the current period s presentation. (b) Basis of Presentation and Measurement These interim condensed financial statements for the three and six month periods ended June 30, 2012 and 2011 were prepared in accordance with IAS 34 and accordingly, should be read together with the annual consolidated financial statements for the year ended December 31, 2011 and the interim condensed financial statements for the period ended March 31, These interim condensed financial statements are presented in Canadian dollars rounded to the nearest thousand and are prepared on a going concern basis under the historical cost convention with certain financial assets and financial liabilities at fair value. There have been no significant changes in accounting policies, nor update on standards and guidelines issued but not yet effective, to those described in the annual consolidated financial statements for the year ended December 31, These interim condensed financial statements were authorized for issue by the Board of Directors on August 9, 2012.

33 Notes to the Interim Condensed Financial Statements (unaudited) Note 3. Assets and Associated Liabilities Held for Sale During 2011, the Company reclassified its European operations to assets and associated liabilities held for sale as the Combined Heat and Power ( CHP ) and Service business within the European region represents a specific line of business that management intends to exit. Accordingly, the assets and liabilities have been reflected in assets and associated liabilities held for sale on the interim condensed statement of financial position. During the second quarter of 2012, the Company signed a share purchase agreement, to sell their 50% share of Presson Descon International (Private) Limited ( PDIL ). Accordingly, the assets and liabilities have been reflected in assets and associated liabilities held for sale on the interim condensed statement of financial position. The closing date of the transaction is August 16, During the second quarter of 2012, the Company recorded an impairment loss of $0.8 million related to these assets held for sale. The following table represents the assets and associated liabilities reclassified to held for sale: June 30, 2012 December 31, 2011 Assets Cash $ 1,219 $ Accounts receivable 5,083 5,474 Inventories 770 3,621 Other current assets Property, plant and equipment Assets held for sale ( AHFS ) $ 8,238 $ 10,054 Liabilities Accounts payable, accrued liabilities and provisions $ 15,898 $ 9,428 Deferred revenues 1, Liabilities associated with AHFS $ 17,703 $ 10,191 During the quarter Enerflex recorded additional reorganization costs totaling $5.9 million to reflect anticipated termination payments to employees, lessors and vendors under the applicable laws in the Netherlands.

34 Notes to the Interim Condensed Financial Statements (unaudited) Note 4. Discontinued Operations As disclosed in Note 3, the Company reclassified its European operations to assets held for sale during As the CHP and Service business within the European region represents a specific line of business that management intends to exit, the corresponding revenues and expenses have been reclassified to discontinued operations in the interim condensed statement of earnings. The following tables summarize the revenues, loss from operations, impairments and income taxes from discontinued operations. The operations presented below had all been part of the International reporting segment. Three Months Ended June 30, 2012 Three Months Ended June 30, 2011 Enerflex Enerflex EEA Europe Europe EEA Revenue $ 5,363 $ $ 8,247 $ Loss from operations $ (7,649) $ $ (2,848) $ Income tax expense $ $ $ (2) $ Six Months Ended June 30, 2012 Six Months Ended June 30, 2011 Enerflex Enerflex EEA Europe Europe EEA Revenue $ 16,246 $ $ 20,143 $ 2,653 Loss from operations $ (8,403) $ $ (4,392) $ (239) Income tax recovery $ $ $ 330 $ 75 The following table summarizes cash provided by (used in) discontinued operations: Three Months Ended June 30, 2012 Three Months Ended June 30, 2011 Enerflex Enerflex EEA Europe Europe EEA Cash from operating $ (1,701) $ $ 2,373 $ Cash from investing $ 515 $ $ (543) $ Cash from financing $ $ $ $ Six Months Ended June 30, 2012 Six Months Ended June 30, 2011 Enerflex Enerflex EEA Europe Europe EEA Cash from operating $ (1,291) $ $ 2,046 $ (1,407) Cash from investing $ 162 $ $ (622) $ (67) Cash from financing $ $ $ $

35 Notes to the Interim Condensed Financial Statements (unaudited) Note 5. Inventories Inventories consisted of the following: June 30, 2012 December 31, 2011 Equipment $ 11,095 $ 13,153 Repair and distribution parts 38,665 32,985 Direct materials 41,381 33,918 Work in process 150, ,363 Total inventories $ 241,306 $ 240,419 The amount of inventory and overhead costs recognized as an expense and included in cost of goods sold accounted for other than by the percentage of completion method during the second quarter of 2012 was $59.4 million (2011 $59.7 million) and during the first six months of 2012 was $114.3 million (2011 $119.2 million). The cost of goods sold includes inventory write downs pertaining to obsolescence and aging together with recoveries of past write downs upon disposition. The net amount charged to the interim condensed statement of earnings and included in cost of goods sold during the second quarter of 2012 was a recovery of ($0.1) million (2011 $0.5 million) and during the first six months of 2012 was $0.1 million (2011 $0.6 million). Note 6. Property, Plant and Equipment, Rental Equipment and Intangibles During the six months ended June 30, 2012, the Company acquired property, plant and equipment assets with a cost of $20.2 million along with $5.3 million in rental equipment assets. The Company also transferred $8.9 million of net book value from assets under construction to intangibles for the six months ended June 30, This primarily relates to the implementation of a new Enterprise Resource Planning System during the second quarter of Depreciation of property, plant and equipment and rental equipment included in income for the three months ended June 30, 2012 was $6.6 million (June 30, 2011 $8.0 million) of which $4.8 million was included in cost of goods sold and $1.8 million was included in selling and administrative expenses (June 30, 2011 $6.2 million and $1.8 million respectively). Depreciation of property, plant and equipment and rental equipment included in income for the six months ended June 30, 2012 was $13.5 million (June 30, 2011 $15.5 million) of which $10.2 million was included in cost of goods sold and $3.3 million was included in selling and administrative expenses (June 30, 2011 $12.0 million and $3.5 million respectively). Note 7. Long Term Debt During the quarter, the Company reached an agreement with its lenders to amend certain terms and conditions on its syndicated revolving credit facilities ( Bank Facilities ). The amendments made to the Bank Facilities increased the amount available by $20.0 million to $345.0 million and extended the maturity date by one year to June 1, As previously agreed, the Bank Facilities may be extended annually on or before the anniversary date with the consent of the lenders. The weighted average interest rate on the Bank Facilities for the six months ended June 30, 2012 was 3.08% (June 30, 2011: 2.99%).

36 Notes to the Interim Condensed Financial Statements (unaudited) During the quarter, the Company was able to reach an agreement to amend certain terms of its committed facility for the issuance of letters of credit (the Bi Lateral ), including extending the maturity date by one year to June 1, The amount available under the Bi Lateral remains unchanged at $50.0 million and as previously agreed the maturity date may be extended annually with the consent of the lender. At June 30, 2012, the Company was in compliance with the covenants on the Bank Facilities, the Bi Lateral, its committed facility with a U.S. lender, and its Unsecured Notes ( Notes ). At June 30, 2012, the Company had $60.5 million cash drawings against the Bank Facilities (December 31, 2011 $31.3 million). The composition of the June 30, 2012 borrowings on the Bank Facilities and the Notes was as follows: June 30, 2012 Drawings of Bank Facilities $ 60,482 Notes due June 22, ,500 Notes due June 22, ,000 Deferred transaction costs (2,983) $ 147,999 At June 30, 2012, the Canadian dollar equivalent principal payments which are due over the next five years are $111.0 million and thereafter, without considering renewal at similar terms, are $40.0 million. Note 8. Income Taxes The Company calculates the period income tax expense using the tax rate that would be applicable to expected total annual earnings. Income tax recognized in profit or loss was as follows: Three Months Ended June 30, Six Months Ended June 30, Total income tax expense is attributable to: Continuing operations $ 7,548 $ 3,440 $ 12,871 $ 7,511 Discontinued operations $ 7,548 $ 3,442 $ 12,871 $ 8,100 The components of income tax expense attributable to continuing operations were as follows: Three Months Ended June 30, Six Months Ended June 30, Current tax $ 4,643 $ 5,229 $ 11,282 $ 9,508 Deferred tax 2,905 (1,789) 1,589 (1,997) $ 7,548 $ 3,440 $ 12,871 $ 7,511

37 Notes to the Interim Condensed Financial Statements (unaudited) Reconciliation of Tax Expense The provision for income taxes attributable to continuing operations differs from that which would be expected by applying Canadian statutory rates. A reconciliation of the difference is as follows: Three Months Ended June 30, Six Months Ended June 30, Earnings before income taxes from continuing operations $ 26,949 $ 15,650 $ 47,170 $ 29,553 Canadian statutory rate 25.0% 26.6% 25.0% 26.6% Expected income tax provision 6,737 4,163 11,793 7,861 Add (deduct) Income taxed in foreign jurisdictions 544 (631) 1,013 (343) Expenses not deductible for tax purposes Other 56 (92) (261) (7) Income tax expense from continuing operations $ 7,548 $ 3,440 $ 12,871 $ 7,511 Note 9. Share Based Compensation Stock Options As at June 30, 2012 Number of options Weighted average exercise price Options outstanding, beginning of period 2,563,985 $ Exercised (255,300) Expired (1,425) 9.57 Forfeited (41,700) Options outstanding, end of period 2,265,560 $ Options exercisable, end of period 1,051,400 $ The following table summarizes options outstanding and exercisable at June 30, 2012: Options Outstanding Options Exercisable Range of exercise prices Number outstanding Weighted average remaining life (years) Weighted average exercise price Number outstanding Weighted average exercise price $9.61 $ ,424, $ ,440 $ $11.88 $ , , Total 2,265, $ ,051,400 $ No stock options were granted in the first six months of 2012.

38 Notes to the Interim Condensed Financial Statements (unaudited) The share based compensation expense included in the determination of net earnings for the periods ended June 30, 2012 was: Three Months Ended June 30, Six Months Ended June 30, Stock options $ 285 $ 65 $ 616 $ 65 Deferred share units Phantom share units 8 46 Total $ 626 $ 136 $ 1,078 $ 136 Note 10. Financial Instruments Designation and Valuation of Financial Instruments Financial instruments at June 30, 2012 are designated in substantially the same manner as they were at December 31, Accordingly, with the exception of Long term debt notes, the estimated fair values of financial instruments approximated the carrying values. The carrying value and estimated fair value of Long term debt Notes as at June 30, 2012 was $87.5 million and $94.0 million, and as at December 31, 2011 was $87.6 million and $91.1 million. The fair value of these Notes at June 30, 2012, was determined on a discounted cash flow basis with a weighted average discount rate of 4.14%. Derivative Financial Instruments and Hedge Accounting Foreign exchange contracts are transacted with financial institutions to hedge foreign currency denominated obligations related to purchases of inventory and sales of products. The following table summarizes the Company s commitments to buy and sell foreign currencies as at June 30, 2012: Notional amount Maturity Canadian dollar denominated contracts Purchase contracts USD 11,625 July 2012 to September 2013 EUR 158 July 2012 Sales contracts USD 50,636 July 2012 to September 2013 EUR 5,038 July 2012 to September 2012 AUD 14,100 July 2012 Australian dollar denominated contracts Purchase contracts USD 6,298 July 2012 to December 2012 EUR 135 July 2012 Sales contracts USD 24,787 July 2012 to March 2014 At June 30, 2012, the fair value of derivative financial instruments classified as financial assets was $1.8 million, and as financial liabilities was $0.7 million. Foreign Currency Translation Exposure The following table shows the effect on net earnings before tax for the period ended June 30, 2012 of a 5% weakening of the Canadian dollar against the U.S. dollar and Australian dollar, everything else being equal. A 5% strengthening of the Canadian dollar would have an equal and opposite effect. This sensitivity analysis is provided as an indicative range in a volatile currency environment.

39 Notes to the Interim Condensed Financial Statements (unaudited) Canadian dollar weakens by 5% USD AUD Earnings from foreign operations Net earnings before tax $ 1,720 $ 141 Financial instruments held in foreign operations Other comprehensive income $ 4,875 $ 3,884 Financial instruments held in Canadian operations Net earnings 648 Other comprehensive loss (1) Interest Rate Risk The Company s liabilities include long term debt that is subject to fluctuations in interest rates. The Company s Notes outstanding at June 30, 2012 include interest rates that are fixed and therefore the related interest expense will not be impacted by fluctuations in interest rates. The Company s Bank Facilities however, are subject to changes in market interest rates. For each 1% change in the rate of interest on the Bank Facilities, the change in interest expense would be approximately $0.6 million. All interest charges are recorded on the condensed statement of earnings in finance costs. Liquidity Risk Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. In managing liquidity risk, the Company has access to a significant portion of its Bank Facilities for future drawings to meet the Company s future growth targets. As at June 30, 2012, the Company had $60.5 million drawn against the Bank Facilities, leaving $284.5 million committed for future drawings plus cash and cash equivalents of $102.9 million at that date. A liquidity analysis of the Company s financial instruments has been completed on a maturity basis. The following table outlines the cash flows including interest associated with the maturity of the Company s financial liabilities as at June 30, 2012: Less than 3 months 3 months to 1 year Greater than 1 year Total Derivative financial instruments Foreign currency forward contracts $ 661 $ $ $ 661 Other financial liabilities Accounts payable and accrued liabilities $ 149,088 $ $ $ 149,088 Long term debt Bank Facilities 60,482 60,482 Long term debt Notes 87,517 87,517 Other Long term liabilities The Company expects that continued cash flows from operations in 2012, together with cash and cash equivalents on hand and credit facilities, will be more than sufficient to fund its requirements for investments in working capital, and capital assets.

40 Notes to the Interim Condensed Financial Statements (unaudited) Note 11. Supplemental Cash Flow Information Three months ended June 30, Six months ended June 30, Cash (used in) provided by changes in non cash working capital Accounts receivable $ (74,655) $ (10,889) $ (56,851) $ (29,870) Inventories (23,053) (48,979) 1,965 (4,885) Accounts and taxes payable, accrued liabilities and deferred revenue 70,712 92,554 26,973 64,978 Foreign currency and other 252 (3,988) 307 (1,096) $ (26,744) $ 28,698 $ (27,606) $ 29,127 Cash paid during the period: Three months ended June 30, Six months ended June 30, Interest $ 2,697 $ 933 $ 3,123 $ 2,363 Taxes $ 10,022 $ 8,517 $ 10,915 $ 11,682

41 Notes to the Interim Condensed Financial Statements (unaudited) Note 12. Segmented Information Three Months Ended Canada & Northern U.S. Southern U.S. & South America International Total June 30, Segment revenue $ 146,970 $ 155,355 $ 102,775 $ 62,642 $ 126,531 $ 83,191 $ 376,276 $ 301,188 Intersegment revenue (20,146) (53,728) (21) (229) (1,473) (740) (21,640) (54,697) External revenue $ 126,824 $ 101,627 $ 102,754 $ 62,413 $ 125,058 $ 82,451 $ 354,636 $ 246,491 Operating income $ 3,891 $ 9,720 $ 12,944 $ 4,252 $ 11,589 $ 2,353 $ 28,424 $ 16,325 Six Months Ended Canada & Northern U.S. Southern U.S. & South America International Total June 30, Segment revenue $ 312,065 $ 298,913 $ 215,921 $ 152,117 $ 219,131 $ 168,214 $ 747,117 $ 619,244 Intersegment revenue (34,595) (54,988) (327) (365) (1,828) (2,891) (36,750) (58,244) External revenue $ 277,470 $ 243,925 $ 215,594 $ 151,752 $ 217,303 $ 165,323 $ 710,367 $ 561,000 Operating income $ 16,558 $ 16,554 $ 22,713 $ 12,456 $ 10,324 $ 2,612 $ 49,595 $ 31,622 As at Canada & Northern U.S. Southern U.S. & South America International Total June 30, 2012 Dec 31, 2011 June 30, 2012 Dec 31, 2011 June 30, 2012 Dec 31, 2011 June 30, 2012 Dec 31, 2011 Segment assets $ 370,745 $ 516,135 $ 264,359 $ 219,931 $ 355,694 $ 274,615 $ 990,798 $ 1,010,681 Corporate (11,073) (110,110) Goodwill 198, ,891 54,514 54, , , , ,935 $ 569,677 $ 715,026 $ 318,873 $ 274,333 $ 562,428 $ 481,257 $ 1,439,905 $ 1,360,506 AHFS 8,238 10,054 8,238 10,054 Total segment assets $ 569,677 $ 715,026 $ 318,873 $ 274,333 $ 570,666 $ 491,311 $ 1,448,143 $ 1,370,560

42 Notes to the Interim Condensed Financial Statements (unaudited) Revenue by geographic location was as follows: Three Months Ended June 30, Six Months Ended June 30, Australia $ 73,875 $ 50,619 $ 134,384 $ 80,295 Canada 101,100 90, , ,606 Indonesia 5,108 3,631 6,874 6,459 Mexico 1, , Nigeria 15,994 4,014 28,202 3,790 Oman 35,300 10,252 38,222 13,077 United States 107,226 80, , ,463 Other 14,347 7,386 27,311 54,172 Total Revenue 354, , , ,000 Revenue is attributed by destination of sale. For the six months ended June 30, 2012, the Company had no individual customers which accounted for more than 10% of its revenues. Note 13. Seasonality The oil and natural gas service sector in Canada has a distinct seasonal trend in activity levels which results from well site access and drilling pattern adjustments to take advantage of weather conditions. Generally, Enerflex s Engineered Systems product line has experienced higher revenues in the fourth quarter of each year while the Service and Rentals product line revenues are stable throughout the year. Rentals revenues are also impacted by both the Company s and its customer s capital investment decisions. The international markets are not significantly impacted by seasonal variations. Variations from these trends usually occur when hydrocarbon energy fundamentals are either improving or deteriorating. Note 14. Subsequent Events Subsequent to June 30, 2012, the Company declared a dividend of $0.06 per share, payable on October 4, 2012, to shareholders of record on September 12, 2012.

43 Directors and Officers Robert S. Boswell 1, 4 Director Denver, CO Kenneth R. Bruce 6 Director Calgary, AB W. Byron Dunn 2,4 Director Dallas, TX J. Blair Goertzen Director President and Chief Executive Officer Calgary, AB Wayne S. Hill 2, 5 Director Toronto, ON H. Stanley Marshall 3 Director Paradise, NL Stephen J. Savidant Chairman Calgary, AB Michael A. Weill 6 Director Houston, TX Jerry Fraelic President (Americas) Houston, TX D. James Harbilas Vice President and Chief Financial Officer Calgary, AB Bill Moore President (International) Calgary, AB Greg Stewart Vice President and Chief Information Officer Calgary, AB Carol Ionel Vice President Human Resources Calgary, AB Chair of the Nominating and Corporate Governance Committee Member of the Nominating and Corporate Governance Committee Chair of the Human Resources and Compensation Committee Member of the Human Resources and Compensation Committee 5 6 Chair of the Audit Committee Member of the Audit Committee Office Enerflex Ltd Macleod Trail SE Calgary, AB T2G 0K3 Canada Tel: Fax: ir@enerflex.com Web: Whistleblower Contact Tel: ener@openboard.info Web:

44 Shareholders Information Common Shares The common shares of the Company are listed and traded on the Toronto Stock Exchange under the symbol EFX. Trustee, Registrar and Transfer Agent Canadian Stock Transfer Company Inc. Calgary, AB Canada For shareholder inquiries: Canada Canadian Stock Transfer Company Inc. 320 Bay Street Toronto, ON M5H 4A6 Canada Mail: PO Box 700 Station B Montreal, QC H3B 3K3 Canada Tel: or Fax: Web: Auditors Ernst and Young LLP Calgary, AB Canada Bankers The Toronto Dominion Bank Calgary, AB Canada The Bank of Nova Scotia Toronto, ON Canada Investor Relations Enerflex Ltd Macleod Trail SE Calgary, AB T2G 0K3 Canada Tel: ir@enerflex.com Requests for Enerflex s Annual Report, Quarterly Reports and other corporate communications should be directed to ir@enerflex.com. United States Computershare Trust Company 118 Femwood Avenue Edison, New Jersey United States Mail: PO Box Providence, Rhode Island United States Tel: (within USA) or (outside USA) Fax: Web: All questions about accounts, share certificates or dividend cheques should be directed to the Trustee, Registrar and Transfer Agent.

45 Enerflex Head Office Macleod Trail SE Calgary, AB T2G OK3 Canada Tel: Fax: Web: