2011 annual report enerflex

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2011 Annual Report

Imagine Natural Gas Without Enerfex.

Imagine A World Without Natural Gas.


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Contents

Financial Snapshot 8

An Interview with J. Blair Goertzen 10

Operations Review 16

Health, Saety and Environment 26

Governance 28

Managements Discussion and Analysis 30

Consolidated Financial Statements 62

Notes to the Consolidated Financial Statements 67

Directors and Ocers 113

Shareholders Inormation 114


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World-classengineered solutions or

a global natural gas market

Enerex Ltd. (TSX:EFX) provides complete compression, processing and power

generation solutions to the natural gas industry in fve major gas-producing regions

around the world. Enerexs proven ull-liecycle capability design, engineering

manuacturing, installation and ater-market support combined with itsstrategic positioning and key relationships are driving the

Companys proftable growth.

Headquartered in Calgary, Alberta, Enerex has

approximately 3,100 employees operating

rom 60 locations in 13 countries

worldwide. Revenues in 2011exceeded $1.2 billion and the

Company entered 2012 with

net debt below $38 million

and a backlog o $986 million.

2 0 1 1 A N N U A L R E P O R T1


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What makes Enerex

a unique investment

For investors seeking to be aligned with a company ocused purely

on the natural gas cycle, Enerex is that pure play. The Companys

revenue is derived rom providing and maintaining inrastructure to the

global natural gas industry including compression, processing and power

generation. Enerexs 2011 results were strong across the board, with EBIT

up 41 percent over 2010. The Companys backlog o $986 million at year-

end positions us or urther growth in 2012. And the long-term uture or

natural gas as an energy source worldwide is strong.

The Enerex investment proposition comes down to this: a strong, ocused,

dividend-paying and growing company serving an expanding industry in fve key

regions around the world.

E N E R F L E X L T D .2


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We are a pure playprovider o

inrastructure to the global naturalgas industry.

We are established in the worlds largest and

astest-growing natural

gas markets.

We are fnancially stable, with 2011year-end net debt down by more than

81 percent rom year-end 2010.

We oer growth and yield 2011 revenues rose15 percent year-over-year to more than $1.2 billion,

and we pay a quarterly dividend o $0.06 per share.

Our strong ater-market diversifcationoers downside protection by

generating stable, recurring revenue.

2 0 1 1 A N N U A L R E P O R T3


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A pure play natural gas

inrastructure provider

Enerexs proven capabilities extend all the way to custom design-through-commissioning o turnkey compression and processing acilities, including

build-own-operate-maintain (BOOM) contracts spanning the complete

acility liecycle. The Company also distributes reciprocating gas-uelled

engines and provides industry-leading ater-market service, rom the smallest

part to maintenance o an entire gas felds inrastructure.

Wherever natural gas is produced, Enerexs capabilities in compression

and processing are needed whether the gas is dry or liquids-rich,

sweet or sour. The more processing required by the natural gas

stream, the greater Enerexs involvement, and the greater the

business opportunity.


2011 Revenue by Product Line

Engineered Systems 74%

Service 21%

Rentals 5%

2011 Revenue by Region

Canada andNorthern U.S. 43%

International 29%

Southern U.S. andSouth America 28%


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2 0 1 1 A N N U A L R E P O R T5

Field and plantcompression

Moving natural gas rom

the wellhead starts with

compression. Virtually all gas

felds o any size, anywhereworldwide, require it, and feld

compression is almost always

gas-uelled. Enerex designs

and manuactures compression

solutions including

high-horsepower applications

or shale gas felds and oers

industry-leading operations and

maintenance capability.

Processing/extractionacilities

Enerexs capability extends

worldwide: From processing

the liquids-rich gas in Canada

and the United States, to

manuacturing and installing

a modularized LPG extraction

plant in New Zealand, to a

$200 million-plus turnkey

processing acility in Oman,

and many more.

Power generation

Distribution o the high

efciency Jenbacher line

o gas-uelled engines andparts on behal o GEs Gas

Engines creates a new

oundation or the Company

to pursue opportunities or

micro-generation o electricity.

Applications range rom

harnessing landfll methane

and biogas to replacing

more-expensive diesel with

natural gas in powering remote

sites and drilling rigs.

EPC and BOOMcapability

Customers who are building

large acilities in markets like

the Middle East and Australia

oten preer dealing with

single-source suppliers. Enerex

has stepped up repeatedly,

using its in-house capabilities to

efciently execute a succession

o large processing acilities.

Innovative nicheprojects

Experience, exibility,

great people and in-house

engineering and manuacturing

enable us to go ar beyond

standard oerings. Whether

these are new approaches to

natural gas storage or helping

a coal seam gas producer

transorm reservoir water into

potable water or agriculture,

Enerex is able to provide its

customers with innovative yet

practical solutions.


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Established in the

worlds astest-growingnatural gas marketsCanada and Northern United States

MarketModestly growing overall consumption amidst boomingproduction rom unconventional liquids-rich shale andtight sand reservoirs.

Growth Strategy

Lever the Companys sales and servicepresence in unconventional gas plays,which are orecast to represent 50 percento North American gas production by 2020.Particular ocus is on increased processing sales.The Company will continue achievingefciencies in state-o-the-artacilities, as well as exploit theexpanded product line.

Current ProjectsLarge compression and processingacilities in the Horn River andMontney shale gas plays.

Southern United States and South America

MarketThe Southern U.S. is shiting decisively tounconventional, liquids-rich reservoirs whileSouth America is a smaller gas market, with shalegas exploration beginning in Argentina.

Growth StrategyLever the greatly expanded U.S. presence and newlyexpanded Houston acility. The Company will ocus on

continuous improvement, exploit positioning inliquids-rich unconventional gas plays and serveexport markets.

Current ProjectsExpansion o the Houston acility, which providestidewater access to worldwide markets, as well as largecompression projects in Texas Eagle Ford and WestVirginias Marcellus shale gas plays.



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Enerexs positioning in fve key regions worldwide results in a ocused business model

with mutually reinorcing components o compression, processing and ater-market support

comprising o parts, maintenance and operations. Enerex has ocused on regions with

growing natural gas production and/or demand areas with an increasing need or Enerexs

products and services.

Enerexs ability to manuacture at modern, strategically located acilities and transport

anywhere worldwide provides internal efciencies. Strong and proven capability in

operations and maintenance delivers recurring revenue on the Companys growing installed

base around the world. In addition, we are expanding into power generation in selected

markets with growth potential.

Europe/CIS

MarketEuropes gas imports continue to increase while

Russias gas production is based on conventionalhistorical technology, creating long-termmodernization potential.

Growth StrategyLever the Companys new Russian joint venture oradditional projects, as well as expanding processingopportunities throughout the region.

Current ProjectsLarge compression projects in eastern Russiaand processing projects or European engineeringcompanies being installed and operated outsidethe region.

Middle East/North Arica

Australasia

MarketAustralia is a major producer o gas rom coal seamsand LNG exporter. Asia is a major gas consumer.

Growth StrategyThe Company will lever its established presence andproven ability to build and commission acilitieson-time and on-budget, as well as continuing toexecute ongoing projects.

Current ProjectsSantos GLNG screw compressor packages and QGCscrew compression and TEG dehydration units inQueensland; silica gel gas dehydration package andmultidiscipline abrication and construction or theMondarra underground natural gas storage; andprocessing acility projects in Western Australia.

MarketWith gigantic natural gas reserves, the MiddleEast is expected to lead the world in productiongrowth over the next 20 years.

Growth StrategyThe Company will take advantage o its growingreputation in continuing to bid on longer-lead,large, ull-liecycle projects. The ocus will alsobe on building the recurring revenue stream.

Current ProjectsThe USD$228 million Oman Oil processingacility (late 2013 commissioning), operate andmaintain the BP Oman gas compression acility,the Tatweer compression acility and operationand maintenance contracts in Bahrain.

2 0 1 1 A N N U A L R E P O R T7


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$84.8

EBIT ($mm)

$60.1

20102011

$56.7

et Earnings Continuingperations ($mm)

$30.3

20102011

0.30

Net Debt-to-EBITDA

2.02

20102011

We are fnancially strongFor the years ended December 31, 1(Thousands of dollars, except percent and per share) (Unaudited) 2011 2010

Revenue $ 1,227,137 $ 1,067,783

Gross margin 225,876 183,898

Operating income 80,086 40,955

Net earnings continuing operations 56,741 30,262

Net loss discontinued operations (64,040) (3,963)

(7,299) 26,299

Earnings per share (basic) continuing operations 0.73 0.40

Loss per share discontinued operations (0.83) (0.05)

(0.10) 0.35

EBITDA

2

127,012 99,231EBITDA normalized 2,3 127,012 80,604

Dividends per share 0.18 0.00

Financial Position

Working capital 191,703 183,019

Total assets 1,370,560 1,377,556

Long-term debt/Note payable 118,963 215,000

Shareholders/Owners equity 836,262 839,528

Key Ratios

Gross margin as a percentage o revenue 18.4% 17.2%

Operating income as a percentage o revenue 6.5% 3.8%

Net debt-to-equity ratio 0.05 0.24

Net debt-to-EBITDA 2 0.30 2.02

Net debt-to-EBITDA normalized 2,3 0.30 2.48

1 Results through May 31, 2011 have been prepared on a carve-out basis. Ener lex became an independently operated and TSX listed

company on June 1, 2011.

2 EBITDA is a non-GAAP measure that does not have a standardized meaning prescribed by IFRS and thereore is unlikely to be

comparable to similar measures presented by other issuers.

3 EBITDA or the twelve months o 2010 is normalized or the net impact o the gain on available or sale assets o $18.6 million ($17.2

million, net o tax) related to Toromonts acquisition o Enerlex Systems Income Fund (ESIF ).

$1,227.1

Revenue ($mm)

$1,067.8

20102011



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Grew by 23 percent year-over-year to

$226 million. This outpaced revenue

growth, reecting internal efciency gains

and cost discipline.

Growing activity and Enerexs expanded geographical

presence and service oering drove 15 percent

year-over-year growth to $1.2 billion.

Strong pickup in second-hal activity drove

year-end backlog to $986 million. This

positions Enerex or a strong 2012.

Free cash ow improved by 72 percent as

a result o higher revenue, cost efciency,

limited capital investment and disposal

o non-core properties.

Recognizing investors desire or yield, in

June 2011 Enerex initiated a quarterly

dividend o $0.06 per share.

Steady debt repayments and strong working

capital management reduced year-end net

debt by 81 percent to less than $38 million at

December 31, 2011.

Generated an increase rom 12 percent to

17 percent in 2011, as a result o improved

earnings while strengthening the balance

sheet and reducing capital employed.

Revenue

Gross Margin Backlog

Free Cash Flow Dividend

Year-End Net Debt Return on Capital Employed

Key measures o our perormance

2 0 1 1 A N N U A L R E P O R T9


12/117

An interview

withJ. Blair Goertzen

President and CEO

We identifed a number o priorities or the

organization. First, we recognized the

need to ully integrate, harmonize

and streamline our operations

to create a single organization in

which dierent regions and business

units could support one another

efciently. That process is ongoing.

Second, we needed to tell the story

o the new, larger, more capable company

to customers and investors. We were, and

continue to be, ocused on efciently ulflling

the growing backlog o orders to the beneft o

our customers and our shareholders. Finally, we

identifed the need to strengthen the balance sheet.

We entered 2011 with $200 million in net debt, andwe exited with less than $38 million. Our balance

sheet strength is very important as it positions the

Company or uture growth.

A major accomplishment in the year was Enerexs

participation in the realignment by GEs Gas Engines o

its channel-to-market strategy and distribution network

o Waukesha and Jenbacher gas-uelled engines. We see

Enerexs creation o Gas Drive Global LP to ulfll that role

as an important opportunity.

The independent Enerex is a pure-

play company that is ocused

on servicing the natural

gas industry. We are a

stronger company coming

out o our recent time as

part o Toromont, with a much

larger geographical presence,

additional products and experienced

employees. With this larger platorm,

becoming a publicly-traded, independent

company once again gives us access to

capital to expand the business and pursue

opportunities. As an independent company,

we are better able to continue the expansion o

our global ootprint. Independence also allows usto pursue new strategic partnerships and alliances.

We have an almost immediate example o this in the

much stronger relationship with GEs Gas Engines that

is unolding right now.

We are a highly ocused business

providing an extensive product and

service line-up with a global reach.

All o our revenue is derived romcompression, processing or some orm o

use o natural gas. For investors who want

to align with a company that ocuses on global

natural gas development, we are that pure play. We

believe natural gas has a strong uture as an energy

source around the world. The investment proposition

comes down to this: a strong, ocused, growing company

operating globally in a developing industry.

What

were your

immediate

goals and tasks

upon becoming

independent?

What did

Enerexs return

to the public

equity markets as

an independent

company mean or

Enerex as a

business?

And what

does it

mean or

investors?

We intend to grow our existing oerings,

expand on the opportunity with GEs Gas

Engines and increase our gas processing

product portolio.



13/117

I think our current continuing

operations, ollowing our

decision to exit the Service

and Combined Heat and

Power business in Europe,

provide the perect shape

or the next couple o years.

We intend to grow our existing

oering, expand on the opportunity

with GEs Gas Engines and increase

our gas processing product portolio.

The strengthened relationship with

GEs Gas Engines expands our

territory or distribution and it

expands our product line,

meaning we will be able to

sell and support additional

world-class products in the regions

that we work in. This makes it a growth

driver or our business. We now distribute

and support two gas engine lines: Waukesha

in Canada and 20 U.S. states and

Jenbacher in Canada.

We created Gas Drive to take on this expanded business

because we want to have a very specifc ocus on gas engine

distribution rom sales to ull product support. We needed to

have separation in terms o branding and reporting, which

provides a greater level o accountability in this

recurring-revenue business. We also anticipate Gas Drive

receiving a lot o support rom GE, which will be positive

or the business. By managing it this way it will beneft our

customers and our investors.

I we think about the progression o natural

gas rom the wellhead to the pipeline,

almost all natural gas needs some

type o processing. Even dry gas

requires compression and may

require the removal o impurities

like carbon dioxide or hydrogen

sulphide. Liquids-rich gas requires more

sophisticated processing. And then there

are ancillary products in a gas processing

acility, including compression, rerigeration,

power generation and the balance o plant items that

have to be integrated into the acility design. Enerexsbusiness lines collectively design, manuacture and install

each o these elements and in some areas they also provide

turnkey solutions or gas plant and gas compression projects.

Once the package or plant is assembled, we are also able

to maintain and operate it, providing care and custody or

its entire liecycle. We are able to deliver on our oering in

each o the fve regions that we operate around the globe.

In Canada, the business drivers or

all three product lines were growth

in two large unconventional

gas plays, the Horn River

and the Montney. Last year

we initiated a number o major

projects in these plays. A prime

example is the two-phase, multi-million

dollar sour gas compression package or

Spectra Energy near Dawson Creek, B.C. It

illustrates Enerexs ability to design, manuacture

and commission a wide variety o compression and

processing solutions or customers operating in diversesupply basins. In addition, our Northern United States acility

in Casper, Wyoming, exited with high utilization as this acility

is responsible or ulflling the backlog or the Australian coal

seam gas project.

Overall activity levels were low in the frst hal, coming o

the bottom o the industry downturn in 2010, which resulted

in low acility utilization and margin compression due to

the competitive landscape. This was ollowed by a buildup

o bookings and backlog in the second hal o 2010 and

throughout 2011. This regions fnancial perormance wasnot ideal in the frst hal, but Canada experienced a pickup in

the second hal o the year. The oil sands in northern Alberta

are driving incremental demand or natural gas and or

condensate, a key component o natural gas liquids (NGL). Over

the medium term, the export capacity provided by the proposed

liquefed natural gas (LNG) export acilities at Kitimat, B.C.,

should drive incremental gas demand or use in the Pacifc

Rim, as well as or power generation at the acility itsel.

Do you now have

the ideal shape

or Enerex, or are

there business

units that need to be

added, discarded,

enlarged,

streamlined,

improved,

and so on?

What is the

opportunity,

and why was Gas

Drive created as

an independently

operating

subsidiary o

Enerex?

How do

Enerexs

business lines

complement one

another? What are

their respective

strengths?

Lets talk about

what the year

brought in each

Enerex region, starting

with Canada and

the Northern

United States.

2 0 1 1 A N N U A L R E P O R T11


14/117

We had an extremely successul

year, bringing three years o

investment in the area to its

culmination o proftability and

growth. The most notable projects

were the successul BP Oman project,

which was a build-own-operate-maintain or

BOOM contract, and the award o the Oman Oil

contract. Valued at approximately USD$228 million, it

is the largest contract in the Companys history and was

a direct result o our success on the BP Oman project. We

have also established operations in Oman and Bahrain

and we are seeing an increase in the operations and

maintenance side o the business. Enerex continues to

expand its international ootprint in the service business.

The main driver was liquids-richgas in several major plays,

especially the Eagle Ford

and the Marcellus, as well

as manuacturing product or

the International regions. We

have seen a noticeable shit rom dry

gas production to liquids-rich gas in the

relative activity in various basins and we

expect to see the shit continuing in 2012.

Enerexs product oering complements this shit

very well. Liquids-rich gas opportunities are a good

story or Enerex due to the act that liquids-rich gas

production remains economic at todays prices, driving

activity and the need or compression. The removal o the

liquids provides additional opportunity or product supply.

The more processing required, the better, because we are

involved in providing the separation capability.

One o the important developments in this region is the

expansion o our Houston acility, which is underway. It will

consist o over 30 acres o production area, including a new

assembly and paint acility. This manuacturing acility is

important to Enerex because o its tidewater location or

International projects and its increased capabilities.

South America did not provide the growth that we

expected, this year. However, we are still in the early

phases o exploring opportunities in this market, which

we will continue to do.

The Australian economy remains oneo the worlds stronger economies,

with continued growth and

increasing activity. Coal seam gas

to LNG is the story there. In 2011,

the Company was awarded a couple

o major projects or compression and

processing or QGC, as well as compression

packages or the Santos GLNG acility.

In the Service business we were awarded

maintenance contracts, including the long-term

service contract or Santos. The Enerex IndonesianService business also perormed extremely well.

Finally, we saw an improvement in bookings or our

Construction business.

And rounding

it out, the Middle

East and North

Arica.

What about

the Southern

United States and

South America?

And

Australasia?

I would like to commend our people ortheir dedication throughout the process

and their commitment to coalescing

around our values so quickly.


Natural gas acility, Australia.


15/117

I would like to commend our people or

their dedication throughout the process

and their commitment to coalescingaround our values so quickly.

We closed overlapping acilities,

trimmed duplicated resources, and o

course we rebranded Enerex globally.

Enerexs employees embraced the

challenges and, as an organization, we came

together as a team and achieved our integration

goals. Combining the two organizations has made

us much stronger as a business in terms o people,

product and geography.

As you may imagine, we were also harmonizing internal

processes to take advantage o the size o our enterprise

rom the standpoints o reporting systems, engineering

tools, business development processes, and so on. The last

phase o the implementation is deploying SAP across the

entire organization which should be completed in 2013.

Coal seam gas to LNG developmentin Australia and unconventional

gas in North America. From

an operating standpoint,

we were very happy with how

our frst BOOM contract went. The

execution was a success, the project is

operating well, and the lessons learned or

operating in a global context were enormous. It

was a way to demonstrate the One Enerex concept.

How is

Enerexs

integrationgoing?

So o all o this,

what were the

astest-growing

and/or strongest

areas in

2011?

The integration o the Company. We

were bringing together people,

acilities and processes rom

two dierent companies, and

that was a ormidable challenge,

especially in the depressed market

or the frst hal o 2010. While the

integration was primarily ocused in

Canada, we also aced some challenges

internationally. In Australia, Queensland

experienced devastating oods in early 2011 which was very hard on a lot o people there.

From an operational perspective, the oods caused

delays and cost overruns in a number o our projects. In

Europe, given some poor business perormance,

macro-economic concerns and GEs realignment, Enerex

decided to exit those operations. We had expected

additional Combined Heat and Power opportunities, which

did not materialize, nor were we able to expand into the

industrial oil and gas applications that we had anticipated.

And

what were

the greatest

challenges?

2 0 1 1 A N N U A L R E P O R T13

Plant inlet compression acility, Eagle Ford Shale, United States.


16/117

I there is another global economic

recession like the one we saw

three years ago, then o course

we are impacted, because

a lower level o economic

activity consumes less energy

and, ultimately, commodities.

Generally, when consumers spend

less, they spend less on a number

o things that are driven by energy.

Enerex has a strong base o recurring

revenue rom its customers existing

installed base; however, this continues

to percolate because there is always some

demand or parts and services. The key or us

in the event o a downturn is to react quickly

to tighten up on the non-recurring revenue side.

Our balance sheet is very solid, with net debt

having been reduced to below $38 million entering

2012 and opening working capital o $192 million.

This is a major source o strength or Enerex during

uncertain times, reducing our overall business risk,

creating exibility and positioning us to thrive in a range

o market conditions. We also have the advantage o

geographical diversifcation, and it is rare or every region

to experience a downturn at the same time, or to the

same degree. The key is to plan ahead and be prepared.

How is

Enerex

aected by the

macro picture,

particularly the

various orms

o instability

around the

world?They were very good. We signifcantly

outperormed 2010, which in part

was coming o the bottom o

a downturn. Our key fnancial

metrics are revenue growth, gross

margin, earnings beore interest and

taxes margin, return on capital employed

and net debt. As you can see rom the

highlights table, Enerex perormed well

across the board. Were particularly pleasedwith the more than 81 percent reduction in year-

end net debt, which makes us better able to pursue

growth opportunities. We also saw signifcant growth

in the bookings and in the backlog throughout 2011, both

o which increased signifcantly in the third and ourth

quarters. We generated new bookings o $768 million in

the second hal, and we ended the year with backlog at

$986 million. That is setting up 2012 as a very strong year.

We were able to achieve a number

o signifcant health, saety and

environmental goals. The most

noteworthy achievement

was that our Calgary

manuacturing acility, which

employs more than 600 people,

went the entire year without a

lost-time incident. Enerex as a whole

is very proud o that accomplishment,

especially when viewed in context. First,

Enerex was dealing with the atermath o the

slowdown. Next, Enerex needed to respond to an

increased workload, which meant hiring hundreds o

people. We take saety seriously, and we recognize that

it has become top-o-mind with Enerexs stakeholders.

Saety and up-to-date management systems are almost

a window into a companys soul i you do those things

right, youre likely to do other things right as well.

How were

the fnancial

results or

2011?

So with all o

these moving

parts plus the

economic swings,

were you able

to maintain a

reasonable

level o

saety?


An amine sweetening acility with an output o 2 x 95 MMSCF per day, Oman.


17/117

We will be building o the backlog

that we exited with in 2011, and

we expect 2012 to continue the

growth that we saw in 2011.

We oresee unconventional

gas plays throughout North

America and gas production

in the Middle East being the

major drivers. In North America

we see many separate, individually

smaller opportunities because o the

wide distribution o gas plays, which are

collectively a gigantic gas market. In addition,

with the increasing production o liquids-rich gas,

Enerex will ocus on expanding into the design and

manuacturing o modular cryogenic plants to capture

these opportunities. Internationally, we have large

projects in Oman and Australia.

That is as long as the world economy remains in reasonable

condition. There are many sources o instability around the

world that we have no inuence over. Within North America,

both the U.S. and Canadian economies are orecast to grow

this year. Natural gas prices, however, are very low they

were low throughout 2011 and as the year turned they

commenced a decline to the mid-$2 mark that we have not

seen in a long time. This is due to the prolifc nature o the

unconventional gas plays, to the astounding success o

the technologies being applied, to a very mild winter, and

also somewhat to the large volumes o solution gas beingproduced in association with the new unconventional oil

plays. It seems that we will need some combination o

signifcantly curtailed natural gas drilling and production,

especially in dry gas felds, and increased use o natural

gas perhaps in association with a push towards North

American energy independence or natural gas prices

to recover. In recent weeks, we have seen a decline in the

U.S. gas-ocused drilling rig count, and announcements o

production shut-ins by some producers. That is encouraging,

but only time will tell how strong the eect will be.

What should

investors

expect in terms o

Enerexs activities

in 2012, and

what is your

economic and

commodity

outlook?

It is an understatement to say there

is more desire or yield than in

the past. We understand that,

and are committed to dividend

growth over the long-term. The

question rom investors is always,

When? We can only answer that

it has to happen at an appropriate

time or the business. We are going to

use our cash frst to grow the business.

As our proftability increases, then we can

increase the dividend. Our capital allocation

priorities include debt repayment, unding

expansion, the dividend, and lastly buyback o

shares via the normal course issuer bid. We do

not say what percentages are going where, because

business conditions and opportunities change over

the course o the year. We do, however, expect capital

expenditures to total approximately $35-$40 million in 2012.

On behal o the Board o Directors,

[signed] J. Blair Goertzen

J. Blair Goertzen

President, Chie Executive Ofcer and Director

February 29, 2012

What are

your capital

allocation

priorities, and

where does

the dividend

ft in?

2 0 1 1 A N N U A L R E P O R T15


18/117

are installing natural gas inrastructure and

building industries that rely on natural gas or

uel and eedstock. Oil-producing countries in

the Middle East are seeing the possibilities in

natural gas both or domestic consumption

and export earnings.

Liqueed natural gas (LNG) tankers are

roaming the oceans, transorming natural gasrom a regional to a global commodity. The

worlds natural gas consumption is increasing

by 1.6 percent per year, with orecasts

showing consumption to grow to 169 trillion 1

cubic eet in 2035.

Natural gas is on the

rise around the world.

In North America, the

unconventional shale and

tight gas revolution is driving

production growth even at

sustained low gas prices. In

Europe and other developed

countries, the cleanest ossiluel is increasingly relied on

or power generation. Rapidly

industrializing developing countries

O P E R A T I O N S R E V I E W

Imagine a world

without natural gas


Build-Own-Operate-Maintain (BOOM) compression acility, Oman.

1 Source: eia, International Energy Outlook 2011


19/117

Industrial fuel manufacturing, water

desalination;

Manufacturing feedstock fertilizer,

petrochemicals;

Power generation;

Fuel-switching from higher-carbon or more

expensive energy sources; and

Potential growth applications such as natural

gas-powered vehicles.

These trends represent major opportunities or

Enerfex, today and or the long-term because

the worlds natural gas markets need everything

Enerfex oers. Enerfex is an established,

recognized company with a track record o

growth, operating in a growing industry. Why

would we want to be anywhere else?

As a low-carbon uel, natural gas has major

environmental attractions compared to other

ossil uels and enormous cost advantages over

alternative energy. Yet the amount o natural gas

that is still fared or simply burnt o in oil elds,

especially in Arica and Russia, is in the multiple

billions o cubic eet per day worldwide. Thats

the equivalent o some countries entire natural

gas consumption and it creates a need or new

capture and processing inrastructure. Demand

will be created as these countries continue

industrialization.

It is very hard to imagine todays world without

natural gas. The uses o natural gas are varied

and growing:

Commercial and residential heating

and cooling;

2 0 1 1 A N N U A L R E P O R T17

Liquids Natural GasCoal Renewables Nuclear

250

200

150

100

50

0

1990 2000 2008

2008

2015 20352025

H I S T O R Y P R O J E C T I O N S

Quadrillion Btu

Year

World Energy Consumption by Fuel (quadrillion Btu) 1

1 Source: eia, International Energy Outlook 2011


20/117

Enerfexs 60 locations in major gas elds

position us to serve the growing demand or

new packages, as well as to generate recurring

revenue rom ater-market support (reer to

pages 22-23). The Company is well-served by

manufacturing facilities in Nisku and Calgary,

Alberta; Casper, Wyoming; Houston, Texas;

and Brisbane, Australia. Internally, Enerfex has

ocused on continuous improvement o internal

processes and cost reductions to achieve

lean manuacturing, along with integration

o engineering, design and manuacturing

unctions across our acilities. Enerfex oresees

continued growth in compression demand at

liquids-rich gas plays across North America.

International compression is a large piece o

Enerfexs overall business, and represents

approximately half of the Companys

international business. Enerfexs success

comes rom its longstanding presence in

selected markets, experienced people, close

ties to local businesses, and relationships with

major energy producers.

The International compression market typically

involves designing and manuacturing to the

individual customers specications. Enerfex

is experienced and comortable in taking on

technically complex projects governed by

dierent codes and standards, as well as varying

climatic and terrain conditions. An important

recent example is the Tatweer Petroleum

compression project in Bahrain, consisting o

six compressor packages totalling 26,000-hp

installed. It was sold by the international team,

manufactured in Houston, shipped in modules

to Bahrain, commissioned by Enerfex, and

is being maintained and operated by a local

Enerfex team.

Essentially most

natural gas elds

require compression

to move gas rom

producing wells to

high-pressure sales

pipelines. Enerfex is a

leading supplier o gas

compression packages

consisting o gas-uelled

engines or motors,

reciprocating and screw

compressors, cooling ans,

piping and instrumentation

and controls. Applications

include gas gathering

compression, inlet and residue

compression in processingacilities, compression or gas

storage and pipeline compression.

Customers range from small

independent producers to majors,

as well as midstream or third-party

processing providers.

Enerfex is positioned in virtually

every unconventional gas play across

North America. Key markets are the

Eagle Ford, Marcellus, Montney, Horn

River, Fayetteville, Haynesville, Barnett,

Avalon and Bakken plays. Enerfex is at

the oreront o todays high-horsepower

compression trend to service high-rate

unconventional wells. The Company accounts

or approximately hal o the worlds installations

of the 8,000-hp Caterpillar GCM34 engine for gas

compression applications.


Compression



21/117

Caiman Energys Reciprocating Compression Project

Enerexs Houston Facility Expansion

QGC QCLNG and Santos GLNG Projects

Enerfex is midway through

a USD$193 million project tosupply compressors and related

equipment for QGCs Queensland

Curtis LNG project (QCLNG).

The high-horsepower rotary screw

compression packages and process

dehydration systems will be supplied

or gas gathering and treatment.

The project integrates multiple

Enerfex capabilities, with design

and prototyping in Calgary, Alberta,

fabrication in Casper, Wyoming, and

nal assembly at a dedicated new

acility in Brisbane, Australia. Thisapproach levers Enerfexs resources,

resulting in cost-eective and

high-quality execution. Much o the

ocus or Enerfex has been on the

coal seam gas basin development in

Australia, where multi-billion dollar

investments are being made or

the domestic market and or the

export o LNG.

Continuing our success in the coal

seam gas industry in Queensland,

Enerfex is supplying over 60,000horsepower o skid-mounted rotary

screw compressor packages or the

Santos GLNG project. The packages

are being engineered and abricated

in the Houston, Texas facility. The

compression packages support a

coal seam gas gathering system

connected to an underground gas

transmission pipeline to Gladstone,

where the liqueed natural gas acility

will produce 7.8 million tonnes per

annum o LNG or export markets.

This strategic acility provides

manuacturing capacity not only orNorth America but globally due to

its tidewater location near the Gul

o Mexico. The plant is undergoing

a two-phase expansion. It includes

a new 81,000-square-oot assembly

and paint building with 20 enlarged

assembly bays having 100-ton lit

capacity doubling the previous

manuacturing capacity and

oering indoor manuacturing

o double-deck skids. Phase

I was completed in February

2012 and Phase II should bepartially operational by April.

The Houston facility is a key

component in Enerfexs integration

o its engineering, design and

manuacturing resources or

worldwide application.

Enerexs Houston facility is

engineering and packaging two9,315-horsepower, electric

motor-driven reciprocating

compressor packages for Caiman

Energys Fort Beeler III gas

processing acility in Marshall

County, West Virginia, which

processes gas produced in the

Marcellus Shale. These packages

represent the highest-horsepower

reciprocating compressors utilizing

an Ariel compressor built in North

America to date, and will serve to

boost processed gas rom the acilityinto the sales gas pipeline. Enerfex

won this contract as a result o its

superior engineering and abrication

capabilities. The project is expected to

be completed in late summer 2012.

QGC QCLNG and Santos

GLNG projects

Queensland, Australia

Enerfexs Houston

acility expansion

Houston, Texas, United States

Caiman Energys reciprocating

compression project

Houston, Texas, United States

2 0 1 1 A N N U A L R E P O R T19


22/117

high-quality manuacturing. Enerfexs

processing business is smaller than its

compression business but generates

typically stronger margins and oers large

growth potential.

Internationally, Enerfex has had strong success

in bidding and winning turnkey processing

projects including ater-market operations

and maintenance contracts. Gas processing

acilities outside North America tend to be large

and complex, requiring a high level o technical

expertise, worldwide logistics capability, plus

the technical expertise to provide design

guarantees. Key markets include Australia

and Arabian Gul nations such as Oman,

Bahrain and the UAE. The large amount o

coal seam gas production in eastern Australia

generates numerous opportunities or

dehydration acilities.

In the Middle East, important past successes

include the build-own-operate-maintain

(BOOM) project or BP Oman. This

multi-million dollar project included a 70

MMSCF per day gas processing plant with inlet

separation, ve 2,500 hp compressors, plus a

three-year contract to operate and maintain theacility. It came on-stream in August 2010. This

success strengthened Enerfexs reputation

in bidding or the much larger Oman Oil

contract. Going orward, Enerfex oresees

multiple opportunities to bid on large,

complex, ull-liecycle projects.

Processing

conditions natural

gas to ready it or

transportation by

pipeline and

end-use consumption.

All newly produced

natural gas requires

the removal o water,

carbon dioxide (CO2) and

other impurities, and gas

containing natural gas liquids

(ethane, propane, butane and

condensate) requires more

complex processing. Enerfex

supplies processing equipment

including plant compression,

general processing, dew point

control, dehydration and liquids

separation, and amine sweetening

to remove hydrogen sulphide or CO2.

The North American producing

sectors increased ocus on

liquids-rich gas opportunities has

generated new demand or processing

acilities. Enerfexs main North American

processing markets are the Horn

River, Montney, Eagle Ford, Bakken and

Marcellus plays. Customers include small

through large producers plus midstream

processing providers. Enerfexs advantages

in this competitive business are its detailed

engineering, longstanding experience and


Processing



23/117

Oman Oils

Gas Processing Facility

Todd Energys LPG Facility

Spectra Energys

Gas Processing

Plant

Oman Oils gas processing

acilityBlock 60, Sultanate o Oman

This USD$228 million contract

or the design, engineering,

procurement, construction and

commissioning of a 90 MMSCF per

day natural gas processing acility

that will extract 6,000 bbls per

day o condensate is Enerfexs

largest-ever project. Currently in

design, construction is to commence

later this year and commissioning

is scheduled or the third quarter

o 2013. Facility design and major

equipment including separators,

dehydrators, an amine unit and dew

point plant are being provided by

Enerfexs Nisku, Alberta acility,

while the Houston, Texas plant

is supplying the compression

packages. Construction will require

a peak workorce o 500. The new

plant will serve Omans growing

natural gas demand, while the

condensate will be sold or export.

The contract strengthens Enerfexs

position in the MENA region.

Spectra Energys gas

processing projectDawson Creek, B.C., Canada

This multi-million dollar,

two-phase sour gas processing

acility exemplies the large,

centralized processing acilities

used in northeast British Columbia.

Enerfex was awarded the process

modules or this acility in July 2010

due to our ability to manuacture

and deliver a wide range o

products and services. Engineering,

design and manuacturing were

performed at Enerexs Calgary

and Nisku, Alberta acilities. Phase

I equipment includes an amine

plant, a hydrocarbon dew point

plant, an inlet separator, an electric

motor drive vapour recovery

compression package, an acid

gas dehydration package, a 1,150

horsepower electric motor drive

acid gas compression package,

and a condensate stabilizer

package. Shipping o the modules

commenced in May 2011 and

Phase II was in abrication in

early 2012.

Todd Energys LPG acility

Taranaki, New Zealand

This multi-million dollar project

to extract natural gas liquids

including propane (LPG) rom locally

produced natural gas demonstrates

Enerfexs ability to eciently lever

its North American capabilities

worldwide. Enerfex designed the

acility and manuactured modules

in its Nisku, Alberta acility in

packages small enough to t in

standard sea containers, minimizing

shipping costs. Using an advanced

process engineering designunique to Enerfex, the acility will

achieve extremely high recovery

o liquids rom the gas stream. The

project was awarded in December

2009, equipment was shipped in

October 2010 and LPG production

commenced in December 2011.

Plant processing capacity is 26

MMSCF per day with annual LPG

output planned at 27,000 tonnes.

2 0 1 1 A N N U A L R E P O R T21


24/117


independent producers to regionally signicant

players to some o the worlds largest producers,such as BP, Shell, ConocoPhillips, and others.

Maintenance contracts are managed centrally

out of Calgary, Alberta by a team of dedicated

engineers and planners using remote monitoring

and on-site specialist personnel to carry out the

work required.

Through its predecessor companies, Enerfex

has accumulated over 40 years o experience

in providing parts, eld repairs, equipment

overhauls and other services to the natural gas

producing sector. Ater-market service helpsproducers maintain existing elds and acilities,

thereby generating stable revenue throughout

the commodity price cycle. Enerfex values

this business as a way o both strengthening

relationships with customers and providing stable

revenue during times o lower capital spending on

natural gas inrastructure.

Creation o Gas Drive

In 2011 Enerfexs ater-market service

business evolved substantially. Through anagreement with GEs Gas Engines, the Company

became the authorized distributor and

ater-sales support provider or Waukesha

parts and engines in Canada and 20 U.S. states,

as well as a distributor and ater sales support

provider o Jenbacher engines and parts in

Canada. GEs Gas Engines produce high-quality

Approximately

21 percent oEnerfexs top-line

consists o recurring

revenue generated by

the Companys after-

market service and

support activities. This

sophisticated business

includes distribution and

remanuacturing acilities,

more than two-dozen outlets

situated in active natural gas

producing areas, hundredso service vehicles, hundreds

o skilled mechanics, tens o

millions o dollars in inventory,

plus an experienced management

team. In 2011, Enerfexs Service

business generated $262 million

in revenue and achieved

strong margins.

Enerfex services a large installed

base o gas compression and storage

acilities in North America and Australia,refecting Enerfexs longstanding

presence. In addition, Enerfex provides

contract maintenance and operation or

large natural gas acilities in the Middle

East and other markets where there is little

experience in operating and maintaining

gas facilities. Customers range from

Ater-market service



25/117

Canada

United States

South AmericaAustralia

Middle East/North Arica

reciprocating gas-uelled engines Waukesha

primarily or gas compression applications and

Jenbacher or power generation.

Enerfex created a wholly-owned limited

partnership, Gas Drive Global LP to act as

distributor. This separation is required to ocus on

a pure distribution business, rom selling engines

and power generation systems to service and ull

liecycle support o the product. Most o Enerfexsater-market service resources were transerred

to Gas Drive, enabling Gas Drive to commence

operations with complete capabilities. The

distribution business is a local business, and Gas

Drive is oering local service provided

by local people by being positioned directly in

gas-producing areas. Gas Drive has 35 branches

including locations in Drumheller, Alberta; Gillette,

Wyoming; Roma, Australia and Jakarta, Indonesia.

Outside o Gas Drives designated distribution/

service areas, ater-market service continues tobe provided by Enerfex Service. This includes

operations and maintenance contracts in the Middle

East. Together, Enerfex and Gas Drive have ormed

one o the worlds largest ater-market service

providers to the natural gas producing sector.

2 0 1 1 A N N U A L R E P O R T23

Commissioning o a compression acilit y, Canada.

The dynamometer cell with the design capability o load testing engines, Canada.


26/117

Gas Drive Global

The Opportunity

Enerfex is excited by

the new opportunities

arising rom Gas Drives

creation. GE Energy is

involved in the delivery o

25 percent o the worlds

electricity. Marketing two

new product lines opens

avenues o sales growth.

Waukesha is a storied

engine manuacturer that,

under the ownership o GEs

Gas Engines, stands to gain

investment in new technologysuch as the larger horsepower

required in todays shale gas plays,

better electronic engine controls

and reduced emissions. GEs

Gas Engines decision to have its

distributors bundle sales with service

enables Enerfex and Gas Drive to

oer customers their ull range o

expertise. Gas Drive is diversiying into

new product sales, into new regions

including many more U.S. states and

eastern Canada and with Jenbacher

engines into a new sector, power

generation.

Power Generation

Enerfexs relationship with GEs Gas Engines

includes a unique opportunity to pursue

growth in power generation. Following the

acquisition o Jenbacher by GEs Gas Engines

and their investment in new technologies,

Jenbacher increased its share o the European

reciprocating gas-uelled power generation market.

Gas Drive is now the authorized distributor o

Jenbacher in Canada and intends to build from

Jenbachers small Canadian presence. There are

numerous potential applications including biogas

and landll gas, wastewater acility power, peak

shaving, remote o-grid locations having local

natural gas resources, and uel-switching romdiesel-powered electricity to gas-driven power

generation on drilling rigs.



Gas Drive has over 200 ully equipped service vehicles.


27/117

Australia

Indonesia

Canada

Northern United States

Alaska

Papua New Guinea

Leduc, Alberta distribution andremanuacturing acility

This state-o-the-art, 55,000-square-oot,

$12 million acility just one minutes drive rom

Edmonton International Airport opened in May

2011 and provides Gas Drive with capabilities

unmatched by any other service provider. Half

the acility is dedicated to parts distribution,

logistics and supporting $40 million o inventory,

including exchange natural gas-uelled engines.

The remanuacturing operation occupies the

other hal, producing exchange engines and a

ull selection o exchange engine components

such as cylinder heads, pumps, connecting

rods and turbochargers. Every remanuactured

exchange engine is ully run-tested in a

dynamometer cell designed to accommodateengine models up to and including the new

Waukesha 16V275GL+ (4,835 hp).

2 0 1 1 A N N U A L R E P O R T25

A brand new, 55,000 square-oot, $12 million parts, distribution and

manuacturing acility, Leduc, Canada.

Over $40 million in company held inventor y, Canada.


28/117

H E A L T H , S A F E T Y A N D E N V I R O N M E N T

indicators were the planned number o site

inspections, pre-job hazard assessments,

hazard identications, and saety meetings

across the Company. Business units maintain

additional health, saety and environmental

perormance indicators. The two key lagging

indicators are total recordable injury requency

(TRIF) and lost-time injury rate (LTIR).

Enerfex ocuses mainly on the TRIF because

the Companys goal is to eliminate injuries.

Enerfex had several important saety

achievements in 2011. The Compression and

Power, Rentals and Retrot and Service (which

became Gas Drive in October 2011) business

units in Alberta operated or one year without

a lost-time injury, while the MENA region

operated or one year without any type o

recordable injury.

In addition to meeting or exceeding the

stringent saety requirements in well-

established jurisdictions such as those across

North America, Enerfex applies undamental

saety standards, such as use o hardhats in all

manufacturing areas. The Company transfers

key best practices to ensure consistency o

operation across geographical boundaries.

For example, Enerfex works according to

North Americas stringent hydrogen sulphide

(H2S) saety requirements when building

and operating gas processing acilities in the

Middle East, where there are no specic H2S

standards. Also in 2011 Enerfex implemented a

stop work authority. It establishes the authority

and obligation or any Enerfex employee to

suspend a work task or group operation when

becoming aware o an unsae condition, act,

error, omission, or lack o understanding that

could result in an undesirable event.

Saety

Saety is a passion

at Enerfex and

an integral part

of the Companys

culture. This passion

begins at the top, with

Enerfexs President

and CEO, the Board ofDirectors and the senior

management team. To be

a health and saety leader is

a core value of the Company.

Enerfexs saety principles and

programs encompass all o the

Companys business units and

regions worldwide. Within this

ramework, each business unit

builds and renes a saety program

that is applicable to its businessocus, specic circumstances and risk

actors. Saety is thereby tied into

everything we do.

Over the past 18 months Enerfex

reviewed its saety programs

across-the-board, with a ocus on achieving

cross-unctional consistency plus sharing o

inormation and ideas to encourage continual

improvement. Enerfexs saety program is

perormance-based. In addition to Enerfexs

safety programs, the Company provides a

comprehensive health and welare benets plan

or employees plus a corporate wellness package

to help employees recognize and overcome

health challenges.

A system o leading and lagging indicators provides

management with insight into the saety perormance

that can be expected in the year ahead and actual

results or the past year. For 2011, the our key leading

Building a global

service provider



29/117

In addition to establishing principles, policies and

leading/lagging indicators, senior management

members are engaged in saety matters,becoming personally involved in the investigation

and root cause analysis ollowing a saety

incident. In keeping with a consistent One

Enerfex philosophy, International health, saety

and environment team members remain in

regular contact to exchange insights and ideas

on saety issues and applying best practices.

Environmental Protection

Being in the natural gas business means

that Enerfex is promoting environmental

improvement. Fuel-switching rom other

ossil uels, as well as choosing natural

gas-based equipment over other ossil uels

has a positive impact on the environment

worldwide. Natural gas is innately clean-burning

and, when properly processed, releases little in

the way o harmul pollutants such as sulphur

dioxide and particulates. Natural gas is simply

a cleaner energy source and natural gas

inrastructure is our business.

In addition, the natural gas-uelled equipment

that Enerfex provides to our customers has

substantially improved. Todays gas-uelled

engines are more uel-ecient than in the past.

That is objectively benecial to the environment.

Enerfexs products are designed to be

environmentally riendly once in operation, with

built-in design eatures that minimize the risk o

spills and provide containment.

Operationally, Enerfex is ocused on

ensuring that its operations meet or exceed

environmental regulations and do not have anegative environmental impact.

Internally, Enerfex has re-examined our

processes around managing chemicals and

hazardous waste, the Company is better at

managing minor spills in acilities and on job sites,

and are reducing the overall use o hazardous

materials. Recently instituted audit programs

ensure that Enerfex is meeting regulations

and industry practices and are applying leading

standards wherever the Company operates.

Community Engagement

Among Enerfexs goals is to be recognized

as a partner o choice. This goes beyond our

technical capabilities and includes ostering pride

in the Companys employees and sustained

loyal relationships with all the stakeholders. In

order to achieve this vision, Enerfex participates

continuously in strengthening and helping to

shape the uture o the communities in which

it operates. Enerfex contributes directly to anumber o causes, and encourages and supports

the employees in the volunteer and charitable

activities in which they engage. Enerfex is

involved with many charities around the world,

including Multiple Sclerosis Societies in Alberta

and Australia, the Alberta Junior Hockey League,

the Kids Cancer Care Foundation of Albertaand

other initiatives in nearly all o the operating

regions worldwide.

2 0 1 1 A N N U A L R E P O R T27

Enerex sponsors many cus tomer events, Canada. Ener exs team or the 2011 Ener ex MS Walk, Canada.


30/117

Governance

long-term success, consistent with the

Boards duciary duty to shareholders. The

Board oversees corporate perormance and

provides judgment, experience and continuity

of guidance to help achieve the Companys

strategic objectives.

Committees and Mandate

Committees of the Board are designed to

ensure the ull accountability o the Board and

the Company by focusing the detailed attention

o experienced members on key aspects o

the business. All committees are comprised

solely o directors who are independent o

management. The ollowing three committees

have been delegated various oversight

responsibilities: the Audit Committee, the

Nominating and Corporate Governance

Committee, and the Human Resources andCompensation Committee.

The Mandate o the Board explicitly arms

the Boards ongoing responsibility or the

stewardship o the business and aairs o

the Company on behalf of shareholders.

To view the ull Mandate o the Board o

Directors, please reer to our website at

www.enerfex.com.

The Board o Directors and

management o Enerfex

believe that for the Company

to achieve its ull potential, it is

necessary for the Company to

maintain a strong and eective

corporate governance program.

Our vision and values are

exemplied by management across

all levels of the Company throughout

the ve geographical regions.

Communicating and reinforcing

Enerfexs values includes circulating a

quarterly global newsletter, as well as

Ethics 101 Communications, in which

employees are presented with an ethics

problem and solution. In 2011, Enerfexs

management also conducted a series

o internal presentations at a number oEnerfexs global locations to promote the

Companys values.

Enerfexs Board o Directors consists

o eight members, seven o whom are

considered independent. These eight

members are responsible or overseeing the

management of the Companys business.

The Boards primary role is to oster Enerfexs


Attendance by Board Members


31/117

Board o Directors

W. Byron DunnDirector

Mr. Dunn is a Principal and a FoundingPartner o Tubular Synergy Group LP,which acts as a sales, marketing andsupply chain services provider or avariety o suppliers o tubular productsto the oil and natural gas industry.

Prior thereto, Mr. Dunn had a 32-yearcareer with Lone Star Steel Company,o which he was CEO, President and aDirector rom 1997 to 2007. Mr. Dunn isalso a Director o Quicksilver ResourcesInc., a publicly traded company.

Stephen J. Savidant

Chairman

Mr. Savidant is an independentbusinessman with over 33 years

o industry experience. He was theChairman o ProspEx Resources Ltd.,a Calgary-based oil and natural gascompany ocused on exploration ornatural gas in the Western CanadaSedimentary Basin, until it wasacquired by Paramount ResourcesLtd. on May 31, 2011. Mr. Savidantwas previously President and ChieExecutive Ofcer o Esprit EnergyTrust rom 2002 to 2006 and CanadianHunter Exploration rom 1998 to2001. He is also a director o EmpireCompany, a reporting issuer.

Michael A. WeillDirector

Mr. Weill has been the CEO o GlobalDeepwater Partners LLC since 2008.From 1996 to 2007, Mr. Weill servedin various positions with BHP BillitonPetroleum, including President,Production Americas and President

Operations and Technology Americas/Australia, based in Houston,Texas. He also served as President,Integrated Business Development,based in Melbourne, Australia. Priorthereto, Mr. Weill served in variouspositions with Royal Dutch Shell inHouston, New Orleans and the Hague.

H. Stanley MarshallDirector

Mr. Marshall is President and ChieExecutive Ofcer and a director

o Fortis Inc., and several o itssubsidiaries (an international electricutility holding company). Fortis Inc.is a reporting issuer. Mr. Marshalljoined Newoundland Power Inc. in1979 and was appointed Presidentand Chie Executive Ofcer o FortisInc. in 1996.

Robert S. Boswell

Director

Mr. Boswell is Chairman and ChieExecutive Ofcer o Laramie EnergyII LLC, a Denver-based companyprimarily ocused on fnding anddeveloping natural gas reservesrom unconventional gas reservoirs.

Prior thereto, Mr. Boswell wasChairman and Chie Executive Ofcero Laramie Energy LLC rom 2004 to2007. Mr. Boswell was previouslyChie Executive Ofcer o Forest OilCompany rom 1995 to 2003.

Wayne S. HillDirector

Mr. Hill is currently a di rector and aormer Executive Vice President and

Chie Financial Ofcer o ToromontIndustries Ltd. He joined Toromont in1985 as Vice President, Finance andChie Financial Ofcer and becameExecutive Vice President and ChieFinancial Ofcer in 2002. He retired onMay 31, 2006, but was re-appointedas Executive Vice President onAugust 28, 2006. He subsequentlyretired in May 2008.

J. Blair Goertzen

Director, President and

Chie Executive Ofcer

Mr. Goertzen is the President andChie Executive Ofcer o EnerexLtd. Mr. Goertzen joined Enerex in2003 as Executive Vice President. Hewas appointed President and Chie

Operating Ofcer in 2005 and becamePresident and Chie Executive Ofcerin 2006. Prior thereto, Mr. Goertzenwas employed by IPEC Ltd, wasVice President o Enserv Corporationand was appointed to Senior VicePresident, Business Development oPrecision Drilling Corporation whenPrecision acquired Enserv.

Kenneth R. BruceDirector

Mr. Bruce retired as Vice Chairmano CIBC World Markets in 2007,

having served in this position since2003. From 1995 to 2003, Mr. Bruceheaded Global Energy at CIBC WorldMarkets, which had proessionals inToronto, Calgary, New York, London,Hong Kong and Sydney. While at CIBCWorld Markets, he was a Fellow othe Canadian Securities Institute and

a Chartered Business Valuator.

(rom let to right)

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Managements Discussion and Analysis

The Managements Discussion and Analysis (MD&A) should be read in conjunction with the audited consolidated nancial statements

or the years ended December 31, 2011 and 2010 and the accompanying notes to the consolidated nancial statements contained in this

annual report. They should also be read in combination with Toromont Industries Ltd. (Toromont) Management Inormation Circular Relating

to an Arrangement involving Toromont Industries Ltd., its shareholders, Enerfex Ltd. and 7787014 Canada Inc. (Inormation Circular or

Arrangement) dated April 11, 2011.

The consolidated nancial statements reported herein have been prepared in accordance with International Financial Reporting Standards

(IFRS) and are presented in Canadian dollars unless otherwise stated. In accordance with the standard related to the rst time adoption o

IFRS, the Companys transition date to IFRS was January 1, 2010 and thereore the comparative inormation or 2010 has been prepared in

accordance with IFRS accounting policies. 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 inormation that is available up to February 29, 2012 and ocuses on inormation

and key statistics rom the audited consolidated nancial 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 uture changes that may occur in general

economic, political and environmental conditions. Additionally, other elements may or may not occur which could aect industry conditions

and/or Enerfex Ltd. in the uture. Additional inormation relating to the Company, including the Inormation Circular, is available on SEDAR

at www.sedar.com.

FORWARD-LOOKING STATEMENTS

This MD&A contains orward-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 o the Companys belie, intentions and expectations about development, results and events which will or

may occur in the uture constitute orward-looking statements and are based on certain assumptions and analyses made by the Company derived

rom its experience and perceptions. All statements, other than statements o historical act contained in this MD&A are orward-looking statements,

including, without limitation: statements with respect to anticipated nancial perormance; uture capital expenditures, including the amount and

nature thereo; bookings and backlog; oil and gas prices and demand; other development trends o the oil and gas industry; business prospects andstrategy; expansion and growth o the business and operations, including market share and position in the energy service markets; the ability to

raise capital; expectations regarding uture dividends; expectations and implications o changes in government regulation, laws and income

taxes; and other such matters. In addition, other written or oral statements which constitute orward-looking statements may be made rom time

to time by and on behal o the Company. Such orward-looking statements are subject to important risks, uncertainties, and assumptions which are

dicult to predict and which may aect the Companys operations, including, without limitation: the impact o general economic conditions; industry

conditions, including the adoption o new environmental, taxation and other laws and regulations and changes in how they are interpreted and

enorced; volatility o oil and gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sucient cash fow rom

operations to meet current and uture obligations, including uture dividends to shareholders o the Company; increased competition; the lack

o availability o qualied personnel or management; labour unrest; fuctuations in oreign exchange or interest rates; stock market volatility;

opportunities available to or pursued by the Company and other actors, many o which are beyond its control. As such, actual results, perormance,

or achievements could dier materially rom those expressed in, or implied by, these orward-looking statements and accordingly, no assurance can begiven that any o the events anticipated by the orward-looking statements will transpire or occur, or i any o them do so, what benets, including

the amount o proceeds or dividends the Company and its shareholders, will derive thererom. The orward-looking statements contained herein are

expressly qualied in their entirety by this cautionary statement. The orward-looking statements included in this MD&A are made as o the date o

this MD&A and other than as required by law, the Company disclaims any intention or obligation to update or revise any orward-looking statements,

whether as a result o new inormation, uture events or otherwise.


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THE COMPANY

Enerfex Ltd. was ormed ater the acquisition o Enerfex Systems Income Fund (ESIF) by Toromont and subsequent integration o Enerfexs

products and services with Toromonts existing Natural Gas Compression and Process business. In January 2010, the operations o Toromont

Energy Systems Inc., a subsidiary o Toromont Industries Ltd., were combined with the operations o ESIF to orm Enerfex Ltd. Enerfex 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 o a plan o arrangement whereby Toromont shareholders received one share o Enerfex or each

common share o Toromont, creating two independent public companies Toromont Industries Ltd. and Enerfex Ltd. Enerfexs shares began

trading on the Toronto Stock Exchange (TSX) on June 3, 2011 under the symbol EFX.

Enerfex Ltd. is a single-source supplier or natural gas compression, oil and gas processing, rerigeration systems and power generation

equipment plus in-house engineering and mechanical services expertise. The Companys broad in-house resources provide the capability

to engineer, design, manuacture, construct, commission and service hydrocarbon handling systems. Enerfexs expertise encompasses eld

production acilities, compression and natural gas processing plants, CO2

processing plants, rerigeration systems and power generators

serving the natural gas production industry.

Headquartered in Calgary, Canada, Enerfex has approximately 3,100 employees worldwide. Enerfex, its subsidiaries, interests in aliates

and joint-ventures operate in Canada, the United States, Argentina, Colombia, Australia, the United Kingdom, the United Arab Emirates,

Oman, Egypt, Bahrain and Indonesia.

OVERVIEW

The oil and natural gas service sector in Canada has a distinct seasonal trend in activity levels which results rom well-site access and

drilling pattern adjustments to take advantage o weather conditions. Generally, Enerfexs Engineered Systems product line has experienced

higher revenues in the ourth quarter o each year while the Service and Rentals product line revenues are more stable throughout the year.

Rentals revenues are also impacted by both the Companys and its customers capital investment decisions. The International markets are not

signicantly impacted by seasonal variations. Variations rom these trends usually occur when hydrocarbon energy undamentals are either

improving or deteriorating.

During the twelve months o 2011, Enerfex continued to see improved bookings in all regions, including successul bids on large projects

in Canada, the Southern U.S. and the International segments. Manuacturing activity levels have increased in Canada and Northern U.S.

and International while service activity levels have increased in all regions as we continue to expand Enerfexs branch network and eld

operations in all three segments. Manuacturing revenue was lower in the Southern U.S. and South America during the twelve months

ended December 31, 2011, compared to the same period the prior year. Booking activity has increased in this region during 2011 driven

predominantly by the Eagle Ford and Marcellus shale gas basins. As a result, the decrease in revenues in the twelve months o 2011 is related

to timing o project deliveries which have been deerred into the rst quarter o 2012 and not lower activity levels.

North American rental utilization levels were challenged throughout 2010; however, utilization rates have increased slightly throughout 2011.

In the International segment, Middle East North Arica (MENA) has contributed positively to protability through the twelve months o

the year as a result o key projects achieving commercial operation in the region and recognition o approved change orders related to past

projects. The European region, within the International segment, has not perormed as expected during 2011. This act, coupled with General

Electrics decision to realign its distribution network in this region, has resulted in Enerfexs decision to exit the Service and Combined Heat

and Power (CHP) business during the third quarter o 2011. This business unit has been reported as a discontinued operation beginning

the third quarter o 2011 and or the twelve months ended December 31, 2011 and Enerfex has recorded a total impairment o $54.0 million,

consisting o non-cash impairments o $46.0 million or goodwill, intangible assets, deerred tax assets and air value adjustments, and

anticipated cash transaction costs totalling $8.0 million.


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FINANCIAL HIGHLIGHTSThree months ended Twelve months

December 31, ended December 31,($ Canadian thousands) 2011 2010 2011 2010 1

Revenue

Canada and Northern U.S. $ 151,844 $ 146,189 $ 524,235 $ 453,757

Southern U.S. and South America 109,664 129,372 342,335 364,273

International 122,294 72,055 360,567 249,753

Total revenue $ 383,802 $ 347,616 $ 1,227,137 $ 1,067,783

Gross margin 68,622 64,518 225,876 183,898

Selling and administrative expenses 42,113 42,863 145,790 142,943

Operating income $ 26,509 $ 21,655 $ 80,086 $ 40,955

Loss (gain) on sale o assets 82 907 (3,594) (68)

(Gain) on available or sale assets (18,627)

Equity earnings (354) (138) (1,161) (468)

Earnings beore nance costs and taxes $ 26,781 $ 20,886 $ 84,841 $ 60,118

Finance costs and income 1,201 4,589 7,011 15,471

Earnings beore taxes $ 25,580 $ 16,297 $ 77,830 $ 44,647

Income tax expense 7,860 7,978 21,089 14,385

Gain on sale o discontinued operations 1,430

(Loss) rom discontinued operations (6,963) 1,133 (65,470) (3,963)

Net (loss) earnings $ 10,757 $ 9,452 $ (7,299) $ 26,299

Key Ratios

Gross margin as a % o revenues 17.9% 18.6% 18.4% 17.2%

Selling and administrative expenses as a % o revenues 11.0% 12.3% 11.9% 13.4%

Operating income as a % o revenues 6.9% 6.2% 6.5% 3.8%

Income taxes as a % o earnings beore income taxes 30.7% 49.0% 27.1% 32.2%

1 2010 amounts include the inancial results o ESIF rom the date o acquisition, January 20, 2010.

Three months ended Twelve months


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NON-GAAP MEASURES Three months ended Twelve months

December 31, ended December 31,

($ Canadian thousands) 2011 2010 2011 2010 1

EBITDA

Earnings beore nance costs and taxes $ 26,781 $ 20,885 $ 84,841 $ 60,118

Depreciation and amortization 9,865 7,966 42,171 39,113

EBITDA $ 36,646 $ 28,851 $ 127,012 $ 99,231

EBITDA normalized 2 $ 36,646 $ 28,851 $ 127,012 $ 80,604

Cash Flow

Cash fow rom operations $ 27,659 $ 17,294 $ 86,329 $ 43,008

Non-cash working capital and other 22,340 18,073 48,466 50,784

Cash fow $ 49,999 $ 35,367 $ 134,795 $ 93,792

1 2010 amounts include the inancial results o ESIF rom the date o acquisition, January 20, 2010.

2 EBITDA or 2010 is normalized or the net impact o the gain on available or sale assets o $18,627. Prior to the acquisition o ESIF, Toromont owned 3,902,100

ESIF Trust Units. On acquisition o ESIF, Toromont recognized a pre-tax gain o $18,627 on this investment which was recorded at the Enerlex Ltd. level.

The success o the Company and business unit strategies is measured using a number o key perormance indicators, some o which

are outlined below. These measures are also used by management in its assessment o relative investments in operations. These

key perormance 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

o perormance under GAAP.

Earnings Beore Interest, Taes, Depreciation and Amortization (EBITDA)

EBITDA provides the results generated by the Companys primary business activities prior to consideration o how those activities are

nanced, assets are amortized or how the results are taxed in various jurisdictions.

Cash Flow

Cash fow provides the amount o cash generated by the business (net o non-cash working capital) and measures the Companys ability to

nance capital programs and meet nancial obligations.

Operating Income and Operating Margin

Each operating segment assumes responsibility or its operating results as measured by, amongst other actors, operating income, which is

dened as income beore income taxes, interest income, interest expense, equity income or loss and gain or loss on sale o assets. Financing

and related charges cannot be attributed to business segments on a meaningul basis that is comparable to other companies. Business

segments and income tax jurisdictions are not synonymous, and it is believed that the allocation o income taxes distorts the historical

comparability o the perormance o business segments.

Bookings and Backlog

Bookings and backlog are monitored by Enerfex as an indicator o uture revenue and business activity levels or Enerfexs Engineered

Systems product line. Bookings are recorded in a period when a rm commitment or order has been received rom Enerfexs 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 o revenue to be recognized in uture periods using percentage o

completion accounting.


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FOR THE THREE MONTHS ENDED DECEMBER 31, 2011

During the ourth quarter o 2011, the Company generated $383.8 million in revenue, as compared to $347.6 million in the ourth

quarter o 2010. The increase o $36.2 million was a result o increased revenue in the Canada and Northern U.S. and International

segment predominantly oset by decreased revenues in Southern U.S. and South America. As compared to the three month period ended

December 31, 2010:

Canada and Northern U.S. revenues increased by $5.7 million as a result o higher Rental revenue, which was partially oset by lower

Engineered Systems and Service revenue. Engineered Systems revenue was impacted by timing o revenue recognition, while Service

revenue was impacted during the ourth quarter o 2011 as a result o producers deerring maintenance due to low natural gas prices.

Rental revenue was higher in the quarter as a result o an increase in utilization rates and increased unit sales compared to the same

period in 2010;

Southern U.S. and South America revenues decreased by $19.7 million, as a result o decreased Engineered Systems and Service

revenue in the ourth quarter o 2011. Engineered Systems revenue continued to be impacted by project delivery dates being deerred

to 2012. Activity levels in this region remain robust with respect to booking and backlogs and are being driven by liquids-rich resource

basins in the Eagle Ford and the Marcellus; and

International revenues increased by $50.2 million as a result o increased revenue in Australia, and Production and Processing (P&P),

partially oset by lower revenues in MENA and International Compression and Power (C&P) as a result o closing the manuacturing

acility in this segment during the ourth quarter o 2010 and the transer o bookings and backlog related to that acility to Enerfexs

other two segments. Revenues in Australia during the ourth quarter o

2011 annual report enerflex

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