2003 Annual Report - Enerflex

Competitive issues in the oil and gas service industryAlthough the Canadian market continues to have distinct differences from the United States market, it is clear thata single North American market is developing. For this reason, investors should be aware of certain competitiveissues in Canada, the United States and overseas markets.CanadaThe Canadian production and processing equipment and compressor packaging markets are very competitive.Several fabricators target the same customers as Enerflex, and fabrication floor space is not a constraint. To besuccessful, the Company must compete based on quality and service while remaining price competitive.A number of new competitors have emerged to both our Syntech electrical and Pamco mechanical servicebusinesses. Enerflex is a market leader in Canada and maintains an extensive branch network, as proximity tocustomer locations is key to earning business. Pamco has a competitive advantage as the authorized Waukeshadistributor. Syntech does not have exclusive distributorships, but has developed proprietary control technology tohelp differentiate its business from the competition.While more compression equipment is being rented each year in Canada, only about 5% of the existing populationof compression equipment in Canada, measured by horsepower, is rented. The remaining 95% is owned byproducers. Enerflex is a leader in the rental industry, supplying an estimated 25% of the Canadian market(calculated by horsepower).United StatesThere are only two major competitors in the U.S. compression fabrication business. We believe that the U.S. marketprovides Enerflex with a strong opportunity to expand our business, which led to our 2002 acquisition of the assetsof EFX Compression USA, a specialty natural gas compression equipment packager in Odessa, Texas. Enerflexstrengthened the management of its U.S. subsidiary in 2003 to capitalize on this opportunity.In the United States there is no dominant service provider such as Enerflex. In 2003, Enerflex used its Odessa,Texas facility as a platform to establish a service business in this large, fragmented market. The Company plans toextend its mechanical service capability into the Rocky Mountain region in 2004.The United States market continues to be more heavily weighted towards compression rentals than theCanadian market. Approximately 30% of the United States market is served by rental compression equipmentwhile 70% is owned by producers and pipeline companies. Rental rates are low in the United States as therehas been a surplus of available equipment. Enerflex plans to compete in certain niche markets where returnson capital are appropriate.Enerflex 2003 Annual Report50