Storm Exploration Inc. (TSX:SEO) is pleased to announce Its Financial and
Operating Results for the Three Months Ended March 31, 2008
Unaudited
Consolidated Highlights -
Thousands of $CDN except
volumetric and per share Three Months to Three Months to
amounts March 31, 2008 March 31, 2007
-------------------------- ----------------- ------------------
Financial
Gas sales 26,241 23,440 (1)
NGL sales 2,389 1,105
Oil sales 5,145 3,227
Royalty income 199 237
----------------- ------------------
Production revenue 33,974 28,009
----------------- ------------------
Funds from operations 19,518 16,417
Per share - basic 0.44 0.38
Per share - diluted 0.43 0.38
Net income 6,426 5,066
Per share - basic 0.14 0.12
Per share - diluted 0.14 0.12
Capital expenditures, net
of dispositions 26,775 24,075
Debt, including working
capital deficiency 91,952 (2) 65,126
Weighted average common
shares outstanding
Basic 44,586 42,914
Diluted 45,685 43,652
Common shares outstanding
Basic 44,619 42,914
Fully Diluted 46,698 44,973
Operations
Oil Equivalent (6:1)
Barrels of oil equivalent (000s) 591 520
Barrels of oil equivalent per day 6,500 5,776
Average selling price ($CDN per BOE) $ 57.10 $ 53.42 (1)
Royalties 20.4% 20.1%
Gas production
Thousand cubic feet (000s) 3,051 2,704
Thousand cubic feet per day 33,525 30,048
Average selling price ($CDN per mcf) $ 8.60 $ 8.67 (1)
NGL Production
Barrels (000s) 30 19
Barrels per day 333 216
Average selling price ($CDN per barrel) $ 78.81 $ 56.93
Oil Production
Barrels (000s) 53 50
Barrels per day 579 553
Average selling price ($CDN per barrel) $ 97.63 $ 64.90
Wells drilled
Gross 11.0 10.0
Net 10.1 7.5
(1) Includes realized gain from hedging activities
(2) Excludes unrealized liability related to Q2 & Q3 2008 hedge positions
at March 31, 2008
First Quarter 2008 Highlights
- Production in the first quarter increased to 6,500 Boe per day, a 12% increase
from production of 5,776 Boe per day in the same period one year ago. This is a
per share increase of 8% using basic shares outstanding. Production is currently
approximately 7,300 to 7,500 Boe per day.
- All 11 wells drilled in the quarter were successful including four oil sands
test holes (4.0 net) at Surmont and seven gas wells (6.1 net) at Parkland. Two
horizontal Montney gas wells were drilled and three horizontal Montney gas wells
were completed and tied in during the first quarter including one horizontal
well drilled in late 2007.
- Cash flow for the quarter totaled $19.5 million or $0.43 per diluted share, an
increase of 13% from cash flow of $0.38 per diluted share in the year earlier
period. Excluding a hedging gain of $2.5 million in the prior year period, the
year over year increase in cash flow per diluted share is 34%.
- Achieved a cash flow netback of $33.00 per boe, an increase of 23% from the
cash flow netback of $26.58 per Boe (excluding hedging gains) in the first
quarter of 2007. With 86% of Storm's production being natural gas, this increase
is notable in comparison to the increase of 10% in the average AECO natural gas
price over the same period.
- Net income for the quarter was $6.4 million or $0.14 per diluted share, up
from net income of $0.12 per diluted share in the prior year period. The
increase is primarily the result of growth in production as well as higher
commodity prices which improved the corporate cash flow netback.
- Invested $26.8 million during the quarter which resulted in the bank debt and
working capital deficiency ending the period at $91.9 million (excluding an
unrealized non-cash mark-to-market hedging loss of $2.8 million) or 1.2 times
annualized quarterly cash flow. Subsequent to the end of the quarter, Storm's
credit facility was increased to $110 million from $94 million.
CORE AREA REVIEW
Parkland/Ft St John Area, North East British Columbia
This area includes our Montney discovery and is the largest of Storm's core
areas, with net production averaging 3,511 Boe per day in the first quarter. As
a result of three additional horizontal Montney gas wells that were completed
and tied in during the quarter, current production has increased to
approximately 4,600 Boe per day. This represents significant growth from average
2007 production of 2,240 Boe per day and very simply illustrates the high
quality of our land position on the Montney fairway.
First quarter activity included:
- Drilling seven wells (6.1 net) with 100% success resulting in two horizontal
Montney gas wells (2.0 net), three vertical Montney gas wells (2.1 net) and two
Halfway/Doig gas wells (2.0 net).
- Completing and tieing in three more horizontal Montney gas wells which are
currently producing 9.2 mmcf per day.
- Installing a third compressor at our Parkland facility which increased the
capacity from 22 to 34 mmcf per day. The success of our first quarter program
has resulted in current gross raw gas throughput increasing to 27 mmcf per day
at Parkland.
During the remainder of 2008, our activity will include drilling 13 wells (13.0
net) with five horizontal Montney development wells (5.0 net) and eight vertical
wells (8.0 net) targeting the Montney formation. This drilling program is
expected to fill up our expanded facility at Parkland by year end and, as a
result, we are also finalizing plans to twin our existing facility in late 2008
or early 2009 in order to ensure that production growth from our horizontal
development program can continue uninterrupted. Cost of this is estimated to be
$10 to $15 million which is not currently included in our budget.
Our 100% working interest Montney discovery has potential gas in place of 330
BCF assuming an areal extent of 5,825 acres (approximately 9 sections), average
net pay of 35 metres, and average porosity of 8%. During the first quarter, we
drilled two successful vertical step-outs; one has been completed, tied in and
is currently producing 900 mcf per day while the second step-out will be
completed later in the second quarter. Although both wells potentially expand
the area of the pool, we will not change our estimate of gas in place until the
current pool boundaries have been completely delineated. Approximately 70% of
the potential gas in place has been delineated with our nine producing vertical
wells and we plan to drill the remaining five vertical wells required to finish
delineation in the second half of this year. Our development efforts using
horizontal wells with five to seven fracs per wellbore have been very successful
with current production of 13 mmcf per day from the five producing horizontal
Montney gas wells that we have drilled to date. The presentation on our website
(www.stormexploration.com) shows monthly average production for each of our
producing vertical and horizontal wells up to the end of April. Vertical well
production is important to track as the average horizontal well is expected to
produce at a multiple (4 to 6 times) of the average vertical well.
Storm's entire land position on the Montney fairway totals 85 net sections with
approximately 35 net sections, including the nine sections encompassing our
Montney discovery, identified as having the most prospectivity based on
geological mapping and evaluation of our 3-D seismic. Numerous other Montney
prospects and leads have been identified on these lands. Over the last year,
three exploratory wells, including one gas well (0.5 net) drilled in the first
quarter of 2008, have been drilled targeting the Montney formation on these
lands with none of them encountering higher quality reservoir similar to what we
have in our existing Montney discovery. All three wells did encounter a thick,
gas saturated Montney interval and, as a result, we plan to drill three more
wells in the second half of 2008 in areas we have identified as having the
potential for improved reservoir quality.
To date, five of the gas wells we have completed in the Montney formation also
have potential in the uphole Halfway and Doig formations. As production declines
from these vertical Montney gas wells, we will be completing them in the Halfway
and Doig formations. Our Halfway and Doig opportunities also include eight
step-out drilling locations that have been identified using our 3-D seismic and
five infill locations in areas with lower expected recoveries. These wells will
be drilled over the next two years.
Grande Prairie Area, North West Alberta
Production from this area averaged 2,042 Boe per day in the first quarter and is
currently 1,900 Boe per day. Average production in 2007 was 2,400 Boe per day.
In the first quarter, we were not active in this area since Alberta's New
Royalty Framework ('NRF') does not provide us with a high enough return to
justify putting capital at risk drilling wells in Alberta. During the remainder
of 2008, our activity will be limited to drilling two wells (0.7 net) at Pouce
Coupe, drilling two horizontal infills (1.5 net) in our Doe Creek light oil pool
at Saddle Hills, and pipeline connecting one standing gas well (1.0 net) at
Culp. Two wells planned at Clairmont testing separate Montney prospects will now
be drilled in 2009 due to the time required to obtain drilling licences being
lengthier than expected. These are all projects less impacted by Alberta's New
Royalty Framework ('NRF') given that wells stabilize at lower rates (Pouce and
Saddle Hills) or qualify for the deeper well reduction as horizontal wells
(Montney at Clairmont). Although natural gas prices have increased to a current
level of $8 to $9 per GJ at AECO, the typical well we have drilled in this area
produces 800 mcf per day and would be subject to a 40% to 45% royalty rate which
results in a field netback of approximately $22 to $25 per Boe which does not
provide us with a high enough return on our capital investment.
Cabin-Kotcho-Junior Area, North East British Columbia
Net production from this area averaged 885 Boe per day in the first quarter.
Production in the quarter was reduced by 150 Boe per day due to the corrosion
failure of a salt water disposal pipeline late in 2007. The repair of the
pipeline was completed in mid-February which has resulted in current production
increasing to approximately 950 Boe per day.
This past winter, we were not active in this area as most of our available
capital was directed at evaluating and bringing on production from our Montney
discovery at Parkland. Historically, our drilling activity in this winter access
area has mainly targeted the Slave Point formation. In the future, our activity
will also include prospects in the Bluesky/Debolt formations and horizontal
wells in the Jean Marie formation, all in the Junior area. Our level of activity
this coming winter will be contingent on the amount of discretionary,
unallocated cash flow that is available which is dependent on natural gas
prices.
Storm also has exposure to the emerging Devonian shale gas play in the Horn
River Basin through our land position in the Cabin area and through our
ownership position in Storm Gas Resource Corp. ('SGR'), a company formed one
year ago to pursue unconventional gas opportunities. Storm and Storm Ventures
International Inc ('SVI') each have 45% ownership of SGR with the remaining 10%
owned by SGR management. SGR has been reviewing available geological data which
has resulted in the identification of areas with greater shale gas prospectivity
where we have been acquiring land jointly with SGR. Over the next one to two
years, we plan to continue acquiring land in these areas and we will evaluate
public data from adjacent shale gas pilot projects as such data becomes
available.
Surmont Oil Sands Leases, Alberta
This past winter, Storm successfully drilled and logged four test holes (4.0
net) which encountered thicker pay in the McMurray formation than had been the
basis for earlier evaluation of our 3,840 acres (6 sections) of oil sands
leases. McDaniel &Associates Consultants Ltd has updated their estimate of the
bitumen contingent resource and this has resulted in a best case estimate of
discovered bitumen in place exploitable using a Steam-Assisted-Gravity Drainage
(SAGD) process to be 312 million barrels (+89%) with the best case estimate of
contingent bitumen resources recoverable using a SAGD process being 113 million
barrels (+102%). The before tax net present value associated with the best
estimate contingent resources is $198 million at an 8% discount rate, $101
million at a 10% discount rate and $37 million at a 12% discount rate.
Next winter, Storm will drill additional test holes to further prove up and
expand the estimated bitumen in place. One section remains largely unevaluated
and could materially increase our bitumen contingent resources. Storm has no
plans at present to initiate development of this resource and no assurance can
be provided that this resource will ever be exploited with a conventional SAGD
project.
STORM VENTURES INTERNATIONAL INC.
Storm owns 4.3 million shares or 13% of the common shares of Storm Ventures
International Inc. ('SVI'), a Calgary based, private energy company focused on
unconventional and international exploration and exploitation opportunities.
This share position has a value of $21.5 million or $0.46 per fully diluted
Storm share using the price of $5 per share from SVI's last equity issue in
December, 2006.
SVI is active in the UK sector of the North Sea through its affiliate,
Silverstone Energy Limited in which SVI has a 34% ownership position.
Silverstone has drilled three new pool gas discoveries in the large, 200,000
acre Viking Fields area which have total potential gas in place of 320 BCF (100%
working interest) and the tie-in of one of these, the Victoria field, is
expected in the last quarter of 2008 at a cost of Pounds Sterling 88 million.
Victoria field gas in place is estimated to be 163 BCF with gross proved plus
probable recoverable reserves being 106 BCF (net 66 BCF). Silverstone has also
recently acquired Granby Oil and Gas for Pounds Sterling 23 million plus the
assumption of Pounds Sterling 31 million of non-recourse project debt. Granby's
main asset is the 54% owned Tristan NW gas field which commenced production in
mid-April at 15 mmcf per day. In addition to this, Granby has 110,000 net
undeveloped acres with the top five prospects on those lands containing 42 MMBoe
of net risked contingent resources. Silverstone has estimated that 4.8 MMboe of
proved plus probable plus possible reserves were added with the Granby
acquisition. Funding for the acquisition is being provided from a rights
offering to existing Silverstone shareholders and the Victoria field tie-in will
be partially funded with project financing which is contingent on a successful
flow test. With current netbacks of Cdn $60 per Boe, significant cash flow will
be provided by the Tristan NW and Victoria fields which will be used to fund the
tie-in of the remaining Viking Fields discoveries in 2009 and 2010 and to fund
additional exploratory drilling which, in 2008, will include two more Viking
Fields wells and a well targeting a medium gravity oil prospect in the Quad
9/Gryphon area which has been farmed out (Silverstone pays 10% and carried for a
30% working interest). Silverstone is estimating 2010 average production of 45
mmcf per day from Tristan and two of the Viking Fields discoveries (Victoria and
Vulcan East).
In Tunisia, SVI has drilled and, in the next two months, will complete and
evaluate an onshore well in the 71% interest Remada Sud permit that is testing
one of two large Ordovician structures with potential gas in place of more than
200 BCF. In the 100% interest Jenein Centre block, a well will be drilled
targeting light oil early in 2009. Significant discoveries in the Acacus
formation have recently been announced in offsetting blocks. Offshore in the
Gulf of Hammamet, nine prospects have been identified offsetting two existing
discoveries using the 440 km2 of marine 3-D seismic recorded by SVI last year.
An exploratory well is planned for mid-2009 to test one of these prospects. Also
offshore, SVI recently acquired the remaining 33% working interest in the Cosmos
permit and now has a 100% working interest in a 1983 discovery that tested at
over 5,000 barrels of light oil per day and contains an estimated 25 million
barrels of oil in place (estimated 3P recoverable is 9 million barrels).
Development is planned later in 2009 using a vessel converted to an FPSO which
is purpose-built for smaller field development.
2008 OUTLOOK
Natural gas prices to the end of April have averaged $7.80 per GJ at AECO with
current spot prices being over $9 per GJ. This is higher than our original
budget assumption of $6.25 per GJ and will result in cash flow for the year
being considerably higher than originally forecasted. This allows us to increase
our level of capital investment in 2008 to $75 million from $65 million. Our
drilling program will expand from 24 wells (23.3 net) to 30 wells (26.5 net) and
$4 million will be added for land acquisition. A further increase to $90 to $100
million will be implemented in mid-August if natural gas prices remain above
$7.50 per GJ. This second increase is likely to be directed towards twinning our
facility at Parkland, drilling one or two additional horizontal Montney gas
wells at Parkland in Q4, and drilling one or two vertical infills targeting the
Halfway formation at Parkland. Production at the end of 2008 is still forecast
to be 8,000 Boe per day which is unchanged from previous guidance. Guidance is
not being increased given that most of the additional activity will happen at
the end of the year and may not impact 2008 production.
Production in April averaged 7,300 Boe per day while current production is at
approximately 7,500 Boe per day. Second quarter production will be reduced by
1,100 Boe per day as a result of several minor facility outages and the 22 day
shut-down in June of the McMahon gas plant for scheduled maintenance. These
outages will result in second quarter production averaging approximately 6,300
to 6,500 Boe per day.
Operating costs in the first quarter were $7.52 per Boe, higher than the $6.50
per Boe we had forecast as an average for 2008. Higher costs were mainly the
result of normal, higher winter costs (methanol, fuel) as well increased salt
water disposal and trucking costs at Junior associated with a pipeline failure
late in 2007 which has now been repaired. As a result of higher first quarter
costs, our forecast average operating cost in 2008 increases to $6.75 per Boe.
We saw significant improvement in our field netback in the first quarter which
averaged $35.87 per Boe, an increase of 23% from the 2007 first quarter field
netback of $29.14 per Boe (excluding hedging gains). Over the same period, the
average spot natural gas price at AECO increased by 10% to $7.44 per GJ from
$6.75 per GJ in the first quarter of 2007. The significant improvement in our
field netback is primarily due to increased volumes from the Parkland area where
we realized a netback of $41.20 per Boe in the first quarter. The gas produced
from our Montney discovery at Parkland is liquids rich resulting in liquids
recoveries of 25 barrels per mmcf and the sales gas stream being higher heat
content as evidenced by the wellhead natural gas price being $9.00 per mcf in
the first quarter of 2008. With production from Parkland averaging 3,510 Boe per
day in the first quarter and currently at approximately 4,600 Boe per day, we
expect further improvement in our field netback throughout 2008 as production
from our Montney discovery continues to increase.
Continued, successful development of our Montney discovery at Parkland has
resulted in significant production growth to date in 2008. This discovery will
be the cornerstone of our growth for the next two years and possibly longer
should our step-out and exploratory drilling efforts continue to be successful
in expanding the size of the Montney resource on our lands. In addition to this,
significant additional value may be added from our exposure to other larger
scale opportunities including SVI's development opportunities and exploration
prospects in the North Sea and Tunisia, the emerging Horn River Basin Devonian
shale gas play and further delineation of our oil sands lease at Surmont. We
look forward to updating our shareholders on our progress on these initiatives
and others throughout the remainder of the year.
Respectfully,
Brian Lavergne, President and Chief Executive Officer
May 8, 2008
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND OPERATING RESULTS FOR THE
THREE MONTHS ENDED MARCH 31, 2008
Set out below is management's discussion and analysis of financial and operating
results for Storm Exploration Inc. ("Storm" or the "Company") for the three
months ended March 31, 2008. It should be read in conjunction with the unaudited
consolidated financial statements for the three months ended March 31, 2008 and
other operating and financial information included in this press release. This
management's discussion and analysis is dated May 8, 2008.
Introduction and Limitations:
Basis of Presentation - Financial data presented below have largely been derived
from the Company's unaudited consolidated financial statements for the three
months ended March 31, 2008, prepared in accordance with Canadian Generally
Accepted Accounting Principles ("GAAP"). Specific accounting policies adopted by
the Company as applicable to its business are set out in footnote 1 to the
audited consolidated financial statements for the year ended December 31, 2007.
The reporting and the measurement currency is the Canadian dollar. Unless
otherwise indicated, tabular financial amounts, other than per share and per Boe
amounts, are in thousands of dollars.
Effective January 1, 2008 Storm adopted with prospective effect certain new
accounting standards introduced as part of GAAP as follows:
- Capital Disclosures:
Section 1535 of the CICA Handbook, Capital Disclosures, requires companies to
disclose in their financial statements objectives, policies and processes for
managing capital, including compliance with any externally imposed capital
requirements.
- Financial Instrument Disclosure and Presentation:
Section 3862 of the CICA Handbook, "Financial Instruments - Disclosures" and
Section 3863, "Financial Instruments - Presentation". The new accounting
standards require the Company to provide information about the significance of
financial instruments to the Company's financial position and performance. In
addition, information about the nature and extent of risks associated with
financial instruments, and how the Company manages such risks, is to be
provided.
Forward-Looking Statements - Certain information set forth in this document,
including management's assessment of Storm's future plans and operations,
contains forward-looking statements. By their nature, forward-looking statements
are subject to numerous risks and uncertainties, most of which are beyond the
Company's control, including the effect of general economic conditions, industry
conditions, volatility of commodity prices, changes in taxation and royalty
regimes, currency fluctuations, imprecision of reserve estimates, relationships
with parties involved with or affected by the Company's activities,
environmental risks, competition from other industry participants, the lack of
availability of qualified personnel or management, stock market volatility and
ability to access sufficient capital from internal and external sources. Readers
are advised that the assumptions used in the preparation of such information,
although considered reasonable at the time of preparation, may prove to be
imprecise and, as such, undue reliance should not be placed on forward-looking
statements. Storm's actual results, performance or achievement, could differ
materially from those expressed in, or implied by, these forward-looking
statements. Storm disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Boe Presentation - For the purpose of calculating unit costs, natural gas is
converted to a barrel of oil equivalent ("Boe") using six thousand cubic feet
("Mcf") of natural gas equal to one barrel of oil unless otherwise stated.
Barrels of oil equivalent ("Boe") may be misleading, particularly if used in
isolation. A Boe conversion ratio of six Mcf to one barrel ("bbl") is based on
an energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead. All Boe conversions
in this report are derived by converting natural gas to oil in the ratio of six
thousand cubic feet of gas to one barrel of oil.
Non-GAAP Measurements - Within management's discussion and analysis, references
are made to terms having widespread use in the oil and gas industry in Canada.
'Funds from operations', 'funds from operations per share', and 'netbacks' and
'netbacks per Boe' are not defined by GAAP in Canada and are regarded as
non-GAAP measures. Measurement of funds from operations is detailed on the
Statement of Cash Flows. Funds from operations per share is calculated based on
the weighted average number of common shares outstanding consistent with the
calculation of net income per share. Netbacks equal total revenue less
royalties, transportation and operating costs, calculated on a commodity and Boe
basis. Total Boe is calculated by multiplying the daily production by the number
of days in the year or quarter as the case may be.
PRODUCTION AND REVENUE
Average Daily Production
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Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
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Natural gas (Mcf/d) 33,525 30,048 31,133
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Natural gas liquids (Bbls/d) 333 216 289
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Crude oil (Bbls/d) 579 553 514
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Total (Boe/d) 6,500 5,776 5,992
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Total Boe production for the first quarter of 2008 increased by 13% when
compared to the first quarter of 2007 and by 8% compared to the fourth quarter
of 2007. Increased production largely came from Storm's successful vertical and
horizontal drilling program in the Parkland area of British Columbia. Production
per million shares outstanding for the first quarter of 2008 averaged 146 Boe
per day, compared to 135 Boe per day for the first quarter of 2007, and to the
same amount in the final quarter of 2007, an increase of 8%.
Production at the date of the report approximated 7,400 Boe per day. The
increase over the average rate for the quarter is attributable to the tie in of
two horizontal wells at Parkland close to the end of the first quarter, which
had no appreciable effect on average quarterly production.
Production for the second quarter of 2008 will be affected by the scheduled
closure for maintenance for much of the month of June of the McMahon gas plant
in north eastern British Columbia, where the Company's Parkland production is
delivered. Average second quarter production is expected to be lowered by
approximately 1,000 Boe per day.
Production Profile and Per Unit Prices
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Quarter Ended March 31, 2008 Quarter Ended March 31, 2007
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Average Selling Average Selling
Percentage Price Before Percentage Price Before
of Total Boe Transportation of Total Boe Transportation
Production Costs Production Costs
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Natural gas
- Mcf 86% $ 8.60 87% $ 7.75
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Natural gas
liquids -
Bbl 5% $ 78.81 4% $ 56.93
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Crude oil -
Bbl 9% $ 97.63 9% $ 64.90
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Per Boe $ 57.10 $ 48.65
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Quarter Ended December 31, 2007
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Average Selling
Percentage Price Before
of Total Boe Transportation
Production Costs
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Natural gas
- Mcf 87% $ 6.76
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Natural gas
liquids -
Bbl 5% $ 72.94
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Crude oil -
Bbl 8% $ 87.29
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Per Boe $ 46.12
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Per unit prices in the table above do not include any gains from hedging of
natural gas prices in the first quarter of 2007.
Storm's production base is largely natural gas and associated liquids. In
addition, Storm's prospect inventory is largely focused on natural gas, and it
is unlikely that in the short and medium term that crude oil will grow
internally as a percentage of Boe production. The Company sells natural gas in
both British Columbia and Alberta, with pricing being based on Station #2 in
British Columbia and AECO in Alberta. In late 2007, as a result of the
commissioning of the Peace River pipeline, natural gas from the Parkland area
was sold with reference to Station #2 instead of AECO pricing. In 2008 growth in
gas production has come largely from Parkland and was priced according to the
Station #2 index. This is expected to continue for the balance of 2008.
The Station #2 reference price for the first quarter of 2008 was $7.43 per GJ;
for the first quarter of 2007 $6.75 per GJ; and for the fourth quarter of 2007
was $5.95 per GJ. The amount per GJ received by Storm for the first quarter of
2008 was approximately 16% higher than the Station #2 reference price, a price
premium attributable to the high heat content natural gas delivered from the
Montney formation at Parkland. In addition to the high heat content, Montney gas
is liquids rich, which has resulted in natural gas liquids growing as a
percentage of total Boe production.
Production by Area - Boe per Day
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Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
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Parkland/Ft. St. John Area
- NE BC 3,511 1,756 2,913
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Grande Prairie Area - NWAB 2,042 2,746 2,181
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Cabin-Kotcho-Junior Area
- NE BC 885 1,084 829
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Other 62 190 69
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Total 6,500 5,776 5,992
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The above sets out the average production from each of Storm's core areas. The
Company's focus on the Parkland area has resulted in 100% year-over-year
production growth at that property. Correspondingly, reduced investment in
Alberta is evidenced by a 26% reduction in year-over-year production.
Production Revenue
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Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
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Natural gas $26,241 $20,959 $19,365
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Natural gas liquids 2,389 1,105 1,937
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Crude oil 5,145 3,227 4,128
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Hedging gains - 2,481 -
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Revenue from product sales 33,775 27,772 25,430
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Royalty income 199 237 123
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Total Production Revenue $33,974 $28,009 $25,553
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Royalty income for each quarter is derived from ownership of overriding
royalties, largely in the Peace River Arch.
A reconciliation of revenue from product sales between 2008 and 2007 is as follows:
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Natural
Natural Gas Crude Hedging
Gas Liquids Oil Gains Total
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Revenue from product
sales - Q1 2007 $20,959 1,105 3,227 2,481 $27,772
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Effect of increased
production year -
over - year 2,767 626 195 - 3,588
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Effect of increased
product prices
year-over-year 2,515 658 1,723 - 4,896
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Decrease in natural
gas hedging gains - - - (2,481) (2,481)
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Revenue from product
sales - Q1 2008 $26,241 2,389 5,145 - $33,775
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Hedging:
Storm had hedges in place at March 31, 2008 for the period April 1 - September
30, 2008. However, in the first quarter of 2007, the Company realized hedging
gains on natural gas contracts of $2.5 million, or $4.77 per Boe, or $0.92 per
Mcf. Storm follows hedge accounting rules with respect to prior hedges and
hedges currently in place. However any future hedges entered into by Storm may
not satisfy hedge accounting criteria; correspondingly the Company may be
obliged to follow mark-to-market rules, which would require that gains and
losses on hedges would be included in the determination of net income at the end
of each reporting period, rather than over the period covered by the hedge.
ROYALTIES
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Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Charge for period $6,902 $5,592 $5,338
----------------------------------------------------------------------------
Royalties as a percentage
of revenue from product
sales before royalties
and hedging gains
- Crown 19.5% 20.3% 19.5%
- Other 0.9% 1.8% 1.5%
----------------------------------------------------------------------------
Total 20.4% 22.1% 21.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per Boe $11.67 $10.76 $ 9.68
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In late 2007 the provincial government of Alberta announced broadly based
changes to the provincial Crown royalty structure. The new royalty structure
reflects both well productivity and product pricing. Higher productivity wells
face the greatest increases; however lower productivity wells, including some of
Storm's production, may benefit from lower royalty rates. Approximately 32% of
Storm's production came from Alberta in the first quarter of 2008, with the
remaining 68% from British Columbia. For the remainder of 2008 Storm's capital
programs will continue to be focused on the exploitation of its largely natural
gas properties in the Peace River Arch area of north eastern British Columbia,
which, assuming operational success, will result in Alberta revenues continuing
to fall as a percentage of total revenue. In addition, natural declines will
further reduce Storm's Alberta based production. In the final quarter of 2008,
immediately prior to implementation of the new royalty framework, successful
execution of the Company's business plan could result in production from British
Columbia increasing to 80% of total Boe production. Nevertheless, the allocation
of capital by the Company to projects outside of Alberta is not exclusively in
response to the changed Crown royalty regime. The Company's British Columbia
projects offer the highest economic return of any from Storm's project
inventory.
PRODUCTION COSTS
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Charge for period $4,448 $3,660 $3,778
----------------------------------------------------------------------------
Percentage of revenue
from product sales
before hedging gains 13.2% 14.5% 14.9%
----------------------------------------------------------------------------
Per Boe $ 7.52 $ 7.04 $ 6.85
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total production costs for the first quarter of 2008 increased over production
costs for the first and fourth quarters of 2007 in response to growing product
sales. Higher per Boe costs in the first quarter of 2008 resulted from weather
related cost increases, additional trucking costs and certain cost allocations
from prior periods.
Storm's cash costs per Boe, which comprise production, general and
administrative costs and interest, amounted to $10.39 for the first quarter of
2008, compared to $9.37 for the first quarter of 2007 and to $10.29 for the
fourth quarter of 2007. Higher production and interest costs in the first
quarter of 2008, resulted in increased cash costs per Boe when compared to the
same period in 2007.
TRANSPORTATION COSTS
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Charge for period $1,408 $1,128 $1,306
----------------------------------------------------------------------------
Percentage of revenue
from product sales
before hedging gains 4.2% 4.5% 5.1%
----------------------------------------------------------------------------
Per Boe $ 2.38 $ 2.17 $ 2.37
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increased charges for transportation reflect increased production levels as well
as increased trucking costs associated with higher levels of natural gas liquids
production. The Company's primary focus on natural gas, with exposure primarily
to pipeline transportation charges, results in largely consistent per Boe
charges between periods.
FIELD NETBACKS
Details of field netbacks per commodity unit are as follows:
----------------------------------------------------------------------------
Quarter ended March 31, 2008
----------------------------------------------------------------------------
Crude Oil Natural Gas Natural Total
($/Bbl) Liquids ($/Bbl) Gas ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $97.63 $78.81 $8.60 $57.10
----------------------------------------------------------------------------
Royalty income 1.67 0.48 0.03 0.34
----------------------------------------------------------------------------
Royalties (14.82) (17.34) (1.83) (11.67)
----------------------------------------------------------------------------
Production costs (8.44) - (1.31) (7.52)
----------------------------------------------------------------------------
Transportation (5.28) (3.45) (0.34) (2.38)
----------------------------------------------------------------------------
Field netback $70.76 $58.50 $5.15 $35.87
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter ended March 31, 2007
----------------------------------------------------------------------------
Crude Oil Natural Gas Natural Total
($/Bbl) Liquids ($/Bbl) Gas ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $64.90 $56.93 $7.75 $48.65
----------------------------------------------------------------------------
Hedging gains - - 0.92 4.77
----------------------------------------------------------------------------
Royalty income 0.47 0.79 0.07 0.46
----------------------------------------------------------------------------
Royalties (10.63) (17.21) (1.75) (10.76)
----------------------------------------------------------------------------
Production costs (6.88) - (1.23) (7.04)
----------------------------------------------------------------------------
Transportation (1.69) (3.26) (0.36) (2.17)
----------------------------------------------------------------------------
Field netback $46.17 $37.25 $5.40 $33.91
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter ended December 31, 2008
----------------------------------------------------------------------------
Crude Oil Natural Gas Natural Total
($/Bbl) Liquids ($/Bbl) Gas ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $87.29 $72.94 $6.76 $46.12
----------------------------------------------------------------------------
Royalty income 0.59 0.42 0.03 0.22
----------------------------------------------------------------------------
Royalties (13.92) (17.96) (1.47) (9.68)
----------------------------------------------------------------------------
Production costs (7.99) - (1.19) (6.85)
----------------------------------------------------------------------------
Transportation (4.71) (3.63) (0.34) (2.37)
----------------------------------------------------------------------------
Field netback $61.26 $51.77 $3.79 $27.44
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Production costs for natural gas liquids are included with natural gas costs.
Field netbacks for the first quarter of 2008 increased by 6% when compared to
the first quarter of 2007. Excluding a hedging gain realized in the first
quarter of 2007, the year-over-year gain would have been 23%. Compared to the
final quarter of 2007, netback for the first quarter of 2008 increased by 31%.
Improved pricing for the Company's products, along with reasonable cost
stability resulted in improvement.
INTEREST
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Charge for period $1,061 $ 669 $1,123
----------------------------------------------------------------------------
Per Boe $ 1.79 $1.29 $ 2.04
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest is paid on Storm's revolving bank facility. Increased interest costs
year-over-year correspond to increased borrowings required to fund a property
acquisition completed in June 2007. Late in 2007 interest rates began to fall,
resulting in a lower per unit interest cost in the first quarter of 2008, when
compared to the immediately prior quarter.
GENERAL AND ADMINISTRATIVE COSTS
Total costs:
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Gross general and
administrative costs $1,364 $1,408 $1,944
----------------------------------------------------------------------------
Capital and operating
recoveries (727) (865) (1,170)
----------------------------------------------------------------------------
Net general and
administrative costs $ 637 $ 543 $ 774
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Costs per Boe:
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Gross general and
administrative costs $2.31 $2.71 $3.51
----------------------------------------------------------------------------
Capital and operating
recoveries (1.23) (1.67) (2.11)
----------------------------------------------------------------------------
Net general and
administrative costs $1.08 $1.04 $1.40
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year-over-year gross general and administrative costs were largely unchanged,
although recoveries fell in the first quarter of 2008 when compared to the prior
year. Compared to the final quarter of 2007, gross general and administrative
costs fell considerably in the first quarter of 2008, as costs for the final
quarter of 2007 contain various costs related to the Company's year end.
Storm does not capitalize general and administrative costs.
STOCK BASED COMPENSATION COSTS
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Charge for period $ 336 $ 337 $ 240
----------------------------------------------------------------------------
Per Boe $0.57 $0.65 $0.44
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock based compensation costs are non cash charges which reflect the value of
stock options and performance warrants issued to directors and employees. The
value is amortized over the life of the award. Storm's performance warrant plan
was terminated mid 2007, upon the exercise of the remaining warrants. The
increase in the charge in the first quarter of 2008, when compared to the
immediately prior quarter, corresponds to the issue of additional stock options
late in 2007.
DEPLETION DEPRECIATION AND ACCRETION
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Depreciation and depletion
charge for period $10,057 $8,360 $9,275
----------------------------------------------------------------------------
Accretion charge for period 121 112 117
----------------------------------------------------------------------------
Total $10,178 $8,472 $9,392
----------------------------------------------------------------------------
Total per Boe $ 17.21 $16.30 $17.04
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The increase in the charge for depreciation, depletion and accretion for the
first quarter of 2008 is a consequence of higher production volumes, as the
depletion component of the charge is based on a cost per Boe.
The increase in the charge for depletion and depreciation per Boe for the first
quarter of 2008 when compared to the equivalent quarter of 2007, is largely
attributable to property acquisitions in mid 2007, when reserves were purchased
at a higher cost per Boe than Storm's historical finding costs. Accretion is the
increase for the reporting period in the present value of the Company's asset
retirement obligation, which is discounted using an interest rate of 8%.
INCOME AND OTHER TAXES
For quarter ended March 31, 2008, Storm recorded a future income tax charge of
$2.6 million compared to $2.5 million for the first quarter of 2007. The
deferral of taxes to future periods largely results from resource pool
deductions exceeding the accounting charge for depletion, depreciation and
accretion. The statutory combined federal and provincial rate used to measure
the future income tax obligation for the first quarter of 2008 is 30%, compared
to 32% for the first quarter of 2007.
At March 31, 2008, Storm had tax pools carried forward estimated to be $210
million. In September 2007 the Company issued flow through shares for gross
proceeds of $15.1 million. The Company is obligated to incur a like amount of
Canadian Exploration Expense by December 31, 2008. At March 31, 2008, the
Company considers that qualifying expenditures totaling $7.2 million have been
incurred.
In addition, Storm has a capital loss in the amount of $10 million available for
application against future taxable capital gains.
NET INCOME AND NET INCOME PER SHARE
Net income for the first quarter of 2008 amounted to $6.4 million, compared to
$5.1 million in the first quarter of 2007 and $2.9 million in the final quarter
of 2007. Net income per diluted share for the first quarter of 2008 increased
largely pro rata when compared to the prior quarters.
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Per Per Per
diluted diluted diluted
$ share - $ share - $ share -
----------------------------------------------------------------------------
Net income $6,424 $0.14 $5,066 $0.12 $2,852 $0.06
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FUNDS FROM OPERATIONS
Funds from operations for the first quarter of 2008 amounted to $19.5 million,
or $0.43 per diluted share, compared to $16.4 million, or $0.38 per diluted
share for 2007.
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Per Per Per
diluted diluted diluted
$ share - $ share - $ share -
----------------------------------------------------------------------------
Funds from
operations $19,518 $0.43 $16,417 $0.38 $13,233 $0.30
----------------------------------------------------------------------------
----------------------------------------------------------------------------
INVESTING AND FINANCING
Working Capital
Receivables comprise production revenue receivables and accruals, and
receivables in respect of operating and capital costs. Prepaid costs include
unamortized insurance premiums, deposits and certain inventory items.
Accounts payable include operating, administrative and capital costs payable.
Net payables in respect of cash calls issued to partners regarding capital
projects and estimates of amounts owing but not yet invoiced to the Company have
been included in accounts payable.
Storm had a working capital deficiency of $14.7 million at March 31, 2008,
compared to $11.3 million at March 31, 2007 and $10.2 million at December 31,
2007. The working capital deficiency at each period end corresponds to the
Company's preference to act as operator and the seasonality of its field
operations. The Company's working capital deficiency is cyclical and is highest
at the end of the first quarter of each year and lowest at the end of second
quarter.
Property and Equipment
Capital costs incurred were as follows:
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Land and lease, net $ 1,793 $ 1,144 $ 1,663
----------------------------------------------------------------------------
Seismic - 773 24
----------------------------------------------------------------------------
Drilling and completions 20,807 11,976 14,657
----------------------------------------------------------------------------
Facilities and equipment 5,237 7,716 4,853
----------------------------------------------------------------------------
Other 16 16 24
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Field Expenditures 27,853 21,625 21,221
----------------------------------------------------------------------------
Property acquisitions 514 2,450 -
----------------------------------------------------------------------------
Property dispositions (1,592) - (4,127)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total $26,775 $24,075 $17,094
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Bank Debt, Liquidity and Capital Resources
Storm has received bank approval for a revolving borrowing base bank credit
facility of $110 million, increased from $94 million at December 31, 2007. The
amount drawn on this facility at March 31, 2008 amounted to $80.1 million. Debt,
including working capital deficiency, amounted to $92 million at March 31, 2008,
resulting in a ratio of debt to annualized funds from operations for the first
quarter of 2008 of 1.2 times.
Storm funds its field capital programs through cash flow and bank borrowings.
Acquisitions are funded by a combination of debt and, if required, equity. Field
capital programs tend to be concentrated in the winter months, with the result
that capital expenditures in the first and fourth quarters of the year will
exceed cash flow, compensated by lower capital expenditures in the second and
third quarters. In quarters of high field activity, Storm operates with a
substantial working capital deficit, which is paid down in quarters of lower
field activity.
Investment
At March 31, 2008, the Company's investment in Storm Ventures International Inc.
("SVI") represented a 13% ownership position, comprising 4.3 million common
shares. The carrying amount of the investment on the Company's consolidated
balance sheet comprises the Company's investment cost, plus a dilution gain
recognized during the year ended December 31, 2005. This carrying amount should
not be regarded as representative of the value of Storm's investment. Storm's
cash investment in SVI since commencement of oil and gas operations in 2004
totals $3,000,000. Storm has no financial or management commitments to SVI:
however, Storm does provide accommodation and administrative services. Amounts,
at cost, billed to SVI amounted to $59,000 in the first quarter of 2008 and
$22,000 in 2007.
Future Income Taxes
Estimated future income taxes at March 31, 2008 represents the excess of the
accounting amounts over the related tax bases of property and equipment and
share capital.
Details of the Company's tax assets are as follows:
----------------------------------------------------------------------------
As at Maximum Annual
March 31, 2008 deduction
----------------------------------------------------------------------------
Canadian oil and gas property expense $ 99,300 10%
----------------------------------------------------------------------------
Canadian development expense 56,901 30%
----------------------------------------------------------------------------
Canadian exploration expense (1) - 100%
----------------------------------------------------------------------------
Undepreciated capital cost 53,145 20 - 100%
----------------------------------------------------------------------------
Other 368 20%
----------------------------------------------------------------------------
Total $209,714
---------------------------------------------------------
---------------------------------------------------------
Capital losses $ 9,666
---------------------------------------------------------
---------------------------------------------------------
(1) An additional $7.9 million of Canadian Exploration Expense must be
incurred prior to December 31, 2008 to satisfy the terms of a flow
though share issue dated September 2007.
Asset Retirement Obligation
Storm's asset retirement obligation represents the present value of estimated
future costs to be incurred to abandon and reclaim the Company's wells and
facilities. Changes in amount of the obligation between March 31, 2008 and
December 31, 2007 comprise the present value of additional obligations accruing
to the Company as a result of field activity and acquisitions during the period,
less costs paid in settlement of abandonment obligations, plus the increase in
the present value of the obligation. The discount rate used to establish the
present value is 8%. Future costs to abandon and reclaim Storm's properties are
based on an internal evaluation of each of the Company's properties, supported
by external data from industry sources.
Share Capital
Details of outstanding share capital and dilutive elements:
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Common shares outstanding
- end of period 44,619 42,914 44,532
----------------------------------------------------------------------------
Performance warrants - 125 -
----------------------------------------------------------------------------
Stock options 2,079 1,934 2,166
----------------------------------------------------------------------------
Fully diluted common shares
- end of period 46,698 44,973 46,698
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common shares
- basic 44,586 42,914 44,518
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common shares
- diluted 45,685 43,652 45,223
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock options outstanding are exercisable over five years on various dates
beginning September 2005 at prices ranging from $2.60 to $8.57.
QUARTERLY RESULTS
Summarized information by quarter for the two years ended March 31, 2008
appears below:
----------------------------------------------------------------------------
Quarter Ended March 31, December September June 30,
2008 31, 2007 30, 2007 2007
----------------------------------------------------------------------------
Production revenue - ($000s) $ 33,974 25,553 19,573 25,156
----------------------------------------------------------------------------
Funds from operations -
($000s)
Per share 19,518 13,233 9,372 12,921
- basic $ 0.44 $ 0.30 $ 0.21 $ 0.30
- diluted $ 0.43 $ 0.28 $ 0.20 $ 0.29
----------------------------------------------------------------------------
Net income - ($000s)
Per share $ 6,426 2,852 299 2,852
- basic $ 0.14 $ 0.06 $ 0.01 $ 0.06
- diluted $ 0.14 $ 0.06 $ 0.01 $ 0.06
----------------------------------------------------------------------------
Average daily
production - Boe 6,500 5,992 5,618 5,713
----------------------------------------------------------------------------
Average field netback
per Boe $ 35.87 $ 27.44 $ 20.83 $ 28.02
----------------------------------------------------------------------------
Capital expenditures -
net - ($000s) 26,775 17,094 19,953 32,768
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended March 31, December September June 30,
2007 31, 2006 30, 2006 2006
----------------------------------------------------------------------------
Production revenue - ($000s) 28,009 23,590 18,973 17,598
----------------------------------------------------------------------------
Funds from operations -
($000s)
Per share 16,417 12,748 10,053 9,186
- basic 0.38 0.30 0.23 0.23
- diluted 0.38 0.29 0.23 0.23
----------------------------------------------------------------------------
Net income - ($000s)
Per share 5,066 3,049 1,828 1,767
- basic $ 0.12 $ 0.07 $ 0.04 $ 0.05
- diluted $ 0.12 $ 0.07 $ 0.04 $ 0.04
----------------------------------------------------------------------------
Average daily
production - Boe 5,776 5,442 4,933 4,478
----------------------------------------------------------------------------
Average field netback
per Boe $ 33.91 $ 27.88 $ 24.24 $ 24.86
----------------------------------------------------------------------------
Capital expenditures -
net - ($000s) 24,075 $ 13,635 $ 7,619 $47,570
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
In the course of its business Storm enters into various contractual obligations,
including the following:
- purchase of services
- royalty agreements
- operating agreements
- processing agreements
- right of way agreements
- lease obligations for accommodation, office equipment and automotive equipment.
All such contractual obligations reflect market conditions at the time of
contract and do not involve related parties, except that SVI subleases office
space from the Company at the same rate as the Company's head lease.
Obligations with a fixed term are as follows:
----------------------------------------------------------------------------
($000's) 2008 2009 2010 2011 2012
----------------------------------------------------------------------------
Lease of premises $759 $759 $772 $785
----------------------------------------------------------------------------
Equipment leases 11 - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total $770 $759 $772 $785
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
Financial amounts included in the Company's Management's Discussion and Analysis
and in the unaudited consolidated financial statements for the three months
ended March 31, 2008 are based on accounting policies, estimates and judgment
which reflect information available to management at the time of preparation.
Information with respect to the accounting policies selected by the Company and
the use of estimates is set out in the Company's audited consolidated financial
statements included in the Company's Annual Report for the year ended December
31, 2007 and the unaudited consolidated financial statements for the three
months ended March 31, 2008.
RISK ASSESSMENT
There are a number of risks facing participants in the Canadian oil and gas
industry. Some of the risks are common to all businesses while others are
specific to the sector and others are specific to Storm. Information with
respect to such risks is set out in the Company's annual report for the year
ended December 31, 2007.
DISCLOSURE CONTROLS
Storm has codified and distributed to staff its controls, policies and
procedures with respect to disclosure to third parties of information concerning
the Company's operations and results. Controls and procedures are designed to
provide reasonable assurance that relevant information is collected and provided
to senior management. Storm's disclosure control policy provides for the
establishment of a Disclosure Committee, comprised of the Chief Executive
Officer and Chief Financial Officer, which reviews policies and procedures
applicable to the provision of information to any party, other than industry
partners in the ordinary course of business, and reviews any circumstances which
may suggest a breach of disclosure controls. Although Storm's disclosure control
policy is believed to be effective, it cannot provide more than reasonable
assurance that its objectives have been realized. No circumstance suggesting a
possible breach of disclosure controls was identified by the Disclosure
Committee in the three months ended March 31, 2008.
ADDITIONAL INFORMATION
Additional information relating to the Company, including the Company's Annual
Information Form, can be viewed at www.sedar.com or on the Company's website at
www.stormexploration.com. Information can also be obtained by contacting the
Company at Storm Exploration Inc., 800, 205 - 5th Avenue, SW, Calgary, Alberta,
T2P 2V7.
Storm Exploration Inc.
Consolidated Balance Sheets
($000s)
UNAUDITED
March 31, 2008 December 31, 2007
---------------- -------------------
ASSETS
Current
Accounts receivable $ 14,370 $ 11,949
Prepaid and other costs 2,597 1,945
---------------- -------------------
16,967 13,894
Property and Equipment - Net (Note 2) 254,598 237,738
Investments 9,692 9,275
---------------- -------------------
$ 281,257 $ 260,907
---------------- -------------------
---------------- -------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 28,869 $ 24,103
Unrealized mark-to-market
hedging provision (Note 9) 2,778 -
---------------- -------------------
31,647 24,103
Bank Indebtedness (Note 4) 80,050 74,472
Asset Retirement Obligation (Note 5) 7,181 6,918
Future Income Taxes (Note 3) 12,321 10,519
---------------- -------------------
131,199 116,012
---------------- -------------------
Shareholders' Equity (Note 6)
Share capital 87,523 86,994
Contributed surplus 2,528 2,318
Retained earnings 62,007 55,583
Accumulated other comprehensive Income (2,000) -
---------------- -------------------
150,058 144,895
---------------- -------------------
$ 281,257 $ 260,907
---------------- -------------------
---------------- -------------------
Storm Exploration Inc.
Consolidated Statements of Income and Retained Earnings
($000s)
Unaudited
Three Months to Three Months to
March 31, 2008 March 31, 2007
---------------- -------------------
Revenue
Production revenue 33,974 28,009
Royalties (6,902) (5,592)
---------------- -------------------
27,072 22,417
---------------- -------------------
Expenses
Production 4,448 3,660
Transportation 1,408 1,128
Interest 1,061 669
General and administrative 637 543
Stock based compensation 336 337
Depletion, depreciation and accretion 10,178 8,472
---------------- -------------------
18,068 14,809
---------------- -------------------
Income before taxes: 9,004 7,608
Future income taxes (Note 3) (2,580) (2,542)
---------------- -------------------
Net income for the period 6,424 5,066
Retained earnings, beginning of period 55,583 44,534
---------------- -------------------
Retained earnings, end of period 62,007 49,600
---------------- -------------------
---------------- -------------------
Net Income per share (Note 7) - basic 0.14 0.12
- diluted 0.14 0.12
Storm Exploration Inc.
Consolidated Statements of Comprehensive Income
($000s)
Unaudited
Three Months to Three Months to
March 31, 2008 March 31, 2007
---------------- -------------------
Net Income for the period 6,424 5,066
Other Comprehensive income (Note 9)
Unrealized Hedging loss (2,778) (155)
Future income tax benefit 778 50
---------------- -------------------
Comprehensive income for the period 4,424 4,961
---------------- -------------------
---------------- -------------------
Storm Exploration Inc.
Consolidated Statements of Cash Flows
($000s)
Unaudited
Three Months to Three Months to
March 31, 2008 March 31, 2007
---------------- -------------------
Operating activities
Net income for the period 6,424 5,066
Add non-cash items:
Depletion, depreciation and accretion 10,178 8,472
Future income tax 2,580 2,542
Stock based compensation 336 337
---------------- -------------------
Funds from operations 19,518 16,417
Net change in non-cash working
capital items (Note 8) (2,638) 2,366
---------------- -------------------
16,880 18,783
---------------- -------------------
Financing activities
Issue of common shares - net of expenses 403 -
Increase (Decrease) in bank indebtedness 5,578 3,373
---------------- -------------------
5,981 3,373
---------------- -------------------
Investing activities
Increase in investments (417) -
Additions to property and equipment (28,367) (24,075)
Disposals of property and equipment 1,592 -
Net change in non-cash working
capital items (Note 8) 4,331 1,919
---------------- -------------------
(22,861) (22,156)
---------------- -------------------
Change in cash during the period - -
Cash, beginning of period - -
---------------- -------------------
Cash, end of period - -
---------------- -------------------
---------------- -------------------
STORM EXPLORATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2008
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
These interim unaudited consolidated financial statements of the Storm
Exploration Inc. ("Storm" or "the Company") have been prepared by management in
accordance with accounting principles generally accepted in Canada, following,
except as described below, the same accounting principles and methods of
computation as used in the audited consolidated financial statements for the
year ended December 31, 2007. The interim unaudited consolidated financial
statement note disclosures do not include all disclosures applicable for annual
financial statements. Accordingly, the interim unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and the notes thereto contained in the Company's annual report for
the year ended December 31, 2007.
CHANGES IN ACCOUNTING POLICIES
On January 1, 2008, the Company adopted additional accounting pronouncements
promulgated by the Canadian Institute of Chartered Accountants ("CICA"). The new
accounting policies are set out in CICA Handbook Section 1535 "Capital
Disclosures"; Section 3862 "Financial Instruments - Disclosures"; and Section
3863 "Financial Instruments - Presentation". As required by the new standards,
prior periods have not been restated.
Section 1535 - "Capital Disclosures" This new accounting pronouncement requires
companies to describe their objectives, policies and processes regarding
management of capital. Information about what constitutes capital is also
required; further, the existence of any obligations relating to capital
maintenance must be disclosed, along with the consequences of non-compliance.
Note 10 to these unaudited consolidated interim financial statements provides
the required disclosures.
Section 3862- "Financial Instruments - Disclosures" This pronouncement is an
expansion of existing standards relating to financial instruments and requires
the disclosure of information about financial instruments to which the Company
is a party. Information is provided about financial instruments and their actual
or potential effect on the financial position and results of the Company.
Further, information is provided about risks to which the Company is exposed
through recognized and unrecognized financial instruments and how these risks
are managed. See Note 9.
Section 3863 - "Financial Instruments - Presentation". This pronouncement also
enhances existing disclosure requirements and establishes presentation standards
for financial instruments and non-financial derivatives. See Note 9.
The adoption of these pronouncements has had no effect on the Company's net
income or funds from operations for the period.
2. PROPERTY AND EQUIPMENT
March 31, 2008 December 31, 2007
------------------------------------
Petroleum and natural gas properties $ 341,854 $ 314,953
Furniture and equipment 650 634
------------------------------------
342,504 315,587
Accumulated depletion and depreciation (87,906) (77,849)
------------------------------------
$ 254,598 $ 237,738
------------------------------------
------------------------------------
At March 31, 2008, the depletion calculation excluded unproved properties of
$21.5 million (December 31, 2007 - $21.0 million) and included future
development costs of $23.1 million.
3. FUTURE INCOME TAXES
The future income tax liability is made up of the excess of the accounting
amounts over the related tax bases of the Company's property and equipment,
share capital and other comprehensive income.
The Company has tax pools associated with property and equipment, for accounting
purposes, of approximately $202 million as well as capital losses of
approximately $10 million, which are not subject to expiry.
Under the terms of a flow-through share issue in September, 2007, the Company is
obligated to incur Canadian Exploration Expenditures in the amount of $15.1
million prior to December 31, 2008. As at March 31, 2008 the Company had
incurred an estimated $7.2 of qualifying expenditures. The full amount of $15.1
million has been renounced to the subscribers at December 31, 2007 and this
amount has been deducted from the Company's tax pool balance.
The provision for future income taxes is different from the amount computed by
applying the combined statutory Canadian federal and provincial tax rates to
pre-tax income for the period.
The differences are as follows:
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March 31, 2008 March 31, 2007
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Statutory combined federal and
provincial income tax rate 30% 32%
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Expected income taxes $ 2,712 $ 2,459
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Add (deduct) the income tax effect of:
Stock based compensation 101 109
Rate adjustments (234) (25)
Other 1 (1)
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Future income tax $ 2,580 $ 2,542
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The significant components of the future income tax liability are as
follows:
---------------------------------------------------------------------------
March 31, 2008 December 31, 2007
---------------------------------------------------------------------------
Property and equipment $ 15,676 $ 13,073
Asset retirement obligation (2,062) (2,006)
Share issue costs (515) (548)
Other comprehensive income (778) -
Future income tax liability $ 12,321 $ 10,519
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4. BANK INDEBTEDNESS
The Company has received approval for an extendible revolving bank facility in
the amount of $110 million (December 31, 2007 - $94 million), based on the
Company's producing reserves. The revolving facility is available to the Company
until May 31, 2009, but may be extended at the Company's request until May 30,
2010, subject to the bank's review of the Company's reserve lending base. If the
revolving facility is not renewed at the end of the current revolving phase, the
facility moves into a term phase whereby the loan is to be retired with one
payment on the 366th day following the last day of the revolving phase, in an
amount equal to the outstanding principal. Interest is payable on the revolving
facility at bank prime rate or banker's acceptance rates plus a stamping fee.
Security comprises a floating charge demand debenture on the assets of the
Company.
5. ASSET RETIREMENT OBLIGATION
The estimated future asset retirement obligation is based on the Company's net
ownership interest in wells and facilities, the estimated costs to abandon and
reclaim the wells and facilities and the estimated timing of the costs to be
incurred in future periods. The total undiscounted amount of the estimated cash
flows required to settle the Company's asset retirement obligations is
approximately $13.5 million (December 31, 2007 - $13.1 million), which will be
incurred over the next 20 years, with the majority of costs incurred between
2015 and 2025. A credit adjusted risk-free rate of eight percent was used to
calculate the present value of the asset retirement obligations, amounting to
$7.2 million (December 31, 2007 - $6.9 million).
6. SHARE CAPITAL
Authorized
An unlimited number of non-voting common shares
An unlimited number of voting common shares
An unlimited number of preferred shares
Included in the following common share balances are 1,275,000 non-voting common
shares.
Except for voting rights, non-voting and voting common shares are identical.
Issued
Number of
Shares Consideration
-------------------------------
Balance as at December 31, 2007 44,532 $ 86,994
Stock options exercised 87 529
-------------------------------
Balance as at March 31, 2008 44,619 $ 87,523
-------------------------------
-------------------------------
Stock Based Compensation Plans
(i) The Company has a stock option plan under which it may grant, at the
Company's discretion, options to purchase common shares to directors, officers
and employees. Under the stock option plan a total of 2,850,000 common shares
has been reserved for issuance. Details of the options outstanding at March 31,
2008 are as follows:
Outstanding Options Exercisable Options
---------------------------------- ----------------------
Weighted Weighted Weighted
Number of Average Average Number of Average
Range of Options Remaining Exercise Options Exercise
Exercise Price Outstanding Life (years) Price Outstanding Price
---------------------------------- ----------------------
$2.60 to $3.61 290 1.9 $3.27 171 $3.18
$3.91 to $5.71 1,350 3.0 $5.44 456 $5.22
$6.03 to $8.57 438 4.3 $7.94 27 $6.66
---------------------------------- ----------------------
2,078 3.1 $5.66 654 $4.75
---------------------------------- ----------------------
---------------------------------- ----------------------
7. PER SHARE AMOUNTS
---------------------------------------------------------------------------
Three Months ended Three Months ended
March 31, 2008 March 31, 2007
---------------------------------------------------------------------------
Basic
Net income per share $0.14 $0.12
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Weighted average number of
shares outstanding ('000) 44,586 42,914
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Diluted
Net income per share $0.14 $0.12
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Weighted average number of
shares outstanding ('000) 45,685 43,652
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---------------------------------------------------------------------------
The reconciling items between the basic and diluted average common shares are
the stock options described in Note 6.
8. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash working capital
Three months ended Three months ended
March 31, 2008 March 31, 2007
----------------------------------------
Accounts receivable $ (2,421) $ 634
Prepaid expenses (652) 919
Accounts payable and
accrued liabilities 4,766 2,732
----------------------------------------
Change in non-cash working capital $ 1,693 $ 4,285
----------------------------------------
----------------------------------------
Relating to:
Financing activities $ - $ -
Investing activities 4,331 1,919
Operating activities (2,638) 2,366
----------------------------------------
$ 1,693 $ 4,285
----------------------------------------
----------------------------------------
Three months ended Three months ended
March 31, 2008 March 31, 2007
----------------------------------------
Interest paid during the period $ 1,059 $ 669
----------------------------------------
Income taxes paid during the period $ - $ -
----------------------------------------
----------------------------------------
9. FINANCIAL INSTRUMENTS
The Company holds various forms of financial instruments. These financial
instruments expose the Company to the following risks:
- credit risk
- market risk
- liquidity risk
Management has primary responsibility for monitoring and managing financial
instrument risks under direction from the Board of Directors which has overall
responsibility for the establishing Company's risk management framework. In
certain circumstances, for example, hedging of future production revenue, the
Board has established policies and has established risk limits and controls and
monitors these risks in relation to market conditions. In other circumstances,
for example extending credit to purchasers of the Company's products, the Board
has delegated responsibility for credit assessment to management, but receives
frequent financial and operating reports.
The Company's financial instruments recognized on the unaudited consolidated
balance sheet at March 31, 2008 consist of accounts receivable, bank debt
indebtedness, accounts payable and accrued liabilities. The fair value of these
financial instruments approximates their carrying amounts based on the short
term to maturity.
Credit risk:
A substantial portion of the Company's accounts receivable are concentrated with
a limited number of purchasers of commodities and joint venture partners in the
oil and gas industry and are subject to normal industry credit risk. Management
considers these concentrations of credit risk to be minimal, as commodity
purchasers are major industry participants, and receivables from partners are
protected by effective industry standard legal remedies. In addition, the
Company's high working interest in its major operating properties mitigates the
risk of partner default. The Company requires cash calls from its partners on
major field projects in advance of commencement. Receivables related to the sale
of the Company's production are normally collected on the 25th day of the month
following delivery. The Company has not experienced any credit loss in the
collection of its accounts receivable.
Market risk:
Market risks are as follows and are largely outside of the control of the Company:
- Commodity prices
- Interest rates
- Foreign exchange
Commodity prices-
The Company is constantly exposed to the risk of declining prices for its
products with a corresponding reduction in cash flow. Reduced cash flow may
result in lower levels of capital being available for field activity, thus
compromising the Company's capacity to grow production while at the same time
replacing continuous declines from existing properties. In certain
circumstances, usually when debt levels are forecast to increase due to capital
expenditures exceeding cash flow, or where the Company has financed, in whole or
in part, an acquisition using bank debt, the Company may enter into oil and
natural gas hedging contracts in order to provide stability to future cash flow.
These contracts reduce the fluctuation in production revenue by fixing prices of
future deliveries of oil and natural gas.
As at March 31, 2008, Storm has hedged the following average gas volumes:
Volume Term
------ ----
Fixed price financial sale
11,000 GJ/d $8.04 / GJ - AECO April 1, 2008 - Sept. 30, 2008
Physical Collar
---------------
10,000 GJ/d $7.50 - 8.70 / GJ - AECO April 1, 2008 - Sept. 30, 2008
These financial instruments have been designated as meeting the criteria for
hedge accounting. Correspondingly, at March 31, 2008, the market value, being
the cost to exit the contracts, of $2.0 million (net of related income tax) has
been charged to Other Comprehensive Income and not included in the determination
of net income for the quarter.
Interest rates -
Interest on the Company's revolving bank facility varies, and is most commonly
based on bankers' acceptance rates plus a stamping fee. The Company is thus
exposed to increased borrowing costs during periods of increasing interest
rates, with a corresponding reduction in both cash flows and project economics.
The Company had no interest rate swaps or similar contracts in place at March
31, 2008 to reduce interest rate risk.
Foreign exchange -
Although the Company's product revenues are denominated in Canadian dollars, the
underlying market prices are affected by the exchange rate between the Canadian
and the United States dollar. As at March 31, 2008 the Company had no contracts
in place to reduce foreign exchange risk.
Liquidity risk:
Liquidity difficulties would emerge if the Company was unable to meet its
financial obligations as they fell due within normal credit terms. This may be
the consequence of diminished cash flows resulting from lower product prices,
production interruptions, or unexpected operating or capital cost increases.
Liquidity difficulties could also occur if the Company's bankers were unable to
continue to provide credit at a level and on terms compatible with the Company's
capital requirements. Generally the Company will, over a reasonable period of
time, limit its capital programs to cash flow from operations. In addition, the
Company endeavours to maintain its debt at a level somewhat less than the
maximum amount of its total bank facility to ensure financial flexibility to
deal with unforeseen or rapidly changing circumstances.
10. CAPITAL MANAGEMENT
Capital management is fundamental to the Company's objective of growing
production cost effectively, while simultaneously replacing continuous
production declines. The Company's capital comprises shareholders' equity, bank
debt and working capital. Management of capital involves the preparation of an
annual budget, which may only be implemented after approval by the Company's
Board of Directors. As the Company's business evolves during the fiscal year,
the budget may be amended; however, any changes are again subject to approval by
the Board of Directors. As part of the budget process, and as part of capital
management control procedures, the Company continuously during the fiscal year
uses a non-GAAP measurement of net debt to cash flow to measure and control debt
levels. This measurement is established as follows:
----------------------------------------
March 31, 2008 December 31, 2007
----------------------------------------
Current assets $ 16,967 $ 13,894
Accounts payable and
accrued liabilities 28,869 24,103
----------------------------------------
Working capital deficiency 11,902 10,209
Bank indebtedness 80,050 74,472
----------------------------------------
Net debt $ 91,952 $ 84,681
----------------------------------------
----------------------------------------
Annualized cash flow for the period $ 78,080 $ 51,943
----------------------------------------
Net debt to cash flow ratio 1.2 : 1 1.6 : 1
----------------------------------------
----------------------------------------
The ratio of net debt to cash flow is subject to quarterly variations and is
usually highest in the first and fourth quarter of each year, when capital
expenditures normally exceed cash flow, with a resulting increase in net debt.
The Company's bank indebtedness is based on the Company's producing reserves and
generally is not subject to restrictions which would potentially affect the
Company's operations. However, the ratio of net debt to cash flow is used to
determine the interest rate applied to the Company's bank indebtedness, with
interest rates changing at certain threshold levels of net debt to cash flow.
From time to time the Company may enter into hedging arrangements if capital
programs or acquisitions result in a high net debt to cash flow ratio. Such
arrangements provide for stability of cash flow during periods when the Company
applies cash flow to reduce its net debt.
The Company may issue share capital when debt levels are high and potentially
constrain operations, usually in circumstances when the Company has completed a
large acquisition.
StorageVault Canada (TSX:SVI)
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