Storm Exploration Ltd. (TSX:SEO) -
Highlights - Thousands of $CDN, except
volumetric and Three months to Three months to
per share amounts March 31, 2009 March 31, 2008
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Financial
Gas sales 21,607 26,241
NGL sales 1,876 2,389
Oil sales 2,875 (1) 5,145
Royalty Income 67 199
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Production Revenue 26,425 33,974
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Funds from operations (2) 13,720 19,518
Per share - basic ($) 0.30 0.44
Per share - diluted ($) 0.30 0.43
Net income 1,250 6,424
Per share - basic ($) 0.03 0.14
Per share - diluted ($) 0.03 0.14
Capital expenditures, net of
dispositions 31,491 26,775
Debt, including working capital
deficiency 97,886 (3) 91,952 (3)
Weighted average common shares
outstanding (000s)
Basic 45,216 44,586
Diluted 46,260 45,685
Common shares outstanding (000s)
Basic 46,553 44,619
Fully Diluted 48,973 46,698
Operations
Oil Equivalent (6:1)
Barrels of oil equivalent (000s) 760 591
Barrels of oil equivalent per day 8,441 6,500
Average selling price ($CDN per BOE) 34.70 (1) 57.10
Gas production
Thousand cubic feet (000s) 3,914 3,051
Thousand cubic feet per day 43,485 33,525
Average selling price ($CDN per mcf) 5.52 8.60
NGL Production
Barrels (000s) 49 30
Barrels per day 542 333
Average selling price ($CDN per barrel) 38.46 78.81
Oil Production
Barrels (000s) 59 53
Barrels per day 651 579
Average selling price ($CDN per barrel) 49.06 (1) 97.63
Wells drilled
Gross 4.0 11.0
Net 2.8 10.1
(1) Includes results of hedging activities
(2) Funds from operations is a non-GAAP measurement. See MD&A.
(3) Excludes unrealized liability related to financial instruments
HIGHLIGHTS for the Quarter Ended March 31, 2009
- Production increased to 8,441 Boe per day, a 30% increase from production of
6,500 Boe per day in the same period one year ago. This is a per share increase
of 24% using basic shares outstanding at quarter end.
- All four wells drilled in the quarter were successful resulting in four gas
wells (2.8 net). This included one vertical and one horizontal well in our
Montney discovery at Parkland plus two vertical shale tests (0.8 net) targeting
Devonian shales in the Horn River Basin. In addition to this, three horizontal
Montney wells drilled at Parkland in the fourth quarter of 2008 were completed
and tied in.
- Cash flow for the quarter was $13.7 million or $0.30 per diluted share, a
decrease of 30% from $0.43 per diluted share in the prior year first quarter.
Not surprisingly, this was the result of lower commodity prices with the year
over year decline of 39% in per Boe sales price more than offsetting 24% growth
in production per share.
- The first quarter cash flow netback of $18.06 per Boe represents a decline of
45% from the cash flow netback of $33.00 per Boe in the year earlier period and,
again, this was due to the 39% decline in the per Boe sales price over the same
period. A 23% decline in total cash costs from the year earlier period did
offset some of the commodity price decline. Total cash costs, which include
operating expenses, interest expense, transportation costs, and general and
administrative costs, averaged $9.81 per Boe in the quarter. Notably, operating
costs were $5.87 per Boe in the quarter, a decline of 22% from the previous
year.
- Net income for the quarter was $1.3 million or $0.03 per diluted share, a
decrease of 79% from net income of $0.14 per diluted share in the prior year
period. Charges for depletion, depreciation and accretion at $14.86 per Boe were
14% lower year over year but, this improvement was more than offset by the
decline in commodity prices over the same period.
- On March 6, a bought deal equity offering was completed resulting in the
issuance of 1,850,000 common shares at a price of $10.60 per share. Net proceeds
after expenses are estimated to be $18.7 million, which has been used to retire
debt and to fund the $8.9 million acquisition of a gross overriding royalty
burdening three sections of land in our Montney discovery at Parkland.
- Capital investment including the acquisition referenced above totaled $31.5
million in the quarter, leaving bank debt and working capital deficiency at
$97.0 million or 1.8 times annualized first quarter cash flow. Year over year,
total debt increased by 6% while production per share grew by 24%.
Boe Presentation - For the purpose of calculating unit revenues and 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 measurements and 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. Mboe means 1,000 Boe.
CORE AREA REVIEW
Parkland/Fort 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 6,100 Boe per day in the first quarter.
During the quarter, approximately 400 Boe per day was shut in or curtailed due
to low natural gas prices. Current production is approximately 5,900 Boe per day
with approximately 500 Boe per day shut in or curtailed. In addition, two
Montney horizontals and one Montney vertical have been completed and tied in and
are capable of adding 1,600 Boe per day of production (1/2 of test rates) but
have not yet been turned on due to low natural gas prices.
First quarter activity was directed to advancing exploitation of our Montney
discovery at Parkland:
- Drilled one successful vertical Montney step-out (1.0 net) which will be
completed after break-up.
- Completed a standing vertical well (35% working interest) on five sections
(1.7 net) acquired last fall adjacent to our Montney discovery. The final test
rate was 0.6 Mmcf per day which is on the lower end of what is economically
exploitable with horizontal wells.
- Drilled one horizontal Montney development well (1.0 net) and completed four
horizontal Montney development wells (4.0 net) including three horizontals
drilled in the fourth quarter of 2008. Two of these horizontals commenced
production during the first quarter and averaged 4.3 Mmcf per day in their first
month (790 Boe per day sales per well, including natural gas liquids). The
remaining two horizontals have been completed and tied in but have not yet been
turned on.
- Acquired a 15% gross overriding royalty burdening three sections of our
Montney discovery for $9 million. Using the 2008 year end reserve evaluation,
this acquisition is approximately 3% to 5% accretive to net asset value.
- Completed construction of the second gas processing facility in January which
added 12 Mmcf per day of capacity and increases our total capacity at Parkland
to 45 Mmcf per day. Current gross raw gas throughput is approximately 34 Mmcf
per day.
Activity at Parkland in 2009 will include drilling five horizontal development
wells (5.0 net) in our Montney discovery, four vertical Montney step-outs (3.7
net), and one exploratory Montney vertical well (1.0 net) to further evaluate a
new pool Montney lead.
Development of our Montney discovery continues to progress as expected. We are
currently producing 25 Mmcf per day of gross raw gas from 12 horizontal Montney
gas wells plus 4 Mmcf per day of gross raw gas from 11 Montney vertical wells.
Two more horizontal wells have been completed, tested, pipeline connected, and
will be turned on as needed to maintain production from the area should natural
gas prices be high enough to ensure a reasonable economic return. To date, the
first year rate from all of our producing horizontal wells is averaging
approximately 2.3 Mmcf per day of raw gas, which represents 400 Boe per day of
sales per well.
Based on the Paddock Lindstrom & Associates Ltd. year-end reserve evaluation,
Discovered Petroleum Initially in Place ('DPIIP) or gross Original Gas in
Place(1) ("OGIP") for our Montney discovery was estimated to be 409 Bcf using an
areal extent of 11 net sections (7,040 acres) based on the 13 successful
vertical gas wells we had drilled by the end of 2008. This estimate of DPIIP
also assumed a relatively conservative porosity cut-off of 6% on a sandstone
scale which is somewhat conservative in comparison to what is being used by
other reserve evaluators in the area. Geological mapping suggests that our
discovery could be larger, covering as many as 15 to 17 net sections. During the
first quarter, we drilled one more successful step-out (100% working interest)
and participated in the completion of another step-out (35% working interest).
As a result of the success of our horizontal Montney development program, we
plan to further expand our infrastructure in 2009 by electrifying and expanding
the capacity of the second gas processing facility from 12 to 25 Mmcf per day
and by adding a liquids extraction plant (refridge). The second facility was
designed to be readily expandable to 50 Mmcf per day of capacity. Cost of the
expansion and installation of the refridge plant is forecast to be $12 million.
The refridge is expected to result in liquids recoveries increasing from 16 to
45 barrels per Mmcf of sales which will add 400 to 600 barrels per day of
liquids production and two to three million barrels of natural gas liquids to
our proven plus probable reserves, based on the 2008 year-end reserve
evaluation.
In the first quarter, the field netback realized at our Parkland property was
$22.77 per Boe, production was 5,950 Boe per day (86.5% natural gas), and
operating costs were $4.11 per Boe.
(1) When used in this press release, original gas in place ("OGIP") means
Discovered Petroleum Initially in Place which is defined in the COGEH handbook
as the quantity of hydrocarbons that are estimated to be in place within a known
accumulation. OGIP is used here as it is a more commonly used industry term when
referring to gas accumulations. Discovered Petroleum Initially in Place is
divided into recoverable and unrecoverable portions, with the estimated future
recoverable portion classified as reserves and contingent resources. There is no
certainty that it will be economically viable or technically feasible to produce
any portion of this Discovered Petroleum Initially in Place except for those
portions identified as proved or probable reserves.
Grande Prairie Area, North West Alberta
Production from this area averaged 1,600 Boe per day in the first quarter which
is a decline of 22% from production of 2,042 Boe per day in the year earlier
period. Current production is approximately 1,500 Boe per day with 100 Boe per
day shut in due to low natural gas prices. Despite our lack of activity in this
area, declines continue to moderate which is indicative of the higher quality
nature of this more mature asset.
Although we had not previously planned to be active in this area in 2009, we
will now redirect some capital into this area in 2009 in order to benefit from
Alberta`s recently announced royalty incentive programs by drilling four to six
locations (70% average working interest), likely in the fourth quarter. Although
we have less discretionary cash flow this year, we are adding these wells to our
2009 program given that:
- the royalty incentive programs are temporary and consequently the wells must
be drilled in 2009 in order to ensure that they commence production prior to
expiry of the incentives in March 2010.
- the locations are all lower risk infills or twins of existing wells to exploit
uphole zones and will increase our net asset value if successful given that they
benefit from reduced royalties and add new reserves.
- the royalty incentive programs offset 50% to 75% of the cost to drill these wells.
As commodity prices recover, new wells will help to preserve the value of our
properties in this area by softening the impact of higher, more punitive
royalties imposed under Alberta`s New Royalty Framework ("NRF") which came into
effect on January 1, 2009. Even with a substantial decline in commodity prices
in the first quarter, the NRF resulted in the average royalty rate in this area
increasing to 27% in the first quarter from an average of 22% in 2008.
Cabin-Kotcho-Junior Area, North East British Columbia
Net production from this area averaged 677 Boe per day in the first quarter, a
decline of 24% from the year earlier period. A salt water disposal pipeline
plugged off in early February and the repair was not completed until mid-March
which resulted in quarterly production being reduced by 100 Boe per day.
Current production is approximately 750 Boe per day.
During June, the Ft. Nelson gas plant will be shut in for a scheduled
maintenance turnaround. This will result in production from this area being shut
in for 21 days.
In the first quarter, two vertical wells (60% SGR, 40% Storm) were drilled in
the Horn River Basin ("HRB") to prove the productivity of our lands. One of the
wells was cored, completed and flow tested in the Muskwa and Otter Park shales.
Results from the core analysis are not expected to be available for another one
to two months. The next step in advancing this play will be drilling one to
three horizontal wells to obtain production data (initial rates, declines,
potential recoverable reserves) as well as operational experience (capital
costs, possible ways to reduce costs) which we can then use in determining the
economic viability of larger scale exploitation with multi-stage frac horizontal
wells. A decision on whether to drill these initial horizontal wells next winter
will be made later this summer. The cost to drill a horizontal well is estimated
to be $3.5 million, while the cost of a completion with 10 to 12 fracs is
estimated to be $8 to $9 million. The completions would likely be delayed to the
spring/summer of 2010 as this would eliminate the significant cost associated
with storing large quantities of water in tanks and heating them during the
winter. The cost of drilling and completing wells is expected to be lower than
this in a larger scale development. The potential economic returns associated
with exploiting these shales is not expected to be known until after we have
several months of production history on the horizontal wells which is likely to
be at least 1.5 years in the future. This remains an early stage project with a
high level of associated economic risk.
Since early 2008, Storm has jointly acquired 43 gross sections of undeveloped
land in the HRB at a 40% working interest (8,940 net acres) prospective for
Devonian shale gas. This land position was acquired at an average cost of $500
per acre. These lands were purchased in partnership with Storm Gas Resource
Corp. ("SGR") which owns the remaining 60% working interest. Combined with
Storm's 22% ownership position in SGR, our exposure to this unconventional shale
gas play is approximately 53%. The two vertical test wells drilled last winter
are within a central project area which encompasses 25 gross sections (10.0 net)
containing an estimated 1.9 Tcf of DPIIP (internal estimate by Storm and SGR)
which is based on average gross pay of 80 metres in the Muskwa and Otter Park
shales. The Klua/Evie shale was not included in this estimate because less
information is available regarding the productivity of this shale in the area.
The results of the core analysis from one of this winter's test wells will
provide information on the reservoir characteristics of the shales (porosity,
total organic content, thermal maturity, gas content scf/ton) which will be used
to verify estimated DPIIP or OGIP.
STORM GAS RESOURCE CORP.
Storm Gas Resource Corp was formed in June 2007, to pursue unconventional gas
opportunities in the HRB and elsewhere. During 2008, SGR completed a private
equity issue and raised $38.2 million (net of share issue costs) at a price of
$6.50 per share. Storm's investment to date in SGR totals $6.2 million and our
share ownership position totals 2.05 million shares, representing 22% ownership
of SGR. At the end of 2008, SGR's land position in the HRB totaled 106 gross
sections or 62 net sections. SGR has also made progress in identifying other
areas with unconventional gas potential and has begun accumulating undeveloped
land in those areas. Our investment in SGR and partnership in the HRB are at an
early stage in terms of information and results and we don't expect to have an
indication regarding upside potential for at least two to three years.
STORM VENTURES INTERNATIONAL INC.
Storm owns 4.5 million shares of Storm Ventures International Inc. ("SVI"), a
Calgary based, private energy company focused on international exploration and
exploitation opportunities. Our share position has a value of $28 million or
$0.60 per fully diluted Storm share using the price of a rights offering
completed in August 2008 which was $6.25 per share. At the end of 2008, SVI's
independently reviewed proven plus probable reserves totaled 36.4 million Boe
SVI's activity in the near term will be focused on advancing three major
development projects including the Vulcan East discovery in the North Sea with
potentially 160 BCF of original gas in place, the Remada Sud light oil discovery
in Tunisia with Stock Tank Original Oil in Place "STOOIP" independently
estimated at 170 million barrels, and the Cosmos fallow discovery offshore
Tunisia with estimated STOOIP of 25 million barrels. Early indications from the
Remada Sud well test are encouraging with the well currently flowing over 200
barrels per day of light oil.
In addition to these development projects, three higher impact exploratory wells
will be drilled by year-end. Two are in Tunisia with one being the Fushia
prospect offshore in the Gulf of Hammamet targeting a 100 MMbbl prospect (pay
38.75% and retain a 65% interest) and the other being onshore targeting a 25
MMbbl prospect in the Silurian Acacus formation on the Jenein Centre block (pay
30% and retain a 65% interest). The third is the Coriander prospect in the North
Sea, which is part of the Vulcan project area containing fallow discoveries and
prospects with prospective gas in place totaling 1 TCF.
OUTLOOK
Storm's overall capital budget and guidance for 2009 is unchanged, however, some
adjustments have been made as to where our investment is directed.
- Capital investment remains at $75 million which includes $16 million to
further expand infrastructure at Parkland and $9 million for the acquisition of
a gross overriding royalty completed in the first quarter. This will be funded
primarily with cash flow which is expected to total $57 million assuming average
2009 prices of $4.75 per GJ at AECO for natural gas and $50.00 per barrel for
oil at Edmonton.
- Our 2009 drilling program will now total 16 gross wells (13.4 net) including
two vertical test wells (0.8 net) in the HRB, five Montney horizontal wells (5.0
net) at Parkland, five Montney verticals (4.7 net), and four wells (2.9 net) in
the Grande Prairie area. In addition, three Montney horizontals at Parkland
drilled in the fourth quarter of 2008 were completed and tied in during the
first quarter.
- An increase in our infrastructure investment at Parkland to $16 million
including $4 million in the first quarter to complete the second facility which
added 12 Mmcf per day of capacity, $5.5 million to electrify and expand the
second facility to 25 Mmcf per day, and $6.5 million to install a liquids
extraction plant (refridge) at the second facility to increase NGL recoveries.
The expansion and liquids extraction plant are expected to be completed by
December of 2009.
- Exit production or production for the final quarter of 2009 is still expected
to be approximately 9,300 Boe per day, an increase of 15% over 2008 fourth
quarter production.
- Operating costs are forecast to be $5.75 per Boe, general and administrative
costs $1.25 per Boe, and the corporate royalty rate, giving effect to the New
Royalty Framework's effect on Alberta production, is forecast to be somewhat
lower at 21%.
Our capital is expected to go a little further this summer with the cost of
drilling and completing wells potentially declining by 10% to 15% based on the
information available at this time. This is primarily the result of lower steel
costs, reductions in day rates for drilling rigs and reduced bid levels on
fracture treatments. Further reduction of overall costs are likely but are not
quantifiable at this time.
Production is currently approximately 8,200 Boe per day with 600 Boe per day
currently curtailed or shut in due to low natural gas prices. In addition, at
Parkland, two Montney horizontal wells have been completed and tied in but have
not commenced production due to the current depressed level of natural gas
prices. The horizontals (both 100% working interest) are each expected to
average 4.5 Mmcf per day or 800 Boe per day of sales in their first month of
production which is half of the test rate after completion. We expect to
maintain production at current levels through the second quarter and into the
summer.
At Parkland, we will continue to work at expanding our Montney discovery with
vertical delineation wells to increase both reserves and our inventory of
undrilled horizontal development locations. Our current undrilled inventory of
30 net horizontal wells represents potential future production additions
totaling 12,000 Boe per day using the expected average first year rate of 400
Boe per day per horizontal. This is based on our 2008 year-end reserve
evaluation which recognized an areal extent of 11 net sections in assigning
proved plus probable reserves. Ultimately, the pool could cover as many as 15 to
17 net sections, increasing the inventory of undrilled horizontal wells to 46 to
54 locations (four horizontal wells per section). This represents potential
future production additions of 18,400 to 21,600 Boe per day. In addition,
considerable upside potential remains associated with:
- separate, new pool Montney leads on the 72 net sections of Montney rights that
we own which we will further test with at least one vertical well in 2009.
- recognizing a higher recovery factor and/or a lower porosity cut-off which
would greatly increase DPIIP (gas in place) and could potentially significantly
increase our inventory of horizontal locations.
- installing liquids recovery which is expected to increase natural gas liquids
('NGL') recovery from 16 to 45 barrels per Mmcf of produced sales gas thereby
adding 400 to 600 barrels per day of NGL production and two to three million
barrels of proved plus probable NGL reserves (based on the 2008 year end reserve
evaluation).
Although reserves at Parkland have increased significantly over the last two
years, this is far from being a mature asset.
In the current depressed natural gas price environment, our business plan will
emphasize accretive growth in net asset value. This approach will impact our
production growth in the near term as we:
- restrict initial production rates from new Montney horizontal gas wells to
flatten out the production profile and level out the price and netback received
over a well's life.
- shut-in higher cost wells or properties to ensure that reserves are not
produced at a loss.
- drill fewer horizontal Montney gas wells given that the increase in forward
strip pricing encourages us to defer drilling wells with high initial rates and
steep initial declines.
- continue to drill Montney vertical step-outs which add horizontal locations
and new reserves but do not have a meaningful impact on production.
At current natural gas prices, spending capital to grow production has little
impact on our cash flow which is what we have historically re-invested to grow
our business and increase net asset value. In the current economic environment,
opportunities are likely to arise where we can use our capital to acquire assets
or undeveloped land at much lower valuations than what we've seen in the last
three to four years and this will have a greater impact on net asset value
growth.
During this period of depressed commodity prices and volatile capital markets,
we will continue to adapt and adjust our business plan and capital spending as
commodity prices change and as new opportunities are identified. Our low cost
structure and high quality asset base, containing several years of low risk
development opportunities, as well as exposure to a very high impact gas project
in the HRB leave us well positioned in the current economic environment. We will
remain patient and disciplined in pursuing new opportunities which must be
accretive to our net asset value.
Sincerely,
Brian Lavergne,
President and Chief Executive Officer
May 13, 2009
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND OPERATING RESULTS FOR THE
THREE MONTHS ENDED MARCH 31, 2009
Set out below is management's discussion and analysis ("MD&A") of financial and
operating results for Storm Exploration Inc. ("Storm" or the "Company") for the
three months ended March 31, 2009. It should be read in conjunction with the
unaudited consolidated financial statements for the three months ended March 31,
2009 and other operating and financial information included in this press
release. In addition, readers are directed to the discussion below regarding
Forward-Looking Statements, Boe Presentation and Non-GAAP Measurements.
This management's discussion and analysis is dated May 13, 2009.
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, 2009, prepared in accordance with Canadian Generally
Accepted Accounting Principles ("GAAP"). Accounting policies adopted by the
Company are set out in note 2 to the audited consolidated financial statements
for the year ended December 31, 2008. 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.
Forward-Looking Statements - Certain information set forth in this document,
including management's assessment of Storm's future plans and operations contain
forward-looking information (within the meaning of applicable Canadian
securities legislation). Such statements or information are generally
identifiable by words such as "anticipate", "believe", "intend", "plan",
"expect", "estimate", "budget", "outlook", "forecast" or other similar words and
include statements relating to or associated with individual wells, regions or
projects. Any statements regarding the following are forward-looking statements:
- future crude oil or natural gas prices;
- future production levels;
- future capital expenditures and their allocation to exploration and
development activities;
- future drilling of new wells;
- future earnings;
- future asset acquisitions or dispositions;
- future sources of funding for capital program;
- future debt levels;
- availability of committed credit facilities;
- development plans;
- ultimate recoverability of reserves or resources;
- expected finding and development costs and operating costs;
- estimates on a per share basis;
- dates by which certain areas will be developed; and
- changes to any of the foregoing.
Statements relating to "reserves" or "resources" are forward-looking statements,
as they involve the implied assessment, based on estimates and assumptions that
the reserves and resources described exist in the quantities predicted or
estimated, and can be profitably produced in the future.
The forward-looking statements are subject to known and unknown risks and
uncertainties and other factors which may cause actual results, levels of
activity and achievements to differ materially from those expressed or implied
by such statements. Such factors include the material risks described in Storm's
Annual Information Form and this MD&A under "Risk Assessment" and the material
assumptions disclosed in the "Production and Revenue" section hereof under the
headings "Production Profile and Per Unit Prices" and "Royalties"; under "Field
Netback" is "Interest" and "General and Administrative costs"; under the
"Investment and Financing" section hereof under the headings "Bank Debt,
Liquidity and Capital Resources"; and " Asset Retirement Obligation"; industry
conditions, volatility of commodity prices, currency fluctuations, imprecision
of reserve estimates, 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. All of these caveats should be considered in the context
of current economic conditions, in particular reduced commodity prices and the
distressed condition of financial institutions and markets, each of which is
outside the control of the Company. 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 publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise, except as required
under securities law. References to forward-looking information are made in the
press release dated May 13, 2009 this MD&A forms part of. The forward-looking
statements contained herein are expressly qualified by this cautionary
statement.
Boe Presentation - For the purpose of calculating unit revenues and 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 measurements and 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 which are not recognized under GAAP in Canada. Specifically,
"funds from operations", "funds from operations per share", and "netbacks" do
not have any standardized meaning as prescribed by GAAP in Canada and are
regarded as non-GAAP measures. It is likely that these non-GAAP measurements may
not be comparable to the calculation of similar amounts for other entities. In
particular, funds from operations is not intended to represent, or be equivalent
to, cash flow from operating activities calculated in accordance with Canadian
GAAP which appears on the Company's Consolidated Statements of Cash Flows. Funds
from operations and similar non-GAAP terms are used to benchmark operations
against prior periods and peer group companies. Funds from operations is also
used to determine leverage for the purposes of establishing interest costs under
the Company's banking agreement.
A reconciliation of funds from operations to cash flows from operating
activities is as follows:
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Quarter Ended March Quarter Ended Quarter Ended
31, 2009 March 31, 2008 December 31, 2008
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Cash flow from
operating
activities $ 14,633 $ 16,880 $ 20,071
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Net change in
non-cash
working (913) 2,638 361
capital items
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Funds from
operations $ 13,720 $ 19,518 $ 20,432
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OPERATIONAL AND FINANCIAL RESULTS
Production and Revenue
Average Daily Production
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Quarter Ended March Quarter Ended Quarter Ended
31, 2009 March 31, 2008 December 31, 2008
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Natural gas (Mcf/d) 43,485 33,525 41,919
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Natural gas liquids
(Bbls/d) 542 333 489
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Crude oil (Bbls/d) 651 579 686
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Total (Boe/d) 8,441 6,500 8,161
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Total Boe production for the first quarter of 2009 increased by 30% when
compared to the first quarter of 2008 and by 3% compared to the fourth quarter
of 2008. Increased year-over-year production came from Storm's horizontal
drilling program in the Parkland area of British Columbia. Production per
million weighted-average shares outstanding for the first quarter of 2009
averaged 187 Boe per day, compared to 146 Boe per day for the first quarter of
2008, and to 183 Boe per day for the final quarter of 2008.
High operating cost production, averaging 400 Boe per day, was shut in for the
first quarter of 2009 due to low natural gas prices. Similarly, average daily
production for the second quarter of 2009 will be reduced by approximately 500
Boe per day. Additional production may be shut in if product prices continue to
fall.
Production Profile and Per Unit Prices
----------------------------------------------------------------------------
Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008
----------------------------------------------------------------------------
Percentage Average Selling Percentage Average Selling
of Total Price Before of Total Price Before
Boe Transportation Boe Transportation
Production Costs Production Costs
----------------------------------------------------------------------------
Natural gas
- Mcf 86% $ 5.52 86% $ 8.60
----------------------------------------------------------------------------
Natural gas
liquids - Bbl 6% $ 38.46 5% $ 78.81
----------------------------------------------------------------------------
Crude oil -
Bbl 8% $ 49.95 9% $ 97.63
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per Boe $ 34.76 $ 57.10
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended
December 31, 2008
----------------------------------------------------------------------------
Percentage Average Selling
of Total Price Before
Boe Transportation
Production Costs
----------------------------------------------------------------------------
Natural gas
- Mcf 86% $ 7.49
----------------------------------------------------------------------------
Natural gas
liquids - Bbl 6% $ 56.52
----------------------------------------------------------------------------
Crude oil -
Bbl 8% $ 62.35
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per Boe $ 47.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average selling prices do not include hedging gains or losses.
Storm's production base is largely natural gas and associated liquids. Short and
medium term exploitation of the Company's existing asset base is not expected to
result in crude oil increasing as a percentage of Boe production. Growth in gas
production year-over-year and quarter-over-quarter came largely from the
Parkland area in British Columbia, in particular from the Company's Montney
discovery.
The average AECO spot market reference price for the first quarter of 2009 was
$4.67 per GJ, compared to $7.49 per GJ for the first quarter of 2008, a
year-over-year reduction of 38%, and $6.34 per GJ for the final quarter of 2008,
a reduction of 26%. Storm's corporate average realized price for natural gas for
the first quarter of 2009 was approximately 18% higher than the AECO reference
price. This pricing premium is attributable to high heat content natural gas
delivered from the Montney formation at Parkland. Growing volumes of Montney
natural gas should result in an expansion of the heat content premium in the
corporate average realized gas price. In addition to superior heat content,
Montney natural gas has a natural gas liquids content of approximately 15
barrels per Mmcf, which has resulted in 63% growth year-over-year in natural gas
liquids production.
Production by Area - Boe per Day
----------------------------------------------------------------------------
Quarter Ended March Quarter Ended March Quarter Ended
31, 2009 31, 2008 December 31, 2008
----------------------------------------------------------------------------
Fort St John/
Parkland - BC 6,105 3,511 5,557
----------------------------------------------------------------------------
Grande Prairie
Area Alberta 1,600 2,042 1,736
----------------------------------------------------------------------------
Cabin-Kotcho-
Junior - BC 677 885 806
----------------------------------------------------------------------------
Other 59 62 62
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total 8,441 6,500 8,161
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 74% year-over-year
production growth from this area. Correspondingly, reduced investment in Alberta
is evidenced by a 22 % reduction in year-over-year production.
Production Revenue
----------------------------------------------------------------------------
Quarter Ended March Quarter Ended Quarter Ended
31, 2009 March 31, 2008 December 31, 2008
----------------------------------------------------------------------------
Natural gas $ 21,607 $ 26,241 $ 28,875
----------------------------------------------------------------------------
Natural gas
liquids 1,876 2,389 2,542
----------------------------------------------------------------------------
Crude oil 2,927 5,145 3,935
----------------------------------------------------------------------------
Hedging losses (52) - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue from
product sales 26,358 33,775 35,352
----------------------------------------------------------------------------
Royalty income 67 199 95
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Production
Revenue $ 26,425 $ 33,974 $ 35,447
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 2009 and 2008 is as
follows:
----------------------------------------------------------------------------
Natural
Natural Gas Crude Hedging
Gas Liquids Oil Activities Total
----------------------------------------------------------------------------
Revenue from product
sales - Q1 2008 $ 26,241 $ 2,389 $ 5,145 - $ 33,775
----------------------------------------------------------------------------
Contribution from
increased production
year-over-year 7,033 1,499 640 - 9,972
----------------------------------------------------------------------------
Effect of decreased
product prices
year-over-year (12,467) (2,012) (2,858) - (17,337)
----------------------------------------------------------------------------
Loss on crude oil
derivatives - - - (52) (52)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue from product
sales - Q1 2009 $ 21,607 $ 1,876 $ 2,927 $ (52) $ 26,358
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Hedging:
Storm has entered into a fixed price sale agreement in respect of 350 barrels of
crude oil per day, at a price of $59.40 per barrel for the period April 1 to
June 30, 2009 and collars for the same volume for each of the last two quarters
of 2009, at prices of $60 - $65/Bbl and $60 - $70/Bbl, respectively. At March
31, 2009 the Company had an unrealized mark-to-market loss of $0.6 million on
these derivative contracts.
In March 2009 Storm sold 350 barrels of crude oil per day at a fixed price of
$55.89 per barrel, realizing a loss of $52, 000.
ROYALTIES
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008 December 31, 2008
----------------------------------------------------------------------------
Charge for period $5,253 $6,902 $6,882
----------------------------------------------------------------------------
Royalties as a percentage
of revenue from product
sales before hedging 19.9% 20.4% 19.5%
----------------------------------------------------------------------------
Per Boe $ 6.91 $11.67 $ 9.17
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Royalties are paid primarily to the provincial governments in Alberta and
British Columbia. The year-over-year reduction in the effective rate and the per
Boe reduction are a result of falling commodity prices which offset a 5%
increase in the average royalty rate on properties in Alberta resulting from the
implementation of the NRF on January 1, 2009.
PRODUCTION COSTS
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008 December 31, 2008
----------------------------------------------------------------------------
Charge for period $4,461 $4,448 $4,386
----------------------------------------------------------------------------
Percentage of revenue
from product sales before
hedging 16.9% 13.2% 12.4%
----------------------------------------------------------------------------
Per Boe $ 5.87 $ 7.52 $ 5.84
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Although production volumes grew, total production costs were largely the same
for each of the quarters. Lower per Boe costs in the first quarter of 2009 are
attributable to cost-effective operating practices, as well as increasing
volumes of low operating cost Montney natural gas in the corporate product mix.
The modest increase in the first quarter of 2009 when compared to the
immediately prior quarter is primarily due to seasonally higher costs in the
winter months.
Storm's cash costs per Boe, which comprise production, general and
administrative and interest costs, amounted to $7.96 for the first quarter of
2009, compared to $10.39 for the first quarter of 2008 and to $8.49 for the
fourth quarter of 2008.
TRANSPORTATION COSTS
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008 December 31, 2008
----------------------------------------------------------------------------
Charge for period $1,402 $1,408 $1,392
----------------------------------------------------------------------------
Percentage of revenue
from product sales before
hedging 5.3% 4.2% 3.9%
----------------------------------------------------------------------------
Per Boe $1.85 $2.38 $1.85
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total transportation costs were largely the same over each of the above
quarters, although production grew 30%. Increased gas production from the
Parkland area resulted in lower per unit costs year-over-year. Storm's low per
unit production and transportation costs are a direct benefit of the Company's
commitment to operatorship and to facility control and ownership.
FIELD NETBACKS
Details of field netbacks per commodity unit are as follows:
----------------------------------------------------------------------------
Quarter ended March 31, 2009
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
----------------------------------------------------------------------------
Product sales $49.95 $38.46 $5.52 $34.76
----------------------------------------------------------------------------
Hedging loss (0.89) - - (0.07)
----------------------------------------------------------------------------
Royalty income 0.13 0.08 0.01 0.09
----------------------------------------------------------------------------
Royalties (7.55) (8.78) (1.12) (6.91)
----------------------------------------------------------------------------
Production costs (1) (7.61) - (1.03) (5.87)
----------------------------------------------------------------------------
Transportation (5.06) (3.89) (0.23) (1.85)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Field netback $28.97 $25.87 $3.15 $20.15
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter ended March 31, 2008
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ 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 (1) (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 December 31, 2008
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
----------------------------------------------------------------------------
Product sales $ 62.35 $ 56.52 $ 7.49 $ 47.08
----------------------------------------------------------------------------
Royalty income 0.28 0.16 0.02 0.13
----------------------------------------------------------------------------
Royalties (10.21) (10.14) (1.50) (9.17)
----------------------------------------------------------------------------
Production costs (1) (6.95) - (1.02) (5.84)
----------------------------------------------------------------------------
Transportation (4.57) (1.16) (0.27) (1.85)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Field netback $ 40.90 $ 45.38 $ 4.72 $ 30.35
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Production costs for natural gas liquids are included with natural gas
costs.
Field netbacks for the first quarter of 2009 fell 44% year-over-year as a direct
result of a 39% reduction in per Boe revenue. Direct costs, plus price-sensitive
royalties, fell by 32% year-over-year, but the decline was insufficient to
offset the revenue erosion. Cost management will continue to be a priority in
coming months and Storm will shut in additional production if individual wells
are not providing a high enough economic return, which may result in lower
production levels in future quarters.
Based on an all-in proved plus probable finding cost for 2008 of $11.10, Storm's
recycle ratio (field netback divided by finding costs) for the first quarter of
2009 was 1.8.
INTEREST
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008 December 31, 2008
----------------------------------------------------------------------------
Charge for period $578 $1,061 $673
----------------------------------------------------------------------------
Per Boe $0.76 $1.79 $0.90
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest is paid on Storm's revolving bank facility. Lower total and per unit
interest costs year-over-year are a result of lower borrowing costs as interest
rates fell considerably in the second half of 2008 and into 2009. Nevertheless
interest costs will rise in future quarters by as much as 50%, assuming the same
level of bank borrowings, as Storm's recently renewed bank facility provides for
a considerable increase in interest costs.
GENERAL AND ADMINISTRATIVE COSTS
----------------------------------------------------------------------------
Total costs Quarter Ended Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008 December 31, 2008
----------------------------------------------------------------------------
Gross general and
administrative costs $ 1,869 $ 1,358 $ 2,269
----------------------------------------------------------------------------
Capital and operating
recoveries (858) (721) (952)
----------------------------------------------------------------------------
---------------------------------------------------
Net general and
administrative costs $ 1,011 $ 637 $ 1,317
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Costs per Boe Quarter Ended Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008 December 31, 2008
----------------------------------------------------------------------------
Gross general and
administrative costs $ 2.46 $ 2.30 $ 3.02
----------------------------------------------------------------------------
Capital and operating
recoveries (1.13) (1.22) (1.27)
----------------------------------------------------------------------------
---------------------------------------------------
Net general and
administrative costs $ 1.33 $ 1.08 $ 1.75
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year-over-year gross general and administrative costs increased due to increased
compensation and the inclusion in the first quarter of 2009, of certain
professional services costs associated with the Company's 2008 year end. General
and administrative costs are expected to fall in succeeding quarters.
Storm does not capitalize general and administrative costs.
STOCK-BASED COMPENSATION COSTS
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008 December 31, 2008
----------------------------------------------------------------------------
Charge for period $ 396 $ 336 $ 540
----------------------------------------------------------------------------
Per Boe $ 0.52 $ 0.57 $ 0.72
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock-based compensation costs are non cash charges which reflect the estimated
value of stock options issued to Storm's directors and employees. The value of
the award is recognized as an expense over the period from the grant date to the
date of vesting of the award. The increase in the charge in the first quarter of
2009, when compared to the prior year, relates to the issue of additional stock
options to new employees in 2008.
The reduction in the first quarter of 2009, compared to the fourth quarter of
2008, is a result of certain prior year awards being fully expensed.
DEPLETION, DEPRECIATION AND ACCRETION
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008 December 31, 2008
----------------------------------------------------------------------------
Depreciation and
depletion charge for
period $ 11,167 $ 10,057 $ 11,472
----------------------------------------------------------------------------
Accretion charge for
period 119 121 121
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total $ 11,286 $ 10,178 $ 11,593
----------------------------------------------------------------------------
Total per Boe $ 14.86 $ 17.21 $ 15.44
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The increase in the total charge for depletion, depreciation and accretion for
the first quarter of 2009 compared to the prior year, is a consequence of higher
production volumes, as the depletion component of the charge is based on a cost
per Boe.
The decrease in the charge for depletion and depreciation per Boe for the first
quarter of 2009 when compared to the equivalent quarter of 2008 is 14%. The
reduction is attributable to proved oil and gas reserves being added in 2008 at
a cost considerably lower than in prior periods. 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, 2009, Storm recorded a future income tax charge of
$0.2 million compared to $2.6 million for the first quarter of 2008. 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 29%, compared
to 30% for the first quarter of 2008.
At March 31, 2009, Storm had tax pools carried forward estimated approximating
$220 million to be applied against future taxable income. 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
As a consequence of lower production revenue, net income for the first quarter
of 2009 amounted to $1.3 million, compared to $6.4 million in the first quarter
of 2008 and $6.0 million in the final quarter of 2008.
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008 December 31, 2008
----------------------------------------------------------------------------
Per diluted Per diluted Per diluted
share share share
----------------------------------------------------------------
Net income $ 1,250 $0.03 $ 6,424 $0.14 $ 5,968 $0.13
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NON-GAAP FUNDS FROM OPERATIONS AND FUNDS FROM OPERATIONS PER SHARE
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008 December 31, 2008
----------------------------------------------------------------
Per diluted Per diluted Per diluted
share share share
----------------------------------------------------------------------------
Funds from
operations $ 13,720 $0.30 $ 19,518 $0.43 $ 20,432 0.45
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-GAAP funds from operations is not a measure recognized by GAAP in Canada,
although it is widely used by analysts and other financial statement users. It
is used by the Company's bankers to determine interest rates. The most directly
comparable measure under GAAP is cash flows from operating activities. Cash
flows from operating activities for each period is as follows:
CASH FLOWS FROM OPERATING ACTIVITIES
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008 December 31, 2008
--------------------------------------------------------------
Per diluted Per diluted Per diluted
share- share share
----------------------------------------------------------------------------
Cash flows
from
operating
activities $14,633 $0.32 $16,880 $0.37 $ 20,071 $0.44
----------------------------------------------------------------------------
----------------------------------------------------------------------------
INVESTMENT AND FINANCING
Working Capital
Receivables comprise production revenue receivables and accruals, and
receivables in respect of operating and capital costs. Prepaid and other costs
include unamortized insurance premiums, deposits and certain inventory equipment
items.
Accounts payable and accrued liabilities 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.
Excluding an unrealized financial instrument provision, Storm had a working
capital deficiency of $13.0 million at March 31, 2009, compared to $11.9 million
at March 31, 2008 and $16.9 million at December 31, 2008. The working capital
deficiency at each period end reflects 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, 2009 March 31, 2008 December 31, 2008
----------------------------------------------------------------------------
Land and lease, net $806 $1,793 $4,494
----------------------------------------------------------------------------
Seismic 664 - -
----------------------------------------------------------------------------
Drilling and completions 15,802 20,807 22,542
----------------------------------------------------------------------------
Facilities and equipment 6,766 5,237 8,098
----------------------------------------------------------------------------
Other 3 16 3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Field Expenditures 24,041 27,853 35,137
----------------------------------------------------------------------------
Property acquisitions 9,012 514 205
----------------------------------------------------------------------------
Property dispositions (1,562) (1,592) -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total $31,491 $26,775 $35,342
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Bank Debt, Liquidity and Capital Resources
Storm has a revolving borrowing base bank credit facility which is renewable
annually. The facility was renewed effective May 1, 2009 and resulted in the
facility increasing from $110 million to $120 million. The amount drawn on the
facility at March 31, 2009 amounted to $84.9 million, or 71% of the renewed
facility. Total debt, including working capital deficiency, amounted to $97.9
million at March 31, 2009, resulting in a ratio of year end debt to annualized
funds from operations for the first quarter of 2009 of 1.8 times. Upon renewal
of the bank line, two additional banks were added to Storm's syndicate to
provide flexibility in the event of a bank failure or if acquisition financing
is required.
The Company normally funds its borrowing by drawing bankers' acceptances plus a
stamping fee. Terms of the renewed facility involve a very large increase in
stamping fees, standby fees and other costs. For example, under the prior
facility the stamping fee applicable to borrowings under bankers acceptances at
certain levels of indebtedness was 110 basis points; this has now been increased
to 300 basis points. Nevertheless, year-over-year, the core bankers' acceptance
rate has fallen considerably, such that year-over-year total borrowing costs
have fallen. In this circumstance, Storm has fixed its bankers' acceptance rate,
before application of stamping fees, for $60 million through a swap mechanism at
a cost of 69.5 basis points for a period of twelve months, beginning May 2009.
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.
In March 2009, Storm issued 1,850,000 common shares at a price of $10.60 per
share for total proceeds of $19.6 million, before commission and expenses.
Proceeds from the offering were initially used to reduce bank indebtedness.
Capital programs were funded as follows:
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008 December 31, 2008
----------------------------------------------------------------------------
Funds from operations $13,720 $19,518 $20,432
----------------------------------------------------------------------------
Non cash working capital (3,894) 1,693 (63)
----------------------------------------------------------------------------
Issue of common shares
- net of expenses 18,675 - -
----------------------------------------------------------------------------
Issue of common shares
- option proceeds - 403 24
----------------------------------------------------------------------------
Increase in bank
indebtedness 2,990 5,578 14,949
----------------------------------------------------------------------------
Proceeds on property
sales 1,562 1,592 -
----------------------------------------------------------------------------
Cash available for
investment $33,053 $28,784 $35,342
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Field expenditures 24,041 27,853 35,137
----------------------------------------------------------------------------
Property acquisition 9,012 514 205
----------------------------------------------------------------------------
Investment in Storm
Gas Resource Corp. - 417 -
----------------------------------------------------------------------------
Total cost of investment
programs $33,053 $28,784 $35,342
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Investments
Storm Gas Resource Corp.
Storm Gas Resource Corp. ("SGR") was incorporated to identify and participate in
unconventional natural gas opportunities, initially a shale gas resource in the
Horn River Basin of northeastern British Columbia. Storm's initial investment in
SGR at $1.00 per share in June, 2007, was satisfied by a cash contribution of
$833,000 and the transfer of undeveloped lands with a value of $417,000. In July
2008, Storm subscribed for an additional 200,000 common shares in SGR at a price
of $5.20 per share, and also participated in a private placement, subscribing
for 600,000 common shares at a price of $6.50. The private placement resulted in
SGR issuing 5,880,000 common shares at a price of $6.50 per share, for total
proceeds after commission and expenses, of $38,220,000. As the private placement
involved the sale of shares by SGR at a price higher than Storm's initial
investment cost, the Company recognized a dilution gain in 2008 of $3.5 million.
Storm's ownership position in SGR is 22%. Including the dilution gain, the
carrying amount of Storm's 2,050,000 common shares of SGR is $4.74 per share.
This amount should not be regarded as representative of the value of Storm's
investment in SGR. Total cash invested plus property transferred to SGR amounts
to $6.19 million. In addition to its investment in SGR, Storm has a direct 40%
working interest in undeveloped lands jointly acquired with SGR in the Horn
River Basin of northeastern British Columbia. This interest, together with
Storm's investment in SGR, provides the Company with 53% exposure to the
potential upside in the Horn River Basin lands.
Storm provides management services to SGR at cost. Amounts charged by Storm to
SGR in the three months ended March 31, 2009 were $65,000 (three months ended
March 31, 2008 - $nil; three months ended December 31, 2008 - $62,000).
Storm Ventures International Inc.
At March 31, 2009, the Company's investment in Storm Ventures International Inc.
("SVI") represented a 6% ownership position, comprising 4.5 million common
shares. The carrying amount of SVI on Storm's consolidated balance sheet
approximates $2.34 per SVI share, and comprises Storm's investment cost, plus a
dilution gain recognized during a prior year. This carrying amount should not be
regarded as representative of the value of Storm's investment. During 2008,
Storm invested $1.25 million to acquire an additional 200,000 common shares,
resulting in total cash invested in SVI since inception of Storm being $4.25
million.
Future Income Taxes
Estimated future income taxes at March 31, 2009 represent the tax effect of the
excess of the accounting amounts over the related tax bases of property and
equipment and share capital.
Details of the Company's tax pools are as follows:
----------------------------------------------------------------------------
As at Maximum Annual
March 31, 2009 deduction
----------------------------------------------------------------------------
Canadian oil and gas property expense $91,634 10%
----------------------------------------------------------------------------
Canadian development expense 80,311 30%
----------------------------------------------------------------------------
Canadian exploration expense 3,211 100%
----------------------------------------------------------------------------
Undepreciated capital cost 42,809 20 - 100%
----------------------------------------------------------------------------
Other 2,426 20%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total 220,391
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital losses $9,666
------------------------------------------------------------
------------------------------------------------------------
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, 2009 and
December 31, 2008 comprise the present value of additional obligations accruing
to the Company as a result of field activity and acquisitions during the
quarter, 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.
Details of outstanding share capital and dilutive elements:
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008 December 31, 2008
----------------------------------------------------------------------------
Common shares outstanding
- end of period 46,553 44,619 44,703
----------------------------------------------------------------------------
Stock options 2,420 2,079 2,267
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fully diluted common
shares - end of period 48,973 46,698 46,970
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common
shares - basic 45,216 44,586 44,702
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common
shares - diluted 46,260 45,685 45,981
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock options outstanding are exercisable over five years on various dates
beginning September 2005 at prices ranging from $2.60 to $12.03.
QUARTERLY RESULTS
Summarized information by quarter for the two years ended March 31, 2009
appears below:
----------------------------------------------------------------------------
Quarter March 31, December 31, September 30, June 30, March 31,
Ended 2009 2008 2008 2008 2008
----------------------------------------------------------------------------
Production
revenue -
($000s) 26,425 35,447 40,215 38,888 $33,974
----------------------------------------------------------------------------
Funds from
operations -
($000s)
Per share 13,720 20,432 24,290 23,250 19,518
- basic 0.30 0.46 $0.54 $0.52 $0.44
- diluted 0.30 0.45 $0.53 $0.50 $0.43
----------------------------------------------------------------------------
Net income -
($000s)
Per share $1.250 5,968 12,829 9,465 $6,426
- basic 0.03 0.13 $0.28 $0.21 $0.14
- diluted 0.03 0.13 $0.28 $0.20 $0.14
----------------------------------------------------------------------------
Average daily
production - Boe 8,441 8,161 7,107 6,130 6,500
----------------------------------------------------------------------------
Average field
netback per Boe $20.15 $30.35 $39.77 $45.09 $35.87
----------------------------------------------------------------------------
Capital
expenditures -
net - ($000s) $31,491 35,342 27,057 5,780 26,775
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter December 31, September 30, June 30,
Ended 2007 2007 2007
----------------------------------------------------------------------------
Production
revenue - ($000s) 25,553 19,573 25,156
----------------------------------------------------------------------------
Funds from operations
- ($000s)
Per share 13,233 9,372 12,921
- basic $0.30 $0.21 $0.30
- diluted $0.30 $0.20 $0.29
----------------------------------------------------------------------------
Net income - ($000s)
Per share 2,852 299 2,832
- basic $0.06 $0.01 $0.06
- diluted $0.06 $0.01 $0.06
----------------------------------------------------------------------------
Average daily
production - Boe 5,992 5,618 5,713
----------------------------------------------------------------------------
Average field
netback per Boe $27.44 $20.83 $28.02
----------------------------------------------------------------------------
Capital expenditures -
net - ($000s) 17,094 19,953 32,768
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 SGR 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) 2009 2010 2011 2012 2013
----------------------------------------------------------------------------
Lease of premises $811 $825 $838 $838 $419
----------------------------------------------------------------------------
Equipment leases 164 101 62 5 -
----------------------------------------------------------------------------
Gas transportation and
processing commitments 2,235 1,437 1,146 599 198
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total $3,210 $2,363 $2,046 $1,442 $617
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
Financial amounts included in the Company's MD&A and in the unaudited
consolidated financial statements for the three months ended March 31, 2009 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 for the year
ended December 31, 2008 and the unaudited consolidated financial statements for
the three months ended March 31, 2009.
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, 2008 and Annual Information Form dated March 31, 2009.
REPORTING CONTROLS
The Company's Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO") are responsible for establishing and maintaining disclosure controls and
procedures ("DC&P") and internal controls over financial reporting ("ICFR").
Storm has codified and distributed to staff its policies, controls and
procedures with respect to disclosure to third parties of information concerning
the Company's operations and results. In addition, DC&P are designed to provide
reasonable assurance that material information is made known to the CEO and CFO
on a timely basis and that information required to be disclosed by the Company
in its annual filings, interim filings or other reports filed or submitted by it
under securities legislation is recorded, processed, summarized and reported
within the time periods specified in securities legislation. The CEO and CFO
have concluded such controls are effective.
ICFR have been designed by the CEO and CFO, either directly or under their
supervision, to provide reasonable assurance regarding the reliability of
financial reporting, including financial reporting for external purposes under
GAAP.
As at December 31, 2008, the CEO and CFO evaluated the design and operating
effectiveness of the Company's ICFR. In part, this evaluation was based on the
work of third party specialists who were engaged by the Company to update
documentation and test the operating effectiveness of such controls. Based on
this evaluation and enquiries made since that date, the CEO and CFO conclude
that the design of ICFR is sufficiently effective as at March 31, 2009 to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with Canadian GAAP.
No changes to internal controls were made and no circumstances suggesting a
possible breach of disclosure controls were identified in the quarter ended
March 31, 2009.
Because of inherent limitations, disclosure controls and procedures and internal
controls over financial reporting cannot prevent or identify all
mismeasurements, errors and fraud.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
The Canadian Institute of Chartered Accountants, the primary source for
accounting standards in Canada, proposes to implement International Financial
Reporting Standards ("IFRS") as part of Canadian GAAP. Such standards have been
established cooperatively by many countries and have widespread application to
financial reporting by businesses throughout the world. The adoption of IFRS in
Canada will result in major changes to GAAP in Canada and to financial reporting
practices followed by Storm. The effective date of introduction for IFRS is
proposed for years beginning after December 31, 2010; thus, in the case of
Storm, the year ended December 31, 2011. However, the need to have comparative
information presented in accordance with IFRS for the year ended December 31,
2010, requires that the Company's consolidated balance sheet at January 1, 2010
be IFRS compliant, meaning that the Company must plan its conversion
considerably in advance of the proposed implementation date. Currently, the
application of IFRS to the oil and gas industry in Canada requires considerable
clarification: correspondingly, the effect of IFRS on the Company's accounting
policies and reporting standards and practices is not presently determinable.
With respect to organizing for the changeover, the Company has recruited
appropriately qualified staff and has identified external resources to assist in
the process. Key elements of the changeover plan include: staff education;
choosing among policies permitted under IFRS; deciding whether certain changes
will be applied on a retroactive or prospective basis; evaluating the effect of
adoption on Storm's information technology and data systems and internal control
over financial reporting and disclosure controls and procedures; alignment of
internal and outsourced processes, applications and internal controls; external
and internal communications; and liason with peers, industry groups and
professional advisors.
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, December 31,
2009 2008
-------------------------
-------------------------
ASSETS
Current
Accounts receivable 10,155 14,274
Prepaid and other costs 3,187 2,916
-------------------------
13,342 17,190
Property and Equipment - Net (Note 3) 311,522 290,944
Investments (Note 4) 20,242 20,242
-------------------------
345,106 328,376
-------------------------
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 26,334 34,076
Unrealized financial instrument provision (Note 11) 606 -
-------------------------
26,940 34,076
Bank Indebtedness (Note 5) 84,894 81,904
Asset Retirement Obligation (Note 6) 7,632 7,259
Future Income Taxes (Note 7) 22,797 22,875
-------------------------
142,263 146,114
-------------------------
Shareholders' Equity (Note 8)
Share capital 106,948 88,013
Contributed surplus 4,376 3,980
Retained earnings 91,519 90,269
Accumulated other comprehensive income (deficit) - -
-------------------------
202,843 182,262
-------------------------
Commitments (note 13)
-------------------------
345,106 328,376
-------------------------
-------------------------
Storm Exploration Inc.
Consolidated Statements of Income and Retained Earnings
($000s)
(UNAUDITED)
Three months to Three months to
March 31, 2009 March 31, 2008
----------------------------------
----------------------------------
Revenue
Production revenue 26,425 33,974
Unrealized loss on financial instruments
(note 11) (606) -
Royalties (5,253) (6,902)
----------------------------------
20,566 27,072
----------------------------------
Expenses
Production 4,461 4,448
Transportation 1,402 1,408
Interest 578 1,061
General and administrative 1,011 637
Stock based compensation 396 336
Depletion, depreciation and accretion 11,286 10,178
----------------------------------
19,134 18,068
----------------------------------
Income before taxes: 1,432 9,004
Future income taxes (Note 7) (182) (2,580)
----------------------------------
Net income for the period 1,250 6,424
Retained earnings, beginning of period 90,269 55,583
----------------------------------
Retained earnings, end of period 91,519 62,007
----------------------------------
----------------------------------
Net Income per share (Note 9) - basic 0.03 0.14
- diluted 0.03 0.14
Storm Exploration Inc.
Consolidated Statements of Comprehensive Income
($000s)
(UNAUDITED)
Three months to Three months to
March 31, 2009 March 31, 2008
----------------------------------
----------------------------------
Net Income for the period 1,250 6,424
Reversal of unrealized hedging loss - (2,778)
Related income tax benefit - 778
----------------------------------
Comprehensive income for the period 1,250 4,424
----------------------------------
----------------------------------
Storm Exploration Inc.
Consolidated Statements of Cash Flows
($000s)
(UNAUDITED)
Three months to Three months to
March 31, 2009 March 31, 2008
----------------------------------
----------------------------------
Operating activities
Net income for the period 1,250 6,424
Add non-cash items:
Depletion, depreciation and accretion 11,286 10,178
Unrealized loss on financial instruments
(note 11) 606 -
Future income tax 182 2,580
Stock based compensation 396 336
----------------------------------
Funds from operations 13,720 19,518
Net change in non-cash working capital
items (Note 10) 913 (2,638)
----------------------------------
14,633 16,880
----------------------------------
Financing activities
Issue of common shares - net of
expenses 18,675 403
Increase (Decrease) in bank
indebtedness 2,990 5,578
----------------------------------
21,665 5,981
----------------------------------
Investing activities
Increase in investments - (417)
Additions to property and equipment (33,053) (28,367)
Disposals of property and equipment 1,562 1,592
Net change in non-cash working capital
items (Note 10) (4,807) 4,331
----------------------------------
(36,298) (22,861)
----------------------------------
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, 2009 AND 2008
(UNAUDITED)
Tabular amounts in '000s, except per share amounts
1. NATURE OF OPERATIONS
Storm Exploration Inc. (the "Company" or "Storm"), is an oil and gas exploration
and development company listed on the Toronto Stock Exchange under the symbol
SEO. The Company operates in the provinces of Alberta and British Columbia. The
Company's production base is largely natural gas and natural gas liquids. These
consolidated financial statements include the accounts of Storm and its wholly
owned subsidiary and partnership.
2. SIGNIFICANT ACCOUNTING POLICIES
These interim unaudited consolidated financial statements have been prepared by
management in accordance with accounting principles generally accepted in Canada
("GAAP"), following the same accounting policies and methods of computation as
used in the audited consolidated financial statements for the year ended
December 31, 2008. The interim unaudited consolidated financial statement note
disclosures do not include all disclosures applicable for annual audited
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, 2008.
FUTURE ACCOUNTING CHANGES
Convergence with International Financial Reporting Standards
Canada's Accounting Standards Board has confirmed January 1, 2011 as the
effective date for the convergence of Canadian GAAP to International Financial
Reporting Standards ("IFRS"). The Company will be required to begin reporting
under IFRS in the first quarter of 2011 with comparative data for the prior
year. IFRS uses a conceptual framework similar to Canadian GAAP; however, there
could be significant differences in recognition, measurement and disclosures
that will need to be addressed.
The Company has established a project team to review the adoption of IFRS and
its impact on financial reporting software, bank covenants, business contracts
and internal controls over financial reporting and to provide regular updates to
the Audit Committee.
3. PROPERTY AND EQUIPMENT
March 31, 2009 December 31, 2008
-----------------------------------
Property and equipment $ 442,139 $ 410,394
Accumulated depletion and depreciation (130,617) (119,450)
-----------------------------------
$ 311,522 $ 290,944
-----------------------------------
-----------------------------------
At March 31, 2009, the depletion calculation excluded unproved properties of
$23.9 million (December 31, 2008 - $23.3 million) and included future
development costs of $126.3 million (December 31, 2008 - $140.3 million).
4. INVESTMENTS
March 31, 2009 December 31, 2008
----------------------------------
Investment in Storm Gas Resource Corp. $ 9,717 $ 9,717
Investment in Storm Ventures
International Inc. 10,525 10,525
----------------------------------
$ 20,242 $ 20,242
----------------------------------
----------------------------------
The Company holds a 22% interest in a private company, Storm Gas Resource Corp.
and accounts for its holding using the equity method.
The Company also has a 6% interest in another private company, Storm Ventures
International Inc., which is accounted for using the cost method as the
ownership position does not meet the requirements for equity accounting.
5. BANK INDEBTEDNESS
The Company has an extendible revolving bank facility in the amount of $120
million (December 31, 2008 - $110 million), based on the Company's producing
reserves. The revolving facility is available to the Company until April 30,
2010, but may be extended at the Company's request until April 29, 2011, 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 paid on the revolving facility at
banker's acceptance rates plus a stamping fee. Security comprises a floating
charge demand debenture on the assets of the Company.
6. 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 estimated undiscounted amount required to
settle the Company's asset retirement obligations is approximately $13.7 million
(December 31, 2008 - $13.0 million), which will be paid over the next 23 years,
with the majority of costs paid between 2015 and 2031. A credit adjusted
risk-free rate of eight percent was used to calculate the present value of the
asset retirement obligations, amounting to $7.6 million (December 31, 2008 -
$7.3 million).
The following table provides a reconciliation of the carrying amount of the
obligation associated with the retirement of oil and gas properties:
----------------------------------------------------------------------------
Three months ended Year ended
March 31, 2009 December 31, 2008
----------------------------------------------------------------------------
Asset retirement obligation, beginning
of period $ 7,259 $ 6,918
----------------------------------------------------------------------------
Liabilities incurred 254 108
----------------------------------------------------------------------------
Liabilities disposed - (255)
----------------------------------------------------------------------------
Accretion expense 119 488
----------------------------------------------------------------------------
--------------------------------------
Asset retirement obligation, end of
period $ 7,632 $ 7,259
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. FUTURE INCOME TAXES
The future income tax liability is based on the excess of the accounting amounts
over the related tax bases of the Company's property and equipment, asset
retirement obligation and share capital.
The Company has tax pools associated with property and equipment, for accounting
purposes, of approximately $220 million as well as capital losses of
approximately $10 million, all of which are not subject to expiry.
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:
March 31, 2009 March 31, 2008
----------------------------------
Statutory combined federal and
provincial income tax rates 29% 30%
Expected income taxes $ 423 $ 2,712
Add (deduct) the income tax
effect of:
Stock-based compensation 117 101
Rate adjustments (452) (234)
Other 94 1
----------------------------------
Future Income Tax $ 182 $ 2,580
----------------------------------
----------------------------------
The significant components of the future income tax liability are as
follows:
March 31, 2009 December 31, 2008
-----------------------------------
Property and equipment $ 25,525 $ 25,331
Asset retirement obligation (2,091) (2,033)
Share issue costs (637) (423)
-----------------------------------
Future income tax liability $ 22,797 $ 22,875
-----------------------------------
-----------------------------------
8. 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, 2008 44,703 $ 88,013
Issuance of common shares (i) 1,850 19,610
Share issue costs (net of income tax benefit) (675)
---------------------------
Balance as at March 31, 2009 46,553 $ 106,948
---------------------------
---------------------------
(1) On March 6, 2009, 1,850,000 common shares were issued at a price of
$10.60 per share for total proceeds of $19,610,000, before commission
and expenses.
Stock Based Compensation Plans
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 3,700,000 common shares have
been reserved for issuance. Details of the options outstanding at March 31, 2009
are as follows:
----------------------------------------------------------------------------
Weighted
Average
Number of options Exercise Price
Outstanding at December 31, 2008 2,267 $ 6.03
Issued during period 153 $ 11.84
----------------------------------------------------------------------------
Outstanding at March 31, 2009 2,420 $ 6.40
----------------------------------------------------------------------------
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 $3.61 266 0.9 $ 3.33 220 $ 3.27
$3.91 to $5.71 1,299 2.0 $ 5.46 721 $ 5.36
$6.03 to $8.57 694 3.5 $ 8.06 195 $ 7.81
$9.62 to $12.03 161 4.8 $ 11.81 2 11.40
------------------------------------------------------------
2,420 2.5 $ 6.40 1,138 $ 5.39
------------------------------------------------------------
------------------------------------------------------------
Using the Black-Scholes pricing model, the weighted average fair value of the
options granted in 2009 was estimated to be $3.70 (2008 - $8.68), using
risk-free interest rates of 2.5 %, volatility of 40% and an expected average
life of 30 months. The amortized cost of the options is charged as stock based
compensation in the consolidated statement of income with an equivalent offset
to contributed surplus.
9. PER SHARE AMOUNTS
Three months Three months
ended ended
March 31, 2009 March 31, 2008
--------------------------------
Basic
Net income per share $ 0.03 $ 0.14
Weighted average number of shares
outstanding 45,216 44,586
Diluted
Net income per share $ 0.03 $ 0.14
Weighted average number of shares
outstanding 46,260 45,685
The reconciling items between basic and diluted weighted average common
shares are stock options described in Note 8.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash working capital
Three months Three months
ended March 31, ended March 31,
2009 2008
---------------------------------
Accounts receivable $ 4,119 $ (2,421)
Prepaid and other costs (271) (652)
Accounts payable and accrued liabilities (7,742) 4,766
---------------------------------
Change in non-cash working capital $ (3,894) $ 1,693
---------------------------------
---------------------------------
Relating to:
Operating activities $ 913 $ (2,638)
Financing activities - -
Investing activities (4,807) 4,331
---------------------------------
$ (3,894) $ 1,693
---------------------------------
---------------------------------
Interest paid during the period $ 578 $ 1,061
---------------------------------
---------------------------------
Income taxes paid during the period $ - $ -
---------------------------------
---------------------------------
11. FINANCIAL INSTRUMENTS
The Company holds various 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 establishing the Company's risk management framework. In
certain circumstances, for example, hedging of future production revenue, the
Board has established policies and 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 consolidated balance sheet
consist of accounts receivable, bank indebtedness, accounts payable and accrued
liabilities and unrealized financial instrument provision. The fair value of
these financial instruments approximates their carrying amounts.
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 this concentration of credit risk to be limited, 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. Nevertheless, the recent widespread disruption of credit
markets exposes the Company to greater credit risks, necessitating greater
vigilance regarding provision of credit to customers and to joint venture
partners.
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 of future cash flow.
These contracts reduce the fluctuation in production revenue by fixing prices of
future deliveries of oil and natural gas. Such arrangements are made in
accordance with the Company's risk management policy and the Company does not
use these instruments for trading or speculative purposes. The Company formally
documents all relationships between derivative instruments and hedged items, as
well as the risk management objectives and strategy for undertaking hedge
transactions. Realized gains and losses on these contracts are recognized as
revenue in the same period in which the revenues associated with the hedged
transactions are recognized. The Company also assesses, both at the contract's
inception and on a ongoing basis, whether the instruments that are used are
highly effective in offsetting the changes in fair values or cash flows of
hedged items. In the event that a derivative does not meet the designation or
effectiveness criterion, the financial instrument is valued on a mark-to-market
basis and the resulting gain or loss is recognized in income.
For the three months ended March 31, 2009, the Company realized a loss on
financial instruments of $52,000 (2008 - $nil) which is recorded in production
revenues.
As at March 31, 2009, Storm has the following derivative contracts in place,
which do not meet the hedge accounting criteria, and therefore, the unrealized
mark-to-market loss of $0.6 million is recognized in the financial statements:
Volume Price Term
------- ------- ------
Fixed price financial
sale
350 Bbls/d $59.40 / Bbl April 1, 2009 - June 30, 2009
Costless Collars
350 Bbls/d $60.00 - $65.00 / Bbl July 1, 2009 - Sept 30, 2009
350 Bbls/d $60.00 - $70.00 / Bbl Oct 1, 2009 - Dec 31, 2009
Interest rates
Interest on the Company's revolving bank facility varies with changes in
interest rates, 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, 2009 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, 2009, the Company had no contracts
in place to reduce foreign exchange risk.
Sensivities
Using the Company's actual production volumes, royalty rates, income tax rates
and debt levels for the first quarter of 2009 and 2008, the estimated after-tax
effects that changes in certain factors would have on net income and net income
per share is as follows:
2009 2008
Change in net Change in net
Change in income per Change in income per
Factor net income share net income share
----------------------------------------------------------------------------
$US 1.00/bbl change in
the price of WTI $ 80,000 $0.00 $ 50,000 $0.00
$0.10/mcf change in the
price of natural gas $225,000 $0.00 $171,000 $0.00
1% change in the interest
rate $603,000 $0.01 $549,000 $0.01
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 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, cost 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.
12. CAPITAL MANAGEMENT
Capital management is fundamental to the Company's objective of cost-effective
production growth, while simultaneously replacing continuous production
declines. The Company's capital comprises shareholders' equity, bank
indebtedness and working capital. Capital management 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 uses a non-GAAP
measurement of net debt to cash flow to measure and control debt levels during
the fiscal year. This measurement is established as follows:
----------------------------------------------------------------------------
As at As at
March 31, 2009 December 31, 2008
----------------------------------------------------------------------------
Current assets $13,342 $17,190
----------------------------------------------------------------------------
Accounts payable and accrued liabilities 26,334 34,076
----------------------------------------------------------------------------
----------------------------------
Working capital deficiency 12,992 16,886
----------------------------------------------------------------------------
Bank indebtedness 84,894 81,904
----------------------------------------------------------------------------
----------------------------------
Net debt 97,886 98,790
----------------------------------------------------------------------------
----------------------------------
Annualized funds from operations for the
period $54,880 $87,490
----------------------------------------------------------------------------
Net debt to non-GAAP funds from operations 1.8 : 1 1.1 : 1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The above measurement 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 credit availability is based on the Company's producing reserves.
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. The Company's bankers are
entitled to complete a year-end and a mid-year evaluation of the Company's
borrowing base, which, in circumstances of falling commodity prices, negative
changes to the Company's operating activities, or credit limitations affecting
the Company's banking syndicate, may result in a decrease in the line of credit
available to the Company.
From time to time the Company may enter into hedging arrangements if capital
programs or acquisition costs 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.
Increased debt levels arising from acquisitions, or capital programs exceeding
cash flow, may be addressed by reduced capital expenditures, disposal of
non-core assets or the issue of common shares.
13. COMMITMENTS
The Company has the following fixed term commitments relating to its
on-going business:
----------------------------------------------------------------------------
2009 2010 2011 2012 2013
----------------------------------------------------------------------------
Lease of premises $ 811 $ 825 $ 838 $ 838 $ 419
----------------------------------------------------------------------------
Equipment leases 164 101 62 5 -
----------------------------------------------------------------------------
Gas transportation and 2,235 1,437 1,146 599 198
processing commitments
----------------------------------------------------------------------------
Total $ 3,210 $ 2,363 $ 2,046 $ 1,442 $ 617
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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