Storm Resources Ltd. (TSX VENTURE:SRX)
Storm has also filed its unaudited consolidated condensed interim financial
statements as at September 30, 2012 for the three and nine months then ended
along with the Management's Discussion and Analysis ("MD&A") for the same
period. This information appears on SEDAR at www.sedar.com and on Storm's
website at www.stormresourcesltd.com.
Selected financial and operating information for the three and nine months ended
September 30, 2012 appears below and should be read in conjunction with the
related unaudited consolidated condensed interim financial statements and MD&A.
Highlights
Thousands of Cdn$,
except volumetric Three Months Three Months Nine Months Nine Months
and per-share to Sept. 30, to Sept. 30, to Sept. 30, to Sept. 30,
amounts 2012 2011 2012 2011
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FINANCIAL
Oil sales 6,702 498 15,318 1,729
Gas sales 1,841 831 4,653 2,243
NGL sales 1,088 153 3,869 427
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Production
revenue(2) 9,631 1,482 22,840 4,399
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Funds from
operations(1) 4,765 396 8,371 1,165
Per share - basic
($) 0.08 0.02 0.15 0.04
Per share - diluted
($) 0.08 0.02 0.15 0.04
Net income (loss) (3,586) (1,023) (4,254) (1,906)
Per share - basic
($) (0.07) (0.04) (0.08) (0.07)
Per share - diluted
($) (0.07) (0.04) (0.08) (0.07)
Field capital
expenditures, net
of dispositions (3,925) 8,394 5,504 20,108
Net (debt)/working
capital (42,511) 4,054 (42,511) 4,054
Weighted average
common shares
outstanding (000s)
Basic 61,824 26,377 54,134 26,377
Diluted 61,824 26,377 54,134 26,377
Common shares
outstanding (000s)
Basic 61,824 26,377 61,824 26,377
Fully diluted 64,547 28,391 64,547 28,391
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OPERATIONS
Oil equivalent (6:1)
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Barrels of oil
equivalent (000s) 219 47 566 126
Barrels of oil
equivalent per day 2,380 511 2,065 462
Average selling
price (Cdn$ per
Boe)(2) 43.96 31.50 40.33 34.91
Oil Production
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Barrels (000s) 77 5 179 18
Barrels per day 838 58 655 66
Average selling
price (Cdn$ per
barrel)(2) 86.75 92.66 85.31 96.30
Gas production
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Thousand cubic feet
(000s) 741 239 2,065 618
Thousand cubic feet
per day 8,058 2,595 7,539 2,263
Average selling
price (Cdn$ per
Mcf) 2.49 3.48 2.25 3.63
NGL Production
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Barrels (000s) 18 2 42 5
Barrels per day 199 20 154 19
Average selling
price (Cdn$ per
barrel) 59.44 81.44 67.90 84.00
Wells drilled
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Gross 3.0 2.0 4.0 2.0
Net 2.2 1.2 3.2 1.2
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(1) Funds from operations and funds from operations per share are non-GAAP
measurements. See discussion of Non-GAAP Measurements on page 8 of the
MD&A and the reconciliation of funds from operations to the most
directly comparable measurement under GAAP, "Cash Flows from Operating
Activities", on page 18 of the MD&A.
(2) Includes hedging gains.
President's Message
THIRD QUARTER 2012 HIGHLIGHTS
-- Production increased by 365% from the year ago period to average 2,380
Boe per day which included 1,037 barrels per day of crude oil plus
natural gas liquids ("NGL") and 8.1 Mmcf per day of natural gas. The
year-over-year improvement is due to production at Umbach increasing by
260 Boe per day, from the business combination with Bellamont
Exploration Ltd. ("Bellamont") which added 1,400 Boe per day, and from
the acquisition of Storm Gas Resource Corp. which added 255 Boe per day.
-- Production in the quarter was reduced by 470 Boe per day as a result of
natural gas wells shut in during early May due to the decline in the
price of natural gas.
-- On a per-share basis, quarterly production of 39 Boe per day per million
shares outstanding represents a year-over-year increase of 98%.
-- At Umbach, the fourth horizontal well (60% working interest) commenced
production in late August and averaged 2.5 Mmcf per day gross raw gas in
September, or 290 net Boe per day. The fifth and sixth horizontal wells
(60% working interest) were drilled in the third quarter and both are
expected to commence production by late November.
-- A horizontal well (100% working interest) was drilled into the Grande
Prairie Dunvegan C oil pool and will commence production by mid-
November.
-- Funds from operations totaled $4.8 million or $0.08 per basic share
which is a 400% improvement from $0.02 per basic share in the year
earlier period. This was mainly due to the transaction with Bellamont
which increased the proportion of higher priced crude oil and NGL to 44%
of total production and offset a 28% decline in natural gas prices.
-- Funds from operations was $21.73 per Boe which is an increase of $6.13
per Boe from the second quarter as a result of higher oil and natural
gas prices plus a reduction in royalties, cash G&A and interest expense.
-- Capital investment of $11.7 million included $8.2 million for drilling
and completions plus $1.1 million at Grimshaw to initiate a pilot
waterflood.
-- Dispositions totaled $15.7 million including 20 Boe per day at Red Earth
for $2.4 million and 145 Boe per day at Mica for $13.3 million.
-- During the quarter, Storm realized proceeds totaling $2.5 million from
the sale of 1.5 million shares of Chinook Energy Inc. and 0.2 million
shares of Bridge Energy ASA.
-- At quarter end, Storm's debt and working capital deficiency was $42.5
million which is a reduction of $11.1 million from the previous quarter.
After including the value of Storm's investment in publicly listed
companies ($6.4 million at September 30), net debt was $36.1 million or
1.9 times annualized third quarter cash flow. Storm's bank line is $62.0
million.
-- A hedging gain of $0.6 million was realized as a result of fixed price
financial hedges that were put in place to protect the 2012 capital
investment program. Commodity price hedges currently include 450 barrels
of oil per day at an average of Cdn $104.95 per barrel until the end of
December, 2012 and 300 barrels of oil per day at an average floor price
of Cdn $93.10 per barrel for the first quarter of 2013.
OPERATIONS REVIEW
Storm has a focused asset base with an inventory of light oil exploitation
opportunities in the Grande Prairie Area and large land positions in resource
plays at Umbach and in the Horn River Basin ("HRB") which have multi-year
drilling upside.
Umbach, North East British Columbia
Storm's current land holdings at Umbach that are prospective for liquids rich
natural gas in the Montney formation total 105 gross sections, or 81 net
sections (58,000 net undeveloped acres). Production in the third quarter
averaged 414 Boe per day (27% liquids) at an operating netback of $15.80 per Boe
which is a 33% increase from production in the second quarter. Liquids recovery
was 61 Bbls per Mmcf with 46% being produced condensate plus pentanes recovered
during processing, 25% butane and 29% propane.
During the third quarter, the fourth horizontal well (60% working interest)
commenced production August 22nd and averaged 2.5 Mmcf per day gross raw gas in
September with the current rate being 2.0 Mmcf per day gross raw gas (235 net
Boe per day). Performance to date is consistent with earlier horizontal wells.
Also in the third quarter, the fifth and sixth horizontal wells (60% working
interest) were drilled and cased with both being drilled approximately 20 metres
lower in the Montney formation. Both have been completed with larger slickwater
fracture treatments and are expected to be tied in and producing by late
November.
In the fourth quarter, two more horizontal wells will be drilled (1.2 net) with
completion and tie-in of both planned for the first quarter of 2013.
Storm's activity in 2012 has been focused on drilling horizontal wells to
continue expanding the areal extent of the resource in the Montney formation and
to modify completion techniques to improve horizontal well flow rates and
reserves. On the fifth and sixth horizontal wells, the wellbores were drilled
lower in the Montney formation and the completions were modified by switching to
larger slickwater fracture stimulations with reduced spacing between fracture
treatments. Currently, four horizontal wells are producing from the Montney
formation with production history for each horizontal being periodically updated
and shown in the presentation on Storm's website www.stormresourcesltd.com. To
date, the gross cost to drill and complete each horizontal has averaged $5.3
million. As the focus transitions from resource delineation to development in
2013, horizontal well costs are expected to decline by drilling wells from
common pads and by eliminating logged, vertical pilot holes.
Grande Prairie Area, North West Alberta and North East British Columbia
Other than production from the since disposed of Mica property, production in
this area comes from properties acquired through the transaction with Bellamont
which closed March 23rd. Third quarter production averaged 1,540 Boe per day
(60% oil plus NGL) at an operating netback of $31.15 per Boe. Production in the
third quarter was reduced by 100 Boe per day due to numerous mechanical failures
in July and by 470 Boe per day associated with natural gas wells that were shut
in during May due to low natural gas prices. The sale of the Mica property was
completed on October 18th with net proceeds at closing totaling $13.3 million
(averaged 145 Boe per day in the third quarter). Excluding the Mica property,
current production has increased to approximately 2,100 Boe per day as a result
of reactivating the shut-in natural gas wells in early October and from
re-equipping wells to reduce downtime caused by equipment failures.
Third quarter activity included drilling and completing a horizontal well in the
Grande Prairie Dunvegan C light oil pool which is expected to begin producing in
mid-November. At Grimshaw, water injection commenced into a horizontal well in
the Montney A pool in late August. In July, downhole equipment failures were
experienced on seven producing wells with all of them being re-equipped with
different pumping systems. Significant progress was made in the quarter on
operating cost reductions with realized savings now totaling approximately $2
million per year from electrifying well sites, purchasing surface equipment to
eliminate processing fees, shutting in or disposing of uneconomic wells,
returning rental equipment and eliminating water trucking and disposal. No
activity is planned for this area in the fourth quarter of 2012.
The Grande Prairie area is relatively mature with shallower declines
(approximately 20% per year) and a higher proportion of light oil and NGL
production resulting in a higher operating netback. There is a large inventory
of light oil opportunities in this area including 30 horizontal wells to be
drilled targeting light oil in the Doe Creek, Dunvegan and Montney formations.
Additional upside is associated with initiating a waterflood in the Montney
formation at Grimshaw. The majority of cash flow from this area will be directed
to advancing exploitation of the Montney formation at Umbach, which is a larger
scale growth opportunity.
Horn River Basin, North East British Columbia
Storm's undeveloped land position in the HRB totals 135 sections at a 100%
working interest (87,700 net acres) and is prospective for natural gas from the
Muskwa, Otter Park and Evie/Klua shales. The resource in the Muskwa and Otter
Park shales is large with the best estimate of DPIIP in the core producing area
being 3.1 Tcf gross raw gas (evaluated by InSite Petroleum Consultants Ltd.
December 31, 2011). The core producing area is 30 gross sections in size (22% of
Storm's total land holdings in the HRB) and productivity has been proven across
the area with one horizontal well that has been producing for 20 months plus two
completed and tested vertical wells.
During the third quarter, production in the HRB averaged 426 Boe per day at an
operating netback of $6.08 per Boe. The first horizontal well (100% Storm) with
12 fracture stimulations is currently producing 3 Mmcf per day gross raw gas
with cumulative production since March 2011 being 2.7 Bcf gross raw gas. The
flow rate has been restricted by high pressure in the raw gas gathering pipeline
(field compression has not been installed). Significant improvements in
productivity and reserves are expected on future horizontals by increasing
fracture density (15 to 18 fracture stimulations per horizontal) and by
installing field compression.
With six years of remaining land tenure for the majority of Storm's lands not
yet proven to be productive, activity in the HRB is being deferred until natural
gas prices improve.
INVESTMENTS
At the end of third quarter, Storm had share ownership positions in two publicly
traded companies. The value of the share positions in the two public companies
totaled $6.4 million at the end of the quarter and these securities could
possibly be sold in the future with the proceeds being used to finance the
Company's capital programs.
Chinook Energy Inc. ("Chinook")
Storm holds 3.0 million shares of Chinook which is a TSX-listed oil and gas
exploration and production company (symbol 'CKE') based in Calgary with
operations focused in Tunisia and western Canada.
Bridge Energy ASA ("Bridge")
Storm holds 0.9 million common shares of Bridge (symbol 'Bridge' on the Oslo
Stock Exchange and 'BRDG' on the AIM Exchange, London), a Norwegian-based
exploration and production company.
OUTLOOK
Storm's 2012 guidance remains largely unchanged. Production in the fourth
quarter is forecast to be approximately 3,000 Boe per day (35% liquids) which is
an increase from prior guidance of 2,400 to 2,600 Boe per day (41% liquids). In
mid-October, the sale of the Mica property closed (145 Boe per day) and shut-in
natural gas wells at Grande Prairie were re-started adding 470 Boe per day.
Based on field estimates, production in October increased to 2,800 Boe per day.
Production will increase further in November with the tie-in of the fifth and
sixth horizontal wells at Umbach (60% working interest). Dispositions will
result in adjusted debt plus the working capital deficiency being reduced to
approximately $38 million at the end of 2012 from prior guidance of $50 million
(including the value of the publicly listed securities owned by Storm). There is
no change to capital investment in operations, estimated royalties, operating
costs and cash G&A.
2012 Guidance
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Bank credit facility $62.0 million
2012 year end adjusted debt plus working capital
deficiency (1) $38.0 million
2012 average operating costs $11 per Boe
2012 average royalty rate 12%
2012 operations capital, excluding dispositions $28.0 million
2012 net property dispositions $12.0 million
2012 corporate acquisitions $151.6 million
2012 cash G&A(2) $3.6 million
2012 exit or fourth quarter average production 3,000 Boe per day
(35% oil + NGL)
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(1) Includes value of publicly listed securities.
(2) Excludes $0.6 million of transaction costs which are required to be
expensed under IFRS.
Looking ahead to 2013, preliminary guidance includes capital spending of $36
million to drill 6 horizontal development wells (4.4 net) at Umbach and to
complete two horizontal wells (60% working interest) at Umbach that are being
drilled in the fourth quarter of 2012. Production in the fourth quarter of 2013
is forecast to increase to 4,000 to 4,300 Boe per day. With a 2013 natural gas
price at AECO of $3.25 per GJ and an Edmonton Par oil price of $84 per barrel,
this program would be funded with cash flow and the sale of non-core assets.
With forecast debt of $38 million at the end of 2012 (including public company
investments) and a bank line of $62 million, Storm retains the financial
flexibility to increase 2013 capital investment if supported by improved
drilling results or higher commodity prices.
Production performance of the properties acquired with the Bellamont transaction
that closed on March 23rd has improved significantly over the last three months.
This is primarily the result of operational improvements and re-equipping wells
in the second and third quarters to eliminate downtime caused by multiple
equipment failures. With relatively shallow declines and higher netbacks from a
higher proportion of crude oil and NGL production, the properties acquired with
the Bellamont transaction provide Storm with the 'free cash flow' to continue
funding exploitation of the large resource in the Montney formation at Umbach.
Although declining commodity prices resulted in less drilling activity and lower
growth in 2012 than what was initially expected, Storm has continued to advance
exploitation of the liquids rich Montney natural gas resource on its large land
position at Umbach. Liquids recoveries are exceeding 60 barrels per Mmcf sales
through a shallow-cut gas plant which greatly improves the netback and economics
at current low natural gas prices. Results continue to be encouraging and are
expected to improve on future horizontal wells as a result of modifying the
completions to use larger, slickwater fracture stimulations with tighter spacing
between fractures. If results at Umbach are supportive of doing so, development
may be accelerated with funding being provided by additional asset sales or from
unused capacity on the bank line. Longer term, Storm continues to retain
significant leverage to an improvement in natural gas prices through our
position in the Muskwa and Otter Park shales of the HRB.
Respectfully,
Brian Lavergne, President and Chief Executive Officer
November 13, 2012
Discovered-Petroleum-Initially-in-Place ("DPIIP") - is defined in the Canadian
Oil and Gas Evaluation Handbook ("COGEH") as the quantity of hydrocarbons that
are estimated to be in place within a known accumulation. DPIIP 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 DPIIP except for those portions identified as proved or probable
reserves.
Contingent Resources - are those quantities of petroleum estimated, as of a
given date, to be potentially recoverable from known accumulations using
established technology or technology under development, but which are not
currently considered to be commercially recoverable due to one or more
contingencies. Contingencies may include factors such as economic, legal,
environmental, political and regulatory matters, or a lack of markets. It is
also appropriate to classify as contingent resources the estimated discovered
recoverable quantities associated with a project at an early stage of
development. Estimates of contingent resources are estimates only; the actual
resources may be higher or lower than those calculated in the independent
evaluation. There is no certainty that the resources described in the evaluation
will be commercially produced.
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. 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.
Forward-Looking Information - This press release contains forward-looking
statements and forward-looking information within the meaning of applicable
securities laws. The use of any of the words "will", "expect", "anticipate",
"intend", "believe", "plan", "potential", "outlook", "forecast", "estimate" and
similar expressions are intended to identify forward-looking statements or
information. More particularly, and without limitation, this press release
contains forward-looking statements and information concerning: production;
drilling plans; reserve volumes; capital expenditures; royalties; financing;
commodity prices; and production, operating and general and administrative
costs.
The forward-looking statements and information in this press release are based
on certain key expectations and assumptions made by Storm, including: prevailing
commodity prices and exchange rates; applicable royalty rates and tax laws;
future well production rates; reserve and resource volumes; the performance of
existing wells; success to be expected in drilling new wells; the adequacy of
budgeted capital expenditures to carrying out planned activities; the
availability and cost of services; and the receipt, in a timely manner, of
regulatory and other required approvals. Although the Company believes that the
expectations and assumptions on which such forward-looking statements and
information are based are reasonable, undue reliance should not be placed on
these forward-looking statements and information because of their inherent
uncertainty. In particular, there is no assurance that exploitation of the
Company's undeveloped lands and prospects will result in the emergence of
profitable operations.
Since forward-looking statements and information address future events and
conditions, by their very nature they involve inherent risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors and risks. These include, but are not limited to the risks
associated with the oil and gas industry in general such as: operational risks
in development, exploration and production; delays or changes in plans with
respect to exploration or development projects or capital expenditures; the
uncertainty of reserve estimates; the uncertainty of estimates and projections
relating to reserves, production, costs and expenses; health, safety and
environmental risks; commodity price and exchange rate fluctuations; marketing
and transportation of petroleum and natural gas and loss of markets;
environmental risks; competition; ability to access sufficient capital from
internal and external sources; stock market volatility; and changes in
legislation, including but not limited to tax laws, royalty rates and
environmental regulations.
Readers are cautioned that the foregoing list of factors is not exhaustive.
Additional information on these and other factors that could affect the
operations or financial results of the Company are included or are incorporated
by reference in the company's MD&A for the three and nine months ended September
30, 2012.
The forward-looking statements and information contained in this press release
are made as of the date hereof and the Company undertakes no obligation to
update publicly or revise any forward-looking statements or information, whether
as a result of new information, future events or otherwise, unless so required
by applicable securities laws.
FOR FURTHER INFORMATION PLEASE CONTACT:
Storm Resources Ltd.
Brian Lavergne
President & CEO
(403) 817-6145
Storm Resources Ltd.
Donald McLean
Chief Financial Officer
(403) 817-6145
Storm Resources Ltd.
Carol Knudsen
Manager, Corporate Affairs
(403) 817-6145
www.stormresourcesltd.com
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