Storm Exploration Inc. Is Pleased to Announce Its Financial and Operating Results for the Year and Three Months Ended December 31, 2008
- Press Release
- Source: Storm Exploration Inc.
- On 6:20 am EST, Tuesday February 24, 2009
CALGARY, ALBERTA--(Marketwire - Feb. 24, 2009) - Storm Exploration Inc. (TSX:SEO - News) -
Related Quotes
| Symbol | Price | Change |
|---|---|---|
| SEO.TO | 12.53 | +0.03 |
Three Three
Consolidated Months Months Year Year
Highlights - Thousands ended ended ended ended
of $CDN, except volumetric December December December December
and per share amounts 31, 2008 31, 2007 31, 2008 31, 2007
--------------------------- --------- --------- -------- ---------
--------------------------- --------- --------- -------- ---------
Financial
Gas sales 28,875 19,366 115,210 (1) 78,327 (1)
NGL sales 2,542 1,937 11,782 5,566
Oil sales 3,935 4,127 20,821 13,726
Royalty Income 95 123 711 672
--------- --------- ------- -------
Production Revenue 35,447 25,553 148,524 98,291
--------- --------- ------- -------
Funds from operations (2) 20,432 13,233 87,490 51,943
Per share - basic ($) 0.46 0.30 1.96 1.20
Per share - diluted ($) 0.45 0.30 1.91 1.18
Net income 5,968 2,852 34,686 11,049
Per share - basic ($) 0.13 0.06 0.78 0.25
Per share - diluted ($) 0.13 0.06 0.76 0.25
Capital expenditures,
net of dispositions 35,342 17,094 94,954 93,890
Debt, including working
capital deficiency 98,790 84,681 98,790 84,681
Weighted average common
shares outstanding (000s)
Basic 44,702 44,518 44,654 43,449
Diluted 45,981 45,223 45,877 44,132
Common shares
outstanding (000s)
Basic 44,703 44,532 44,703 44,532
Fully Diluted 46,970 46,698 46,970 46,698
Operations
Oil Equivalent (6:1)
Barrels of oil
equivalent (000s) 751 551 2,554 2,108
Barrels of oil equivalent
per day 8,161 5,992 6,978 5,775
Average selling price
($CDN per BOE) 47.08 46.13 57.87 (1) 46.31 (1)
Royalties 19.5% 21.0% 21.0% 20.8%
Gas production
Thousand cubic feet (000s) 3,857 2,864 13,209 11,058
Thousand cubic feet per day 41,919 31,133 36,089 30,296
Average selling price
($CDN per mcf) 7.49 6.76 8.72 (1) 7.08 (1)
NGL Production
Barrels (000s) 45 27 140 84
Barrels per day 489 289 383 230
Average selling price
($CDN per barrel) 56.52 72.94 83.97 66.44
Oil Production
Barrels (000s) 63 47 212 181
Barrels per day 686 514 580 496
Average selling price
($CDN per barrel) 62.35 87.29 98.06 75.82
Wells drilled
Gross 9.0 6.0 29.0 25.0
Net 9.0 5.1 27.8 20.6
(1) Includes results of hedging activities
(2) Funds from operations is a non-GAAP measurement. See MD&A.
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.
HIGHLIGHTS for the Year and Quarter Ended December 31, 2008
- Average 2008 production increased to 6,978 Boe per day, representing growth of 21% from average production of 5,775 Boe per day in 2007. This is a per share increase of 17% using basic shares outstanding.
- Average fourth quarter production increased to 8,161 Boe per day, representing year over year growth of 36% from average production of 5,992 Boe per day in the fourth quarter of 2007. On a per share basis, the increase is 35%, using basic shares outstanding for each period.
- For the year, Storm drilled 29 wells (27.8 net) which resulted in 21 gas wells (19.8 net), one dry hole (1.0 net) and seven oil sands evaluation wells at Surmont for a 97% success rate. This includes 11 horizontal Montney gas wells (10.7 net) that were in drilled in the Parkland area. In the fourth quarter, all nine wells drilled were successful, resulting in three oil sands evaluation wells (3.0 net) at Surmont, and six (6.0 net) gas wells, including five horizontal Montney gas wells.
- Net income for the year was $34.7 million or $0.76 per diluted share, an increase of 304% from net income of $0.25 per diluted share in 2007. Increased earnings were primarily due to higher commodity prices and a $3.5 million non-cash dilution gain on our investment in a private company, Storm Gas Resource Corp. Charges for depletion, depreciation and amortization at $16.48 per Boe were relatively unchanged year-over-year but, are expected to decline in 2009 given significant growth in total proved reserves.
- Cash flow for the year totaled $87.5 million, or $1.91 per diluted share, an increase of 62% from cash flow of $1.18 per diluted share in the prior year. Approximately half of this increase was the result of production growth.
- Capital investment totaled $35.3 million in the fourth quarter and $95 million for the year. This is net of dispositions totaling $5 million and excludes Storm's equity investments in Storm Gas Resource Corp. ("SGR") and Storm Ventures International Inc ("SVI") which amounted to $7.4 million, in aggregate, in 2008.
- The 2008 cash flow netback was $34.53 per Boe, an increase of 40 % from the prior year amount of $24.65 per Boe. Total cash costs including operating expense, interest expense, transportation costs, and cash general and administrative costs declined 7% from the previous year to average $11.47 per Boe in 2008. Operating costs were $6.68 per Boe in 2008, a decline of 6% from the previous year. Notably, the operating cost in the fourth quarter of 2008 declined even further, to average $5.84 per Boe.
- Storm's bank debt and working capital deficiency at the end of the year was $98.8 million, or 1.2 times annualized fourth quarter cash flow. This represents a year-over-year increase in total debt of $14 million with the increase being primarily to fund $11 MM spent on facilities and associated pipelines at Parkland.
- Construction of the second facility at Parkland was started in November, 2008 and the facility was completed and operational on January 14, 2009. Initial capacity of this facility is 12 mmcf per day which increases our total capacity at Parkland to 45 mmcf per day with current gross raw gas throughput being 36 mmcf per day.
- At December 31, 2008, total proved reserves increased by 109% to 26.4 million Boe ("Mmboe"): and total proved plus probable reserves grew by 105% to 41.9 Mmboe. Using basic shares outstanding, growth per share amounted to 109% for total proved reserves and 104% for total proved plus probable reserves.
- The all-in cost to add reserves was $12.99 per Boe for proved reserves and $11.10 per Boe for proved plus probable reserves (including the change in future development costs, acquisitions, dispositions and revisions). Using the cash flow netback of $34.53 per Boe for 2008, Storm generated a recycle ratio of
2.6 for total proved reserve additions and 3.1 for total proved plus probable reserve additions.
- Estimated net asset value per fully diluted share at December 31, 2008 was $16.67, a year-over-year increase of 110% over 2007, using the pre-tax present value of proved and probable reserves discounted at 10% using December 31, 2008 forecast prices.
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 5,592 Boe per day in the fourth quarter. Average production in 2008 was 4,219 Boe per day, an increase of 63% from average 2007 production of 2,592 Boe per day. Current production is approximately 6,000 Boe per day with approximately 500 Boe per day shut-in to maximize netbacks from the area.
We were very active at Parkland in the fourth quarter of 2008:
- Drilled one successful vertical Montney step-out (1.0 net). This well has been completed with a final flow test rate of 2 mmcf per day and is expected to be tied in before the end of March.
- Drilled five horizontal Montney development wells (5.0 net). Two of these were completed and tied in before the end of 2008 and averaged approximately 6 mmcf per day in their first month of production.
- Started construction of the second gas processing facility in November, 2008 with the facility being completed and operational on January 14, 2009. Initial capacity of this facility is 12 mmcf per day which increases our total capacity at Parkland to 45 mmcf per day with current gross raw gas throughput being approximately 36 mmcf per day.
In 2009, our activity will continue to be focused on our Parkland property where we plan to drill nine horizontal development wells (9.0 net) in our Montney discovery, five vertical Montney step-outs (4.6 net), and one exploratory Montney vertical well (1.0 net) to further evaluate a new pool Montney lead. To date in the first quarter, we have drilled one successful vertical step-out to our Montney discovery and have completed three standing horizontals drilled in the fourth quarter of 2008. One of these was pipeline connected in mid-January and is currently producing 3.5 mmcf per day while the other two have been completed with both having final restricted test rates of 9 mmcf per day. One more vertical step-out and one horizontal Montney development well remain to be drilled in our first quarter program. As well, we recently negotiated the termination of the farm-in agreement we entered into last year in the Sunrise area.
Based on the Paddock Lindstrom & Associates Limited year end reserve evaluation, Gross Original Gas in Place(1) ("OGIP") is now estimated to be 409 Bcf assuming an areal extent of 11 sections (7,040 acres) with log analysis from 13 successful vertical gas wells showing average net pay of 37 metres (average gross pay of 87 metres) and average porosity of 7.7% . Net pay has been determined primarily using gas effect on logs which is evidenced by cross-over on limestone scale neutron-density logs; this is approximately equivalent to a 6% sandstone scale cut-off. Using a 3% sandstone scale cut-off, Storm's internal management estimate of gross original gas in place(1) would increase to 770 Bcf with average net pay being 87 metres and with 6.4% average porosity. Geological mapping suggests that there is still potential to further expand the size of our discovery which could cover as many as 15 sections. As a result, we plan to drill five more vertical step-outs in 2009 with two of these in the first quarter.
Development of our Montney discovery continues to progress as expected. We are currently producing 27 Mmcf per day of gross raw gas from 11 horizontal Montney gas wells plus 3 Mmcf per day of gross raw gas from 10 Montney vertical wells. Two more horizontal wells drilled late last year have been completed, tested, pipeline connected, and are expected to come on production by the end of March (will be turned on as needed to maintain production from the area). First year rates from our producing horizontal wells are averaging approximately 2.2 Mmcf per day of raw gas which represents 400 Boe per day of sales per well.
We expect to recover 50% of OGIP by drilling four horizontal wells per section which represents an undrilled inventory of 32 horizontal wells (three years of activity). Our inventory of undrilled horizontal wells will increase should our vertical well step-out program continue to be successful in further expanding the size of the pool and OGIP. Note that results from our vertical wells would suggest that reservoir quality and thickness does vary across the pool which will result in the need for increased horizontal well density in areas of thicker reservoir as well as in areas of lower reservoir quality in order to ensure that the recovery of the resource in place is maximized.
As a result of the success of our horizontal Montney development program, we have further expanded our infrastructure at Parkland and will continue to do so in 2009. The second facility was completed and operational January 14, 2009 with 12 Mmcf per day of initial capacity at a lower than expected cost of $11 million, which includes $1.5 million to twin parts of our gathering system. Approximately $8 million of the total cost was incurred in 2008 with the remaining $3 MM incurred in the first quarter of 2009. This second facility is designed to be expandable to 50 mmcf per day of capacity at a total cost $10 to $15 million by electrifying, adding three more compressors, and installing either a second dehy tower or a liquids extraction plant. We plan to invest an additional $5 million in this facility in the third quarter of 2009 for electrification and to install a second compressor which will increase the capacity to 25 to 30 Mmcf per day. We are currently evaluating whether or not to proceed with the installation of a liquids extraction plant ($5 million) at this facility in the fall of 2009. This would allow us to double natural gas liquids recovery while reducing shrinkage due to fuel gas consumption which will significantly increase total reserves on a Boe basis.
Financial results from our Parkland property continue to improve. Operating costs at Parkland averaged $3.75 per Boe in the fourth quarter and $3.98 per Boe in 2008. The field netback during the fourth quarter was $33.03 per Boe and was $41.28 per Boe for the year.
(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 1,706 Boe per day in the fourth quarter and production in 2008 averaged 1,816 Boe per day which is a decline of 11% from average 2007 production of 2,052 Boe per day. Current production is approximately 1,600 Boe per day.
During 2008, one standing well (1.0 net) was recompleted and tied in and is currently producing 50 Boe per day. Despite the lack of activity, declines continue to moderate in this area which is indicative of the higher quality nature of this more mature asset.
Cabin-Kotcho-Junior Area, North East British Columbia
Net production from this area averaged 807 Boe per day in the fourth quarter while average production of 884 Boe per day during 2008 represents a 12% decline from average production of 1,010 Boe per day in the year earlier period. Current production is approximately 800 Boe per day.
This winter, two vertical wells (0.8 net) will be drilled in the Horn River Basin with one being cored, completed and flow tested in the Muskwa and Otter Park shales. If commercial test rates are obtained, one to three horizontal wells may be drilled later in 2009 or in 2010 to determine the economic viability of horizontal development.
Since early 2008, Storm has jointly acquired 43 gross sections of undeveloped land in the Horn River Basin 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 being drilled this winter are part of a central project area which encompasses 25 gross sections (10.0 net) containing an estimated 1.9 Tcf of gross original gas in place (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 core from one of this winter's test wells should also 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 original gas in place. The economic potential associated with exploiting these shales is not expected to be known until after we have drilled several horizontal wells and have longer term production data which will give us an estimate of potential full-cycle capital costs as well as an estimate of the expected recoverable reserves. This is likely at least two years away, making this an early stage project with a high level of associated risk.
Surmont Oil Sands Lease, Alberta
An evaluation of the estimated bitumen contingent resource contained in the McMurray formation on Storm's 3,840 acres (6 sections) of oil sands leases was prepared by McDaniel & Associates Consultants Ltd. effective July 1, 2008. The best case estimate of discovered bitumen resource (defined as bitumen in place exploitable using a Steam-Assisted-Gravity Drainage or SAGD process) is 312 million barrels with the best estimate of contingent bitumen resources recoverable using a SAGD process, being 113 million barrels.
In December, 2008, Storm drilled an additional three oil sands evaluation wells (3.0 net) to further evaluate and expand estimated bitumen in place. All three wells were drilled on one section where no wells had been drilled previously. Average net bitumen pay of 22 metres was encountered based on log analysis by Storm's technical staff which has the potential to increase the area of exploitable bitumen by 15% to 20%. Storm has no plans at present to initiate development of this resource and no assurance can be provided that this resource will ever be exploited with a conventional SAGD project.
STORM GAS RESOURCE CORP.
Storm Gas Resource Corp ('SGR') was formed in June 2007, to pursue unconventional gas opportunities in the Horn River Basin 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 balance sheet showed a cash position of approximately $30 million and the land position in the Horn River Basin totaled 106 gross sections or 62 net sections. SGR's focus in the short term continues to be directed towards expanding its Devonian shale land position in the Horn River Basin, and to test the productivity of its land position with vertical wells as well as horizontal wells. This winter, two vertical test wells (60% SGR, 40% Storm) are planned in the Horn River Basin and, if flow testing results in commercial gas rates, one to three horizontal wells may be drilled later in 2009 or in 2010 in order to evaluate the economic viability of a larger scale development. SGR is also looking to identify other areas with unconventional gas potential where undeveloped land can be acquired at reasonable cost. This is a longer term investment and we don't expect to have an indication regarding the 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. This includes an additional 200,000 shares which Storm acquired as part of a rights offering which closed in August 2008 and raised $31 million from existing shareholders at $6.25 per share. Our share position has a value of $28 million or $0.60 per fully diluted Storm share using the rights offering price of $6.25 per share.
SVI recently concluded the acquisition of Silverstone Energy Ltd. This involved the exchange of 1.67 shares of SVI for each share of Silverstone not already owned by SVI. The merged entity has 76.2 MM shares outstanding, 36 million Boe of proved plus probable reserves (as evaluated by Sproule Associates Limited and Paddock Lindstrom & Associates Ltd.), estimated current production of 2,000 Boe per day primarily from the Victoria gas discovery in the North Sea which is currently producing approximately 12 mmcf per day. We understand that the majority of SVI's activity over the next year will be focused on advancing three major development projects including the Vulcan East discovery in the North Sea with potentially 150 BCF of original gas in place, the Remada Sud light oil discovery in Tunisia with Stock Tank Original Oil in Place "STOOIP" estimated at 220 million barrels and the Cosmos fallow discovery offshore Tunisia with estimated STOOIP of 25 million barrels. In addition to these development projects, SVI has accumulated a land position containing multiple higher impact, larger scale prospects with one being tested in the first half of 2009 at Jenein Centre in Tunisia. We also understand that obtaining a listing as a public company on the TSX to provide liquidity to existing shareholders had been contemplated prior to the merger with Silverstone, however, current market conditions have necessitated that this be delayed.
RESERVES AT DECEMBER 31, 2008
Storm's year-end reserve evaluation effective December 31, 2008 was prepared by Paddock Lindstrom & Associates Limited ('Paddock'). Paddock has evaluated all of Storm's crude oil, NGL and natural gas reserves. The Paddock price forecast at December 31, 2008 was used to determine all estimates of future net revenue (also referred to as net present value or NPV). Storm's Reserves Committee, comprised of independent and appropriately qualified directors, has reviewed and approved the evaluation prepared by Paddock, and the report of the Reserves Committee has been accepted by the Company's Board of Directors.
Summary:
- Total proved reserves grew by 109% to 26.4 Mmboe at December 31, 2008, an increase of 109% per share from the year earlier, using basic shares outstanding for each year.
- Total proved plus probable reserves grew by 105% to 41.9 Mmboe at December 31, 2008, an increase of 104% per share from the year earlier, using basic shares outstanding for each year.
- Total proved plus probable reserves increased by 9.4 Boe for each Boe that was produced during 2008 (840% reserve replacement on a total proved plus probable basis).
- The total proved finding and development cost as per NI 51-101 requirements, was $12.74 per Boe: total proved plus probable finding and development cost, as per NI 51-101 requirements, was $10.38 per Boe. Changes to future development costs (FDC) of properties were included in the calculation and the effect of acquisitions, divestitures, and revisions were excluded. Comparable amounts for the prior year were $17.41 and $10.77 per Boe.
- The all-in cost for adding proved reserves was $12.99 per Boe, and for adding proved plus probable reserves was $11.10 per Boe. The all-in calculation reflects the result of Storm's entire capital investment program as it takes into account the effect of acquisitions, dispositions, revisions, as well as the change in future development costs. Comparable amounts for the prior year were $21.40 and $13.64 per Boe.
- The net present value of total proved plus probable reserves, discounted at 10% before tax, amounted to $755 million, an increase of 105% year-over-year. The net present value of total proved reserves amounted to $504 million, or 67% of the net present value of total proved plus probable reserves. Increased net present value of reserves came from growth in both proved and probable reserves, as well as a 9% increase in the forecast AECO natural gas price used in the first three years of the evaluation.
- During 2008 non core properties with proved and probable reserves of 209 Mboe were sold at an average price of $36.84 per Boe.
- Future development costs were $140 million on a proved basis and $219 million on a total proved plus probable basis. A breakdown of these amounts is provided below:
---------------------------------------------
Total Proved Total Proved
plus Probable
----------------------------------------------------------------------------
Development of Montney
discovery at Parkland $ 114 million $ 182 million
Parkland 20 horizontal wells 32 horizontal wells
----------------------------------------------------------------------------
Completion and
expansion of $5.5 million to complete $ 5.5 million to complete
2nd Parkland $ 7.5 million expansion $9 million expansion to 40
facility to 25 mmcf/d capacity mmcf/d capacity
----------------------------------------------------------------------------
Other $ 13 million $ 22 million
----------------------------------------------------------------------------
$ 140 million $ 219 million
---------------------------------------------
Storm plans to drill nine of the proved undeveloped horizontal Montney gas wells in 2009.
- The Montney formation at Parkland was assigned 20.8 Mmboe of proved reserves and 33.8 Mmboe of proved plus probable reserves. This reserve assignment is based on original gas in place in the Montney formation of 312 Bcf for proved reserves (area of 8 sections), with a recovery factor of 40%, and 409 Bcf for proved plus probable reserves (area of 11 sections), with a 50% recovery factor. Ultimate recoverable raw gas averaging 3.4 Bcf (610 Mboe sales) was assigned to the 20 horizontal wells in the proved evaluation, while an average of 4.2 Bcf (750 Mboe sales) was assigned to the 32 horizontal wells in the proved plus probable evaluation.
- The Parkland property represented 85% of total Company proved reserves, and 87% of total Company proved plus probable reserves. This includes reserves assigned to the Halfway, Doig, and Charlie Lake formations as well as to the Montney formation.
- Proved developed producing ("PDP") reserves represent 44% of total proved reserves, compared to 73% in 2007, and 28% of total proved plus probable reserves compared to 45% in 2007. The proportion of PDP reserves declined year-over-year as a result of assigning 32 proved undeveloped and probable additional horizontal gas wells in Storm's Montney discovery at Parkland. This is a significant increase from December 31, 2007, when only eight proved undeveloped and probable additional horizontal gas wells were recognized in our Montney property.
- The recycle or reinvestment ratio was 2.6 times for proved reserves and 3.1 times for total proved plus probable reserves, using the cash flow netback of $34.53 per Boe for 2008. This measurement uses the all-in total proved finding cost of $12.99 per Boe, and proved plus probable finding cost of $11.10 per Boe (includes the effect of future development capital, acquisitions, dispositions and revisions).
- Net downward revisions to prior year reserves totaled 6.3% on a total proved basis and 10.5% on a proved plus probable basis. Poorer than expected performance at wells producing from the Halfway and Doig formations at Parkland accounted for the majority of the revision. Approximately 25% of this was the result of new, high rate Montney horizontal wells elevating gathering system pressures, which resulted in the reduction of production from Halfway and Doig wells. The remainder was due to a combination of water encroachment and reservoir size being smaller than predicted. Reserves lost as a result of higher gathering system pressures are expected to be recovered as the second Parkland facility is now operational and part of the gathering system was twinned in late 2008, which has resulted in a significant decrease in gathering system pressures and increased production at wells producing from the Halfway and Doig formations.
Gross Company Interest Reserves as at December 31, 2008
(Before deduction of royalties payable, not including royalties
receivable)
---------------------------------------------
Light Crude Sales 6:1 Oil
NGLs
Oil Gas Equivalent
(Mbbls) (mmcf) (Mbbls) (Mboe)
---------------------------------------------
Proved Producing 483 59,525 1,200 11,604
Proved Non-Producing - 5,135 121 977
---------------------------------------------
Total Proved Developed 483 64,660 1,321 12,581
Proved Undeveloped 355 69,798 1,815 13,803
---------------------------------------------
Total Proved 838 134,458 3,136 26,384
Probable Additional 418 79,385 1,869 15,518
---------------------------------------------
Total Proved plus Probable 1,256 213,843 5,005 41,902
---------------------------------------------
---------------------------------------------
Gross Company Reserve Reconciliation for 2008
(Gross company interest reserves before deduction of royalties payable)
------------------------------------
6:1 Oil Equivalent (Mboe)
Proved
Total Probable plus
Proved Probable
------------------------------------
December 31, 2007 - Opening Balance 12,596 7,880 20,476
Acquisitions - - -
Discoveries 67 (91) 24
Extensions 17,221 9,085 26,306
Dispositions (163) (46) (209)
Technical revisions (787) (1,354) (2,141)
------------------------------------
Production (2,554) - (2,554)
------------------------------------
December 31, 2008 - Closing Balance 26,384 15,470 41,902
------------------------------------
------------------------------------
NI 51-101 Finding & Development Costs
3 YEAR
Total Proved Finding & Development Cost 2008 2007 TOTAL
---------------------------------------------------------------------------
Capital expenditures excluding
acquisitions and dispositions-'000 $ 99,222 $69,287 $224,781
Net change from previously allocated
future development capital - '000 $121,090 $16,641 $139,788
-------- ------- ---------
Total capital including the net change in
future capital - '000 $220,312 $85,928 $364,569
Reserve additions excluding acquisitions,
dispositions and revisions
MBoe 17,288 4,935 26,106
Total Proved Finding and Development
Costs - per Boe $ 12.74 $ 17.41 $ 13.96
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total Proved Plus Probable Finding & 3 YEAR
Development Cost 2008 2007 TOTAL
---------------------------------------------------------------------------
Capital expenditures excluding
acquisitions & dispositions-'000 $ 99,222 $ 69,287 $224,781
Net change from previously allocated
future development capital - '000 $ 174,036 $ 35,685 $216,697
-------- ------- --------
Total capital including the net change in
future capital - '000 $ 273,258 $104,972 $441,478
Reserve additions excluding acquisitions,
dispositions & revisions -
MBoe 26,331 9,748 41,206
Total Proved plus Probable Finding and
Development Costs - per Boe $ 10.38 $ 10.77 $ 10.71
---------------------------------------------------------------------------
---------------------------------------------------------------------------
All-In Finding, Development & Acquisition Costs
Total Proved All-In Finding, Development &
Acquisition Cost - including FDC, Acquisitions, 3 YEAR
Dispositions, Revisions 2008 2007 TOTAL
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditures including acquisitions
& dispositions -'000 $ 94,954 $ 93,772 $ 273,231
Net change from previously allocated future
development capital - '000 $ 117,206 $ 16,606 $ 136,419
--------- --------- -----------
Total capital including the net change in
future capital - '000 $ 212,160 $ 110,378 $409,650
Reserve additions including acquisitions,
dispositions & revisions -
MBoe 16,338 5,159 25,715
All In Total Proved Finding and Development
Costs - $/Boe $12.99 $21.40 $15.93
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Proved Plus Probable All-In Finding,
Development & Acquisition Cost
- including FDC, Acquisitions, 3 YEAR
Dispositions, Revisions 2008 2007 TOTAL
----------------------------------------------------------------------------
Capital expenditures including acquisitions
and dispositions -'000 $ 94,954 $ 93,772 $ 273,231
Net change from previously allocated future
development capital - '000 $ 171,177 $ 31,794 $ 213,147
--------- --------- -----------
Total capital including the net change in
future capital - '000 $ 266,131 $ 125,566 $ 486,378
Reserve additions including acquisitions,
dispositions and revisions -
MBoe 23,980 9,204 39,183
All In Total Proved plus Probable Finding
and Development Costs
$/Boe $11.10 $13.64 $12.41
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total exploration and development costs incurred in the most recent financial year and the change during that year in estimated future development costs, generally will not reflect the total cost of reserve additions in that year.
Net Present Value Summary (before tax) as at December 31, 2008
Benchmark oil and NGL prices used are adjusted for quality of oil or NGL produced and for transportation costs. The calculated NPVs include a deduction for estimated future well abandonment costs.
------------------------------------------------------------
DISCOUNTED DISCOUNTED DISCOUNTED DISCOUNTED
UNDISCOUNTED AT 5% AT 10% AT 15% AT 20%
$'000 $'000 $'000 $'000 $'000
------------------------------------------------------------
Proved
Producing 437,118 327,876 268,956 231,185 204,471
Proved Non-
Producing 38,433 28,401 22,739 19,108 16,567
------------------------------------------------------------
Total Proved
Developed 475,551 358,277 291,695 250,293 221,038
Proved
Undeveloped 472,847 303,568 212,638 156,398 118,296
------------------------------------------------------------
Total Proved 948,398 659,845 504,333 406,691 339,334
Probable
Additional 668,487 378,937 251,139 180,483 135,992
------------------------------------------------------------
Total Proved
plus
Probable 1,616,885 1,038,782 755,472 587,174 475,326
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Present Value Summary (after tax) as at December 31, 2008
Benchmark oil and NGL prices used are adjusted for quality of oil or NGL produced and for transportation costs. The calculated NPVs include a deduction for estimated future well abandonment costs.
------------------------------------------------------------
DISCOUNTED DISCOUNTED DISCOUNTED DISCOUNTED
UNDISCOUNTED AT 5% AT 10% AT 15% AT 20%
$'000 $'000 $'000 $'000 $'000
------------------------------------------------------------
Proved
Producing 370,929 279,984 230,280 198,172 175,356
Proved Non-
Producing 27,739 20,366 16,207 13,544 11,683
------------------------------------------------------------
Total Proved
Developed 398,668 300,351 246,488 211,716 187,039
Proved
Undeveloped 344,503 217,123 148,274 105,550 76,585
------------------------------------------------------------
Total Proved 743,171 517,474 394,761 317,266 263,624
Probable
Additional 488,884 274,866 180,154 127,780 94,861
------------------------------------------------------------
Total Proved
plus
Probable 1,232,055 792,339 574,915 445,046 358,485
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Paddock Lindstrom & Associates Ltd. Escalating Price Forecast as at December
31, 2008
----------------------------------------------------------------------------
WTI Edmonton Henry Hub AECO
Crude Oil Light Crude Oil Natural Gas Natural Gas Propane Butane
$US/bbl $CDN/bbl $US/mmbtu $CDN/mmbtu $CDN/bbl $CDN/bbl
----------------------------------------------------------------------------
2009 60.00 70.18 6.75 7.24 42.11 56.14
2010 67.50 77.21 7.50 7.90 46.33 61.77
2011 75.00 83.93 8.00 8.26 50.36 67.14
2012 82.50 90.34 8.50 8.60 54.20 72.27
2013 90.00 98.65 9.00 9.13 59.19 78.92
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 Actual Price 2008 Actual Price 2008 Actual Price and
and PLA Forecast Price and PLA Forecast PLA Forecast Price
Storm Wellhead Oil Storm Wellhead Gas Storm Wellhead NGL
Price Price Price
$CDN/bbl $CDN/mcf $CDN/bbl
----------------------------------------------------------------------------
2008
Actual (2) 93.03 8.58 82.14
2009 67.10 7.73 58.42
2010 73.19 8.45 64.46
2011 80.68 8.86 70.20
2012 82.50 9.27 75.70
2013 90.00 9.97 82.80
----------------------------------------------------------------------------
(2)2008 actual wellhead price excludes hedging gains/losses and is after
deduction of transportation costs.
OUTLOOK
We will continue our long standing approach to management and financing of our operations in 2009 by reinvesting cash flow and using a limited amount of debt to deliver continued and profitable growth per share from operations, particularly from our low cost-high netback Montney discovery at Parkland. Storm's capital budget for 2009 has been revised to reflect the current natural gas price environment and includes:
- Capital investment totaling $75 million with approximately 50% of this amount being invested in the first half of 2009. This includes an $11 million investment in expanding infrastructure at Parkland which will be funded with debt, while cash flow will be used to fund the remainder of Storm's 2009 capital budget assuming a natural gas price of $5.25 per GJ at AECO.
- The drilling of 13.0 gross wells (11.4 net) including six horizontal development wells in Storm's Montney discovery at Parkland, all at a 100% working interest. In addition, two vertical wells (0.8 net) have been drilled this winter in the Horn River Basin in northeastern British Columbia, with one being cored, completed and flow tested.
- An allocation of $50 million to drilling, completion and tie-ins, $11 million to expanding infrastructure at Parkland, $5 million for land and seismic, and $9 million for miscellaneous projects and contingency items. Over 90% of our capital budget will be invested in the Parkland area.
- Infrastructure investment at Parkland totaling approximately $11 million including $5 million in the first quarter to complete the second facility increasing our capacity in the area by 12.5 Mmcf per day. We plan to spend an additional $6 million in the third quarter to electrify and further increase the capacity of the second facility to 25-30 Mmcf per day. An additional $6 million, not at present included in the capital budget, may be invested in the second half of the year to install a liquids extraction plant at the second facility, which will reduce gas shrinkage and increase NGL recoveries.
- Exit production or production for the final quarter of 2009 of approximately 9,300 Boe per day, an increase of 14% over 2008 fourth quarter production.
- Forecast operating costs of $5.80 per Boe and general and administrative costs of $1.20 per Boe in 2009. The corporate royalty rate, giving effect to the New Royalty Framework's effect on Alberta production, is forecast to be 22%.
Storm's capital budget will be reviewed in mid-2009 and in the event that natural gas prices are higher or lower than expected, the Company will adjust capital spending at that time to better match cash flow.
Production is currently approximately 8,500 Boe per day as a result of starting up the second Parkland facility, the tie in of one new horizontal Montney gas well, and better than expected performance from horizontal Montney gas wells drilled and tied in during the second half of 2008. More than 500 Boe per day is currently curtailed or shut in, primarily at Parkland, to maximize operating netbacks. We expect to maintain production at current levels through the first half of 2009 with the tie-in of two more recently completed horizontal Montney gas wells drilled in the fourth quarter of 2008 and one new horizontal Montney gas well currently being drilled.
At Parkland, the potential growth associated with our Montney discovery has increased significantly over the past year with the current undrilled inventory of 32 net horizontal wells representing potential future production additions totaling 12,800 Boe per day using the average first year rate of 400 Boe per day per horizontal. This is based on the 11 sections we have delineated to date with 14 vertical wells. Ultimately, we expect that the pool could be as large as 15 net sections in size which would increase the inventory to 48 undrilled horizontal wells, representing 19,200 Boe per day of potential future production additions. As a result, our main priority in 2009 is to attempt to prove up this upside by drilling a minimum of five more vertical delineation wells around our Montney discovery. In addition to this, considerable upside remains associated with the Montney formation at Parkland including:
- recognizing a lower porosity cut-off which would greatly increase OGIP and our inventory of undrilled horizontals. This is something we will work towards validating in 2009 by coring more vertical wells as well as monitoring well performance and reserve recovery from one section where we now have four producing horizontal gas wells.
- installing a liquids extraction plant which is expected to double natural gas liquids recovery from 15 to 30 barrels per mmcf thereby adding significantly to our liquids reserves.
- several other separate Montney leads exist on our 72 net sections of Montney rights that we own which we will further test with at least one vertical well in 2009.
Although reserves at Parkland increased significantly last year, this is far from being a mature asset.
In the current, depressed natural gas price environment, we will not be aggressive in producing out our reserves. Until natural gas prices improve, our business plan will adapt to emphasize accretive growth in net asset value instead of production growth. We will do this by:
- restricting initial production rates from new Montney horizontal gas wells in order to flatten out the production profile which will level out the price and netback received over a well's life.
- maximizing the corporate netback by shutting in higher cost properties and wells.
- reducing capital directed towards our drilling program to maximize free cash flow directed towards growing our asset base through undeveloped land acquisitions, farm-ins, or asset acquisitions.
- continuing to drill vertical Montney delineation and exploratory wells at Parkland which, if successful, will further increase our inventory of horizontal development locations and our reserves.
This approach may result in reduced production growth in the near term but, in the current economic environment, opportunities are likely to arise where we can acquire assets or undeveloped land at much more reasonable valuations than what we've seen in the last four years, leaving us in a better position to capitalize on the next up cycle in commodity prices.
In February 2009, we entered into a bought deal agreement to sell 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 initially will be used to retire debt.
Over the last year, we have witnessed significant volatility in commodity prices which rose through the first half of 2008 to all time highs by the summer and then dropped to five year lows by the end of the year. The decline in commodity prices in the latter half of 2008 was in reaction to reduced demand for commodities resulting from the onset of what may be a world-wide recession. This was triggered by problems in the financial industry resulting from relaxed or non-existent mortgage lending standards, which has ended up affecting all sectors of the economy. Increasingly, blame for the current economic crisis is being directed towards a lack of employee ownership and high levels of executive cash compensation which were not tied to long-term corporate results. With employees and directors of Storm owning approximately 30% of the outstanding shares, our interests are aligned with the interests of all shareholders. Having a high level of employee and director ownership will not protect us from this economic downturn, however, we are in a better position than most with a low cost structure and a high quality asset base containing several years of lower risk development opportunities primarily at Parkland, as well as exposure to a very high impact gas project in the Horn River Basin. Having this depth and quality of inventory allows us to remain focused on accretive growth in net asset value over the long term which will benefit all shareholders.
I would like to thank our employees and directors for their effort and hard work in 2008 and our shareholders for your continued patience and support.
Respectfully,
Brian Lavergne, President and Chief Executive Officer
February 23, 2009
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND OPERATING RESULTS FOR THE YEAR AND THREE MONTHS ENDED DECEMBER 31, 2008
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 year and three months ended December 31, 2008. It should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008 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 Measures.
This management's discussion and analysis is dated February 23, 2009.
Introduction and Limitations:
Basis of Presentation - Financial data presented below have largely been derived from the Company's consolidated financial statements for the year and three months ended December 31, 2008, prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). Accounting policies adopted by the Company are set out in note 2 to the consolidated financial statements for the years ended December 31, 2008 and 2007. The reporting and the measurement currency is the Canadian dollar. Unless otherwise indicated, tabular financial amounts, other than per share and per Boe amounts, are in thousands.
On January 1, 2008, Storm adopted, with prospective effect, certain new accounting standards introduced as part of GAAP as follows:
- Capital Disclosures:
Section 1535 of the CICA Handbook, Capital Disclosures, requires companies to disclose in their financial statements objectives, policies and processes for managing capital, including compliance with any externally imposed capital requirements.
- Financial Instrument Disclosure and Presentation:
Section 3862 of the CICA Handbook, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Disclosure and Presentation. The new accounting standards require the Company to provide information about the significance of financial instruments to the Company's financial position and performance. In addition, information about the nature and extent of risks associated with financial instruments, and how the Company manages such risks, is to be provided.
Additional details about such accounting changes and their effect on the Company are described in the notes to the consolidated financial statements for the year and three months ended December 31, 2008.
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 the "Provision for Account Receivable" and "Depletion, Depreciation and Accretion" sections hereof; 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 February 23, 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 is used to benchmark operations against prior periods and peer group companies. It 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:
---------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
---------------------------------------------------------------------------
Cash flow from operating activities $85,972 $56,153
---------------------------------------------------------------------------
Net change in non-cash working
capital items 1,518 (4,210)
---------------------------------------------------------------------------
Funds from operations $87,490 $51,943
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Funds from operations per share is calculated using the weighted average number of common shares outstanding consistent with the calculation of net income per share. Field netbacks equal total revenue adjusted for hedging gains or losses, plus royalty income, less royalties paid, production and transportation costs, calculated on a Boe basis for the reporting period. Total Boe is calculated by multiplying the daily production by the number of days in the year or quarter as the case may be.
PRODUCTION AND REVENUE
Average Daily Production
----------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Natural gas (Mcf/d) 36,089 30,296
----------------------------------------------------------------------------
Natural gas liquids (Bbls/d) 383 230
----------------------------------------------------------------------------
Crude oil (Bbls/d) 580 496
----------------------------------------------------------------------------
Total (Boe/d) 6,978 5,775
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Production grew by 21% year-over-year, consistent with the year-over-year growth in 2007. Growth came largely from exploiting Storm's Montney discovery at Parkland in northeastern British Columbia.
Production per million shares outstanding in 2008 averaged 156 Boe per day, compared to 133 Boe per day for 2007, an increase of 17%.
Production Profile and Per Unit Prices
----------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Average Selling Average Selling
Percentage Price Before Percentage of Price Before
of Total Boe Transportation Total Boe Transportation
Production Costs Production Costs
----------------------------------------------------------------------------
Natural gas
per mcf 86% $8.88 87% $6.85
----------------------------------------------------------------------------
Natural gas
liquids per
bbl 6% $83.97 4% $66.44
----------------------------------------------------------------------------
Crude oil
per bbl 8% $98.06 9% $75.82
----------------------------------------------------------------------------
Per Boe $58.73 $45.10
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)Average selling prices above do not include any 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 in 2008 came largely from Parkland, in particular from the Company's Montney discovery.
The average AECO spot market reference price for 2008 was $7.74 per GJ compared to $6.15 for 2007. Storm's average realized price per Mcf for 2008 was approximately 15% higher than the AECO reference price per GJ. This pricing premium is attributable to high heat content natural gas delivered from the Montney formation at Parkland as well as natural gas hedges outstanding during the second and third quarter requiring that an equivalent amount of natural gas production be sold at monthly index pricing during those quarters, with the third quarter monthly index pricing being higher than AECO spot pricing. Currently, all of Storm's natural gas volumes are being sold at daily spot market pricing. 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 67% growth in natural gas liquids production.
Production by Area - Boe per Day
----------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
----------------------------------------------------------------------
Fort St. John/Parkland BC 4,219 2,592
----------------------------------------------------------------------
Grande Prairie Area -
Alberta 1,816 2,052
----------------------------------------------------------------------
Cabin-Kotcho-Junior - BC 884 1,010
----------------------------------------------------------------------
Other 59 121
----------------------------------------------------------------------
Total 6,978 5,775
----------------------------------------------------------------------
The above sets out the average production from each of Storm's core areas. Production from the Parkland property averaged 4,041 Boe per day, an increase of 94% from the prior year when production averaged 2,080 Boe per day. Production from our Montney discovery at Parkland represented 38% of total corporate production for 2008, a percentage that is likely to increase considerably in future years.
The Company's focus on the Parkland area has resulted in year-over-year production from British Columbia growing by 42%. Correspondingly, reduced investment in Alberta is evidenced by a 12% reduction in year-over-year production in the Grande Prairie area.
Production Revenue
Production revenue by product is as follows:
----------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Natural gas $117,397 $75,776
----------------------------------------------------------------------------
Natural gas liquids 11,782 5,566
----------------------------------------------------------------------------
Crude oil 20,821 13,726
----------------------------------------------------------------------------
Hedging (losses) gains (2,187) 2,551
----------------------------------------------------------------------------
Revenue from product sales 147,813 97,619
----------------------------------------------------------------------------
Royalty income 711 672
----------------------------------------------------------------------------
Total Production Revenue $148,524 $98,291
----------------------------------------------------------------------------
----------------------------------------------------------------------------
A reconciliation of revenue from product sales between 2008 and 2007 is as follows:
---------------------------------------------------------------------------
Hedging
Natural Gas Crude Gains
Natural Gas Liquids Oil (Losses) Total
---------------------------------------------------------------------------
Revenue from product
sales - 2007 $75,776 5,566 13,726 2,551 $97,619
---------------------------------------------------------------------------
Contribution from
increased production 19,096 4,734 3,069 - 26,899
---------------------------------------------------------------------------
Contribution from
increased product prices 22,525 1,482 4,026 - 28,033
---------------------------------------------------------------------------
Change in contribution
from hedging activities - - - (4,738) (4,738)
---------------------------------------------------------------------------
Revenue from product
sales - 2008 $117,397 11,782 20,821 (2,187) $ 147,813
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Hedging:
Storm had no hedges in place at December 31, 2008. During 2008, Storm realized a loss of $2.2 million, or $0.86 per Boe or $0.17 per Mcf on natural gas hedging contracts. In 2007, the Company realized a hedging gain of $2.6 million, or $1.21 per Boe or $0.23 per Mcf.
Storm followed hedge accounting rules with respect to hedges outstanding during 2008, and for all prior hedges. However, any future hedges entered into by Storm may not satisfy hedge accounting criteria; correspondingly the Company may be obliged to follow mark-to-market rules.
ROYALTIES
----------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Charge for period $31,021 $20,341
----------------------------------------------------------------------------
Royalties as a percentage of revenue
from product sales before hedging
- Crown 19.9% 20.2%
- Other 0.7% 1.2%
----------------------------------------------------------------------------
Total 20.6% 21.4%
----------------------------------------------------------------------------
Per Boe $12.15 $9.65
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Royalty rates are based on provincial government reference pricing and exclude gains or losses from hedging. Higher per Boe royalty rates in 2008, when compared to the prior year, are due to increased commodity prices.
The introduction of the New Royalty Framework by the Provincial Government of Alberta announced in October 2007, came into effect on January 1, 2009. It has the broad effect of increasing Alberta provincial royalties, particularly on wells with high initial production rates. Such wells tend to be wells with higher amounts of capital at risk, with a corresponding reduction in returns accruing to oil and gas investment in the province. Approximately 26% of Storm's production came from Alberta in 2008, compared to 36% in 2007. All other production comes from British Columbia. During 2009, Storm's capital programs will continue to be focused on the exploitation of its largely natural gas properties in the Fort St. John/Parkland area of northeastern British Columbia, which, assuming operational success, will result in revenue from Alberta continuing to fall as a percentage of total revenue. In addition to lower investment, natural declines will further reduce Storm's Alberta-based production and revenue. The allocation of capital by the Company to projects outside of Alberta is not exclusively in response to the changed Crown royalty regime in Alberta as the Company's British Columbia projects, particularly our Montney discovery, offer superior economic returns.
PRODUCTION COSTS
-------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
-------------------------------------------------------------------------
Charge for period $17,065 $14,908
-------------------------------------------------------------------------
Percentage of revenue from
product sales before hedging 11.4% 15.7%
-------------------------------------------------------------------------
Per Boe $6.68 $7.07
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total production costs for 2008 increased by 14% year-over-year, but fell as a percentage of revenue in response to improved pricing. Per Boe, production costs for 2008 fell by 6% when compared to 2007, in part due to the concentration of Storm's asset base and increased production from Parkland, which has lower operating costs. Operating costs at the Parkland property averaged $3.98 per Boe in 2008.
Storm's cash costs per Boe, which comprise production, general and administrative costs and interest, amounted to $9.40 for 2008, compared to $9.98 for 2007. Lower interest and operating costs were primarily responsible for the year-over-year decrease.
TRANSPORTATION COSTS
-------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
-------------------------------------------------------------------------
Charge for period $5,279 $4,959
-------------------------------------------------------------------------
Percentage of revenue from
product sales before hedging 3.5% 5.2%
-------------------------------------------------------------------------
Per Boe $2.07 $2.35
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Increased total charges for transportation reflect increasing production levels. The reduction in transportation costs per Boe in 2008 is a result of increased production from the Parkland area which has lower associated transportation costs per Boe.
FIELD NETBACKS
Details of field netbacks per commodity unit are as follows:
-------------------------------------------------------------------------
Year Ended December 31, 2008
-------------------------------------------------------------------------
Natural
Crude Natural
Gas Total
Oil Gas
Liquids ($ Boe)
($ Bbl) ($ Mcf)
($ Bbl)
-------------------------------------------------------------------------
Product sales $98.06 $83.97 $8.88 $58.73
-------------------------------------------------------------------------
Hedging loss - - (0.17) (0.86)
-------------------------------------------------------------------------
Royalty income 0.80 0.35 0.04 0.28
-------------------------------------------------------------------------
Royalties (16.07) (18.47) (1.89) (12.15)
-------------------------------------------------------------------------
Production costs(1) (8.04) - (1.16) (6.68)
-------------------------------------------------------------------------
Transportation (5.03) (1.84) (0.30) (2.07)
-------------------------------------------------------------------------
Field netback $69.72 $64.01 $5.40 $37.25
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year Ended December 31, 2007
-------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas
($ Bbl) ($ Bbl) ($ Mcf) Total ($ Boe)
-------------------------------------------------------------------------
Product sales $75.82 $66.44 $6.85 $45.10
-------------------------------------------------------------------------
Hedging gain or
loss - - 0.23 1.21
-------------------------------------------------------------------------
Royalty income 0.54 0.60 0.05 0.32
-------------------------------------------------------------------------
Royalties (12.09) (17.67) (1.51) (9.65)
-------------------------------------------------------------------------
Production costs(1) (8.10) - (1.22) (7.07)
-------------------------------------------------------------------------
Transportation (3.03) (3.97) (0.37) (2.35)
-------------------------------------------------------------------------
Field netback $53.14 $45.40 $4.03 $27.56
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1)Production costs for natural gas liquids are included with natural gas
costs.
Field netback per Boe for 2008 increased by 35% over 2007. Storm benefited from increased prices for each product category, supported by lower controllable costs, offset by a hedging loss, compared to a hedging gain in 2007. Improved field netbacks were weighted to the first three quarters of 2008, the increase being 45%; however in the final quarter of 2008 falling commodity prices saw the increase in field netback over the prior year fall to 11%.
INTEREST
----------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
----------------------------------------------------------------------
Charge for period $3,503 $3,811
----------------------------------------------------------------------
Per Boe $1.37 $1.81
----------------------------------------------------------------------
----------------------------------------------------------------------
Interest is paid on Storm's revolving bank facility. Lower interest expense in 2008, when compared to the prior year, is a result of lower bank borrowings and lower interest rates in the second half of 2008.
GENERAL AND ADMINISTRATIVE COSTS
---------------------------------------------------------------------------
Year Ended Year Ended
Total Costs December 31, 2008 December 31, 2007
---------------------------------------------------------------------------
Gross general and administrative
costs $6,390 $5,735
---------------------------------------------------------------------------
Capital and operating recoveries (2,949) (3,406)
---------------------------------------------------------------------------
Net general and administrative
costs $3,441 $2,329
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Costs Per Boe Year Ended Year Ended
December 31, 2008 December 31, 2007
---------------------------------------------------------------------------
Gross general and administrative
costs $2.50 $2.72
---------------------------------------------------------------------------
Capital and operating recoveries (1.15) (1.62)
---------------------------------------------------------------------------
Net general and administrative
costs $1.35 $1.10
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Increases in gross general and administrative costs for 2008, when compared to 2007, were primarily due to an increased staff count, as well as higher year-over-year compensation and accommodation costs.
Capital recoveries in 2008 were lower than in the prior year due to recoveries in 2007 being increased by a significant pipeline construction project.
PROVISION FOR ACCOUNT RECEIVABLE
In July 2008, SemCanada Energy Company ("SemCan"), a purchaser of part of Storm's natural gas production in British Columbia, was part of a group of affiliated companies which filed for creditor protection under the Companies' Creditors Arrangement Act. Storm is owed $725,000 and has set up a provision for the full amount of the receivable. Sales contracts with SemCan were terminated immediately and the Company has no continuing exposure under these contracts. The Company has taken necessary action to protect its position. It is not presently determinable how much of the amount owing to Storm, if any, will be recoverable.
STOCK-BASED COMPENSATION COSTS
----------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Charge for period $1,886 $1,232
----------------------------------------------------------------------------
Per Boe $0.74 $0.58
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock-based compensation costs are non-cash charges which reflect the value of stock options and performance warrants awarded to directors and employees. The value is recognized as an expense over the period from the grant date to the date of vesting of the award. Storm's performance warrant plan was terminated mid-2007, upon the exercise of the remaining warrants. The increase in the charge for 2008, when compared to 2007, is due to the issue of additional stock options late in 2007.
DEPLETION, DEPRECIATION AND ACCRETION
--------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
--------------------------------------------------------------------------
Depreciation and depletion charge
for period $41,601 $34,390
--------------------------------------------------------------------------
Accretion charge for period 488 462
--------------------------------------------------------------------------
Total $42,089 $34,852
--------------------------------------------------------------------------
Total per Boe $16.48 $16.53
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The increase in the total charge for depreciation, depletion and accretion for 2008, when compared to 2007, is a consequence of higher production volumes as the depletion component of the charge is based on a cost per Boe. The charge for depreciation is based on the expected life of the asset.
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%.
INVESTMENT GAINS
The Company is a shareholder in a private company, Storm Gas Resource Corp ("SGR"). In July 2008 SGR completed a private placement at a price greater than Storm's average investment cost. Storm's ownership percentage fell from 45% to 22% after completion of private placements. Accordingly, Storm has included in net income for the year ended December 31, 2008 a non-cash dilution gain of $3.5 million.
INCOME AND OTHER TAXES
For the year ended December 31, 2008, Storm recorded a future income tax provision of $12.4 million, compared to $4.8 million for the year ended December 31, 2007, the increased future tax provision corresponding to the 197% year-over-year increase in income before taxes. 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 applicable to pre tax income in 2008 is 30%, compared to 32% for 2007.
At December 31, 2008, Storm had tax pools carried forward estimated to be $202 million. In September 2007, the Company entered into a flow through share issue, which provided for the renunciation of Canadian Exploration Expense of $15.1 million, and the incurrence of such expenditures by December 31, 2008. The Company considers that the necessary expenditures have been incurred. Storm also has a capital loss in the amount of $9.7 million available for application against future capital gains.
NET INCOME AND NET INCOME PER SHARE
Net income for the year ended December 31, 2008, increased by 214% when compared to the prior year.
----------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Per diluted share Per diluted share
----------------------------------------------------------------------------
Net income $ 34,686 $0.76 $ 11,049 $0.25
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FUNDS FROM OPERATIONS AND FUNDS FROM OPERATIONS PER SHARE
----------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Per diluted share Per diluted share
----------------------------------------------------------------------------
Funds from
operations $ 87,490 $1.91 $ 51,943 $1.18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non GAAP funds from operations for 2008 increased by 68% to $87.5 million, or $1.91 per diluted share, compared to $51.9 million, or $1.18 per diluted share for 2007.
CASH FLOWS FROM OPERATING ACTIVITIES
Non GAAP funds from operations is not a measure recognized by GAAP in Canada. The most directly comparable measure under GAAP is cash flows from operating activities. Cash flows from operating activities for each year is as follows:
----------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
----------------------------------------------------------------------
Cash flows from
operating activities $85,972 $56,153
----------------------------------------------------------------------
----------------------------------------------------------------------
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 and software licensing fees, deposits and certain inventory 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 and accrued liabilities.
Storm had a working capital deficiency of $16.9 million at December 31, 2008 compared to $10.2 million at December 31, 2007. The working capital deficiency at each year end reflects the Company's position as operator of most of its projects and the seasonality of its field operations. The Company accrues for or recognizes capital expenditures as payable when they are incurred. The Company's working capital deficiency is cyclical and is normally 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:
---------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
---------------------------------------------------------------------------
Land and lease, net $7,634 $3,860
---------------------------------------------------------------------------
Seismic (1,197) 2,997
---------------------------------------------------------------------------
Drilling and completions 74,023 41,102
---------------------------------------------------------------------------
Facilities and equipment 18,762 21,446
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Field Expenditures 99,222 69,405
---------------------------------------------------------------------------
Property acquisitions 712 27,578
---------------------------------------------------------------------------
Property dispositions (4,980) (3,093)
---------------------------------------------------------------------------
Total $94,954 $93,890
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Bank Debt, Liquidity and Capital Resources
Storm has a revolving borrowing base bank credit facility of $110 million. The amount drawn on this facility at December 31, 2008 amounted to $81.9 million. Net debt, including working capital deficiency, amounted to $98.8 million at December 31, 2008, resulting in a ratio of net debt to non GAAP funds from operations of 1.1 times.
Preliminary discussions with the Company's bankers regarding renewal of the Company's credit facility indicate that the syndicate is likely to offer an increase in the Company's facility. Nevertheless, as the Company's facility is renewable on May 31, 2009, volatile credit conditions may result in changes to the syndicate's proposal. In addition, debt service costs are expected to rise considerably following the renewal.
Storm funds its field capital programs through cash flow and bank borrowings. Over a reasonable period of time, the cost of capital programs is limited to available funds from operations which is dependent on commodity prices. 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 may exceed cash flow from operations, which is 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. The Company considers that its estimate of cash flow, risked for potential changes in commodity prices, plus its existing borrowing capacity, will be sufficient to fund field operations in 2009. In the event that cash flow and borrowing capacity are not sufficient to fund activity, the Company will reduce its field capital program.
Capital programs were funded as follows:
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Funds from operations $87,490 $ 51,943
----------------------------------------------------------------------------
Non cash working capital 6,677 3,305
----------------------------------------------------------------------------
Issue of flow through shares - net of expenses - 14,174
----------------------------------------------------------------------------
Issue of common shares - option proceeds 795 406
----------------------------------------------------------------------------
Increase in bank indebtedness 7,432 24,062
----------------------------------------------------------------------------
Proceeds on property sales 4,980 3,093
---------------------------
----------------------------------------------------------------------------
Cash available for investment $ 107,374 $ 96,983
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Field expenditures $99,222 $ 69,405
----------------------------------------------------------------------------
Property acquisitions 712 27,578
----------------------------------------------------------------------------
Investment in Storm Ventures International Inc. 1,250 -
----------------------------------------------------------------------------
Investment in Storm Gas Resources Corp 6,190 -
----------------------------------------------------------------------------
Total cost of investment programs $ 107,374 $ 96,983
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 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. In addition, Storm has a direct 40% working interest in undeveloped lands jointly acquired 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 Ventures International Inc.
At December 31, 2008, 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 December 31, 2008 represents the excess of the accounting amounts over the related tax bases of property and equipment and share capital.
Details of the Company's tax pools are as follows:
-------------------------------------------------------------------------
December 31, 2008 Maximum Annual
deduction
-------------------------------------------------------------------------
Canadian oil and gas property
expense 85,297 10%
-------------------------------------------------------------------------
Canadian development expense 75,703 30%
-------------------------------------------------------------------------
Canadian exploration expense - 100%
-------------------------------------------------------------------------
Undepreciated capital cost 39,379 20 - 100%
-------------------------------------------------------------------------
Other 1,611 20%
-------------------------------------------------------------------------
Total 201,990
-----------------------------------------------------
-----------------------------------------------------
Capital losses $9,666
-----------------------------------------------------
-----------------------------------------------------
Asset Retirement Obligation
Storm's asset retirement obligation of $7.3 million represents the present value of estimated future costs to be incurred to abandon and reclaim the Company's wells and facilities. Changes in the amount of the obligation between 2008 and 2007 comprise the present value of additional obligations accruing to the Company as a result of field activity and property purchases during the year, less costs paid in settlement of abandonment obligations, plus the quarterly increase in the present value of the obligation. The discount rate used to establish the present value is 8%. Future costs to abandon and reclaim Storm's properties are based on an internal evaluation of each of the Company's properties, supported by external data from industry sources.
Share Capital
Details of outstanding share capital and dilutive elements as at and for the year ended December 31, 2008:
---------------------------------------------------------------------------
December 31, 2008 December 31, 2007
---------------------------------------------------------------------------
Common shares outstanding
- end of year 44,703 44,532
---------------------------------------------------------------------------
Stock options 2,267 2,166
---------------------------------------------------------------------------
Fully diluted common shares
- end of year 46,970 46,698
---------------------------------------------------------------------------
Weighted average common shares
- basic 44,654 43,449
---------------------------------------------------------------------------
Weighted average common shares
- diluted 45,877 44,132
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Stock options outstanding are exercisable over five years on various dates beginning September 2005 at prices ranging from $2.60 to $11.40.
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.
Obligations with a fixed term are as follows:
----------------------------------------------------------------------------
2009 2010 2011 2012 2013
----------------------------------------------------------------------------
Lease of premises $ 811 $ 825 $ 838 $ 838 $ 419
----------------------------------------------------------------------------
Equipment leases 129 58 14 - -
----------------------------------------------------------------------------
Gas transportation and
processing commitments 2,235 1,437 1,146 599 198
----------------------------------------------------------------------------
Total $ 3,175 $ 2,320 $ 1,998 $ 1,437 $ 617
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NET ASSET VALUE
An estimate of Storm's net asset value at December 31, 2008 is as follows:
---------------------------------------------------------------------------
December 31, December 31, Percentage
2008 2007 Change
---------------------------------------------------------------------------
Present value of reserves, before
tax, discounted at 10% $756,000 $369,000 105%
---------------------------------------------------------------------------
Undeveloped land, excluding
Parkland area in NE British
Columbia (1) 138,120 net acres 19,000 16,000 19%
---------------------------------------------------------------------------
Undeveloped land, Parkland area in
NE British Columbia (1) 51,922 net
Acres 53,000 34,000 56%
---------------------------------------------------------------------------
Surmont oil sands leases(2) - 19,000 -
---------------------------------------------------------------------------
Investment - SVI (3) 28,000 22,000 27%
---------------------------------------------------------------------------
Investment - SGR (4) 13,000 - -
---------------------------------------------------------------------------
Cash proceeds on exercise of stock
options 14,000 15,000 (7)%
---------------------------------------------------------------------------
Net debt (99,000) (85,000) 16%
---------------------------------------------------------------------------
Net Asset Value Before Tax $784,000 $390,000 101%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Fully diluted common shares
outstanding (000s) 46,970 46,698 1%
---------------------------------------------------------------------------
Net Asset Value per Common
Share $ 16.69 $ 8.35 100%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Based on internal estimates - $1,021 per acre Parkland, $138 per acre
other.
(2) Based on external valuation July 31, 2007: no valuation completed in
2008.
(3) Based on a private placement completed mid-2008 at $6.25 per share.
(4) Based in a private placement completed mid-2008 at $6.50 per share.
FOURTH QUARTER RESULTS
Storm's summarized financial and operating results for the fourth quarter of 2008, compared to the fourth quarter of 2007, are as follows:
----------------------------------------------------------------------------
Three Months Three Months
Ended Ended
December 31, December 31, Percentage
2008 2007 Change
----------------------------------------------------------------------------
Financial - $
----------------------------------------------------------------------------
Production revenue 35,447 25,553 39%
----------------------------------------------------------------------------
Funds from operations 20,432 13,233 54%
----------------------------------------------------------------------------
Per share - basic 0.46 0.30 53%
----------------------------------------------------------------------------
Per share - diluted 0.45 0.30 50%
----------------------------------------------------------------------------
Net income 5,968 2,852 109%
----------------------------------------------------------------------------
Per share - basic 0.13 0.06 117%
----------------------------------------------------------------------------
Per share - diluted 0.13 0.06 117%
----------------------------------------------------------------------------
Capital expenditures - net 35,342 17,094 107%
----------------------------------------------------------------------------
Debt, including working capital
deficiency 98,790 84,681 17%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operations
----------------------------------------------------------------------------
Boe production per day 8,161 5,992 36%
----------------------------------------------------------------------------
Gas production per day - mcf 41,919 31,133 35%
----------------------------------------------------------------------------
NGL production per day - bbls 489 289 69%
----------------------------------------------------------------------------
Oil production per day- bbls 686 514 33%
----------------------------------------------------------------------------
Gross wells drilled 9.0 6.0 50%
----------------------------------------------------------------------------
Net wells drilled 9.0 5.1 76%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Production:
In the fourth quarter of 2008 average Boe per day volumes increased by 36% when compared to the fourth quarter of 2007, and by 15% when compared to the third quarter of 2008. Production of natural gas amounted to 86% of total Boe production in the fourth quarter of 2008, generally identical to the fourth quarter of 2007 and the third quarter of 2008. Production increases in the final quarter of 2008 largely came from horizontal wells at Parkland.
Production Revenue:
Production revenue for the fourth quarter of 2008 increased by 39%, when compared to the fourth quarter of 2007, but fell by 12% when compared to the immediately preceding quarter. The average realized price per Boe for the quarter amounted to $47.08, about 2% greater than the equivalent amount for the final quarter of 2007, but 23% less than in the third quarter of 2008, corresponding to the rapid commodity price decline in the fourth quarter. The realized gas price for the final quarter of 2008 was $7.49; the price for the final quarter of 2007 was $6.76 and was $8.96 for the third quarter of 2008.
Royalties:
Royalties for the fourth quarter of 2008 amounted to $6.9 million, an increase of 29% when compared to the same quarter of 2007 and a reduction of 21% compared to the third quarter of 2008. Price declines largely account for the changes. The royalty rate in the fourth quarter of 2008 was 19%; for the fourth quarter of 2007, 21%; and for the third quarter of 2008, 22%.
Production Costs:
Production costs for the quarter increased by 16% to $4.4 million when compared to the final quarter of 2007 and by 3% when compared to the third quarter of 2008. Total production costs have grown in response to increased production volumes. However, per Boe costs have fallen; for the final quarter of 2008 production costs per Boe amounted to $5.84, compared to $6.86 for the same quarter of 2007 and to $6.50 per Boe in the third quarter of 2008.
Cash costs per Boe, comprising production costs, interest and general and administrative costs, amounted to $8.49 for the final quarter of 2008, $10.30 for the equivalent quarter of 2007 and $8.58 for the third quarter of 2008. Lower interest and production costs resulted in the quarterly differences.
Transportation Costs:
Transportation costs for the final quarter of 2008 amounted to $1.4 million, an increase of 7% over 2007 and 14% over immediately preceding quarter. Costs per Boe amounted to $1.85 in the fourth quarter of 2008, compared to $2.37 in the same quarter of 2007 and to $1.87 in the third quarter of 2008. The reduction in transportation costs per Boe is a result of increased production from the Parkland area.
Field Netbacks:
Details of field netbacks per commodity unit are as follows:
----------------------------------------------------------------------------
Three Months to December 31, 2008
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($/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 (6.95) - (1.02) (5.84)
----------------------------------------------------------------------------
Transportation (4.57) (1.16) (0.27) (1.85)
----------------------------------------------------------------------------
--------------------------------------
Field netback $40.90 $45.38 $4.72 $30.35
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months to December 31, 2007
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($/Bbl) ($/Bbl) ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $87.29 $72.94 $6.76 $46.13
----------------------------------------------------------------------------
Royalty income 0.59 0.42 0.03 0.22
----------------------------------------------------------------------------
Royalties (13.92) (17.96) (1.47) (9.68)
----------------------------------------------------------------------------
Production costs (7.99) - (1.19) (6.86)
----------------------------------------------------------------------------
Transportation (4.71) (3.63) (0.34) (2.37)
----------------------------------------------------------------------------
--------------------------------------
Field netback $61.26 $51.77 $3.79 $27.44
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest:
Interest costs for the final quarter of 2008 fell by 40% to $0.7 million compared to the same quarter in 2007 and fell by 18% compared to the third quarter of 2008. Interest costs per Boe amounted to $0.90 in the fourth quarter of 2008, compared to $2.04 in the same quarter of 2007 and $1.26 in the third quarter of 2008. Growing production and falling interest rates account for both total and per Boe reductions in interest costs in the final quarter of 2008.
General and Administrative:
----------------------------------------------------------------------------
Three Months Ended December 31 2008 2007
----------------------------------------------------------------------------
Gross general and administrative costs $2,269 $1,944
----------------------------------------------------------------------------
Capital and operating recoveries (952) (1,170)
----------------------------------------------------------------------------
--------------------------------------
Net general and administrative costs $1,317 $774
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per Boe:
----------------------------------------------------------------------------
Three Months Ended December 31 2008 2007
----------------------------------------------------------------------------
Gross general and administrative costs $ 3.02 $ 3.51
----------------------------------------------------------------------------
Capital and operating recoveries (1.27) (2.11)
----------------------------------------------------------------------------
--------------------------------------
Net general and administrative costs $ 1.75 $ 1.40
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross general and administrative costs for the final quarter of 2008 increased by 17% when compared to the final quarter of 2007 and by 66% compared to the third quarter of 2008. The year-on-year increase in general and administrative costs is largely attributable to an increased staff complement and to increased compensation levels. The increase in the final quarter of 2008, when compared to the third quarter, is due to the inclusion in the final quarter of certain costs related to the Company's year end, including external services and accrued performance incentives for staff. Increased capital and operating recoveries in the final quarter of 2008, when compared to the third quarter, reflect increased field activity as the Company begins its winter drilling program. The reduction in recoveries in the fourth quarter of 2008, when compared to the prior year, is attributable to the recognition in the final quarter of 2007 of recoveries associated with a major pipeline project.
Stock Based Compensation:
Stock based compensation increased by 125% in the final quarter of 2008 compared to the same quarter of 2007 and fell by 12% when compared to the third quarter of 2008. The increase in stock based compensation in 2008 is attributable to the issue of stock options late in 2007.
Depletion, Depreciation and Accretion:
Increased production resulted in the charge for depletion, depreciation and accretion increasing by 23% in the final quarter of 2008, compared to the same quarter in 2007, and by 8% compared to the third quarter of 2008. Per Boe, depletion, depreciation and accretion amounted to $15.44 in the final quarter of 2008; the charge for the final quarter of 2007 amounted to $17.04 and for the third quarter of 2008, $16.40. Falling per unit charges for depletion, depreciation and accretion demonstrate the Company's ability to add proved reserves at a cost lower than in prior years.
Net Income:
Net income for the fourth quarter of 2008 increased by 109% compared to the same quarter of 2007 but fell by 53% over net income for the third quarter of 2008. Per diluted share amounts were $0.13 for the final quarter of 2008; $0.06 for the final quarter of 2007; and $0.28 for the third quarter of 2008.
Funds from Operations and Cash Flows from Operating Activities:
Funds from operations for the fourth quarter of 2008 increased by 54% to $20.4 million from $13.2 million in the fourth quarter of 2007, but fell by 16% compared to the third quarter of 2008. Per diluted share amounts were $0.44 for the final quarter of 2008; $0.30 for the final quarter of 2007; and $0.53 for the third quarter of 2008. Falling commodity prices resulted in lower funds from operations in the final quarter of 2008 when compared to the immediately preceding quarter.
Non GAAP funds from operations is not a measure recognized by GAAP in Canada. The most directly comparable measure under GAAP is cash flows from operating activities. Cash flows from operating activities for the quarter ended December 31, 2008 amounted $20.1 million, compared to $19.2 million for the same quarter of 2007; and to $24.1 million for the third quarter of 2008.
Capital expenditures:
Capital expenditures for the final quarter of 2008 amounted to $35.3 million, compared to $17.1 million in 2007, and to $27.1 million in the third quarter of 2008.
QUARTERLY RESULTS
Summarized information by quarter for the two years ended December 31, 2008 appears below:
----------------------------------------------------------------------------
Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31,
Quarter Ended 2008 2008 2008 2008 2007 2007 2007 2007
----------------------------------------------------------------------------
Production
revenue -
($000s) 35,447 40,215 38,888 33,974 25,553 19,573 25,156 28,009
----------------------------------------------------------------------------
Funds from
operations -
($000s) 20,432 24,290 23,250 19,518 13,233 9,372 12,921 16,417
Per share
- basic 0.46 $ 0.54 $ 0.52 $ 0.44 $ 0.30 $ 0.21 $ 0.30 0.38
- diluted 0.45 $ 0.53 $ 0.50 $ 0.43 $ 0.30 $ 0.20 $ 0.29 0.38
----------------------------------------------------------------------------
Net income -
($000s) 5,968 12,829 9,465 6,426 2,852 299 2,832 5,066
Per share
- basic 0.13 $ 0.28 $ 0.21 $ 0.14 $ 0.06 $ 0.01 $ 0.06 $ 0.12
- diluted 0.13 $ 0.28 $ 0.20 $ 0.14 $ 0.06 $ 0.01 $ 0.06 $ 0.12
----------------------------------------------------------------------------
Average daily
production -
Boe 8,161 7,107 6,130 6,500 5,992 5,618 5,713 5,776
----------------------------------------------------------------------------
Average field
netback per
Boe $ 30.35 $ 39.77 $ 45.09 $ 35.87 $ 27.44 $ 20.83 $ 28.02 $ 33.91
----------------------------------------------------------------------------
Capital
Expenditures
- net -
($000s) 35,342 27,057 5,780 26,775 17,094 19,953 32,768 24,075
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SELECTED ANNUAL FINANCIAL INFORMATION
Financial Results:
----------------------------------------------------------------------------
Year Ended Year Ended Year ended Year ended
December 31, December 31, December 31, December 31,
2008 2007 2006 2005
----------------------------------------------------------------------------
Production revenue - $000 148,524 98,291 80,165 70,345
----------------------------------------------------------------------------
Funds from operations -$000 87,490 51,943 43,297 37,992
----------------------------------------------------------------------------
Per share basic 1.96 1.20 $ 1.04 $ 0.98
----------------------------------------------------------------------------
Per share diluted 1.91 1.18 $ 1.03 $ 0.93
----------------------------------------------------------------------------
Net Income - $000 34,686 11,049 11,505 26,533
----------------------------------------------------------------------------
Per share basic 0.78 0.25 $ 0.28 $ 0.68
----------------------------------------------------------------------------
Per share diluted 0.76 0.25 $ 0.27 $ 0.65
----------------------------------------------------------------------------
Total assets - $000 328,376 260,907 202,652 146,989
----------------------------------------------------------------------------
Debt, including working
capital deficiency- $000 98,790 84,681 57,314 33,248
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating Results:
---------------------------------------------------------------------------- Average production 6,978 5,775 4,720 3,324 ---------------------------------------------------------------------------- Revenue per Boe $ 57.87 $ 46.31 $ 45.93 $ 57.29 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Comparability of net income between years is affected by variations in production revenue and increased costs relating to an increased production base. In addition, in 2005 the provision for future income taxes was largely eliminated through use of prior years' losses. Also, in both 2008 and 2005, the company realized non-cash investment gains for which there was no equivalent in any other year.
Earnings per share and per diluted share, are affected by variations in net income and the issue of common shares in both 2006 and 2007, and the periodic issue of stock options. Increases in total assets for each period reflect the Company's need to continually invest in capital assets to maintain and grow production.
Bank indebtedness has grown each period as bank debt is used, in part, to fund capital investment, including acquisitions.
Share Trading:
Set out below is share trading activity for Storm for 2008 and 2007:
----------------------------------------------------------------------------
Year -
2008 Q1 Q2 Q3 Q4 2008
----------------------------------------------------------------------------
High $ 12.20 $ 19.41 $ 19.75 $ 14.25 $ 19.75
----------------------------------------------------------------------------
Low $ 8.52 $ 11.74 $ 11.53 $ 6.92 $ 6.92
----------------------------------------------------------------------------
Close $ 12.02 $ 19.17 $ 13.89 $ 13.82 $ 13.82
----------------------------------------------------------------------------
Volume traded ('000) 7,219 11,515 11,939 12,078 42,751
----------------------------------------------------------------------------
Value traded ('000) $75,928 $178,132 $188,404 $135,146 $577,610
----------------------------------------------------------------------------
Weighted average
trading price $ 10.52 $ 15.47 $ 15.78 $ 11.19 $ 13.51
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year -
2007 Q1 Q2 Q3 Q4 2007
----------------------------------------------------------------------------
High $ 7.80 $ 9.43 $ 9.10 $ 9.10 $ 9.43
----------------------------------------------------------------------------
Low $ 6.30 $ 7.41 $ 7.27 $ 7.90 $ 6.30
----------------------------------------------------------------------------
Close $ 7.46 $ 8.61 $ 8.75 $ 8.90 $ 8.90
----------------------------------------------------------------------------
Volume traded ('000) 2,676 2,525 2,431 4,107 11,738
----------------------------------------------------------------------------
Value traded ('000) $18,820 $ 21,638 $ 20,022 $ 35,741 $ 96,222
----------------------------------------------------------------------------
Weighted average
trading price $ 7.03 $ 8.57 $ 8.24 $ 8.70 $ 8.20
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
Financial amounts included in the Company's Management's Discussion and Analysis and in the consolidated financial statements for the year ended December 31, 2008 are based on accounting policies, estimates and judgment which reflect information available to management at the time of preparation. Certain financial amounts are derived from a fully completed transaction cycle, or are validated by events subsequent to the end of the reporting year, or are based on established and effective measurement and control systems. However, other amounts, as described below, are based on estimations using information that involves a high degree of measurement uncertainty which could have a material effect on Storm's operating results and financial position.
Oil and Gas Properties
Storm uses the full cost method of accounting for exploration and development activities whereby all costs associated with these activities are capitalized. The aggregate of capitalized costs, less unproved property costs, but including estimated future development costs, is amortized using the unit-of-production method based on estimated proved reserves estimated by external reservoir engineers reporting to the Reserves Committee of the Board of Directors.
Storm's investment in oil and gas assets is evaluated at least annually (the "ceiling test") to consider whether the investment is recoverable and the carrying amount does not exceed the value of the properties, as determined by formula. If the carrying amount of the oil and gas assets is not determined to be recoverable, a loss is recognized to the extent that the carrying amount exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves plus the lower of cost and market value of unproved properties. Cash flows are estimated using future product prices and costs and are discounted using a risk-free rate appropriate to the Company.
The amount of the charge for depletion and the periodic application of the ceiling test are based on the independent reserves report, which reflects future events, including future pricing, which are subject to a high degree of estimation. No write downs of the carrying amount of Storm's oil and gas assets have been required upon the annual application of the ceiling test.
Asset Retirement Obligation
Storm records as a liability the estimated fair value of obligations associated with the retirement of field assets, such as producing well sites and processing facilities. The carrying amount of property and equipment is increased by an amount equivalent to the liability. The future asset retirement obligation is based on the Company's ownership interest in wells and facilities, and reflects estimated costs to complete the abandonment and reclamation as well as the estimated timing of the costs to be incurred in future periods. The liability is increased each reporting period to reflect the passage of time, with the accretion charged to earnings. The liability is also adjusted to reflect changes in the amount and timing of the future retirement obligation and is reduced by the amount of any costs incurred in the period. The amount of the abandonment obligation, the charge for accretion and the charge for depletion of the amount added to property and equipment are subject to uncertainty of estimation.
Income Taxes
The measurement of Storm's future income and other tax liabilities and assets, including losses carried forward and asset pools, requires interpretation of complex laws and regulations. All tax filings and compliance with tax regulations are subject to audit and reassessment, potentially several years after the initial filing. Accordingly, actual income tax assets or liabilities may differ significantly from the amounts initially estimated.
Stock Based Compensation
To determine the charge for stock based compensation, the Company estimates the fair value of stock options at time of issue using assumptions regarding the life of the option, dividend yields, interest rates and the volatility of the security under option. Although the assumptions used to value a specific option remain unchanged throughout the life of the option, assumptions may change with respect to subsequent option grants. In addition, the assumptions used may not properly represent the fair value of stock options at any time; as no alternative valuation model is applied, the difference between the Company's estimation of fair value and the actual value of the option is not measurable.
RISK ASSESSMENT
There are a number of risks facing participants in the Canadian oil and gas industry. Some risks are common to all businesses while others are specific to the industry. The following reviews a number of the identifiable business risks faced by Storm. Business risks evolve constantly and additional risks emerge periodically. The risks below are those identified by management at the date of completion of this report, and may not describe all of the business risks faced by the Company.
Exploration
Storm's exploration program requires sophisticated and scarce technical skills as well as capital and access to land and equipment to generate and test exploration ideas. Further, the drilling of an exploratory prospect frequently does not result in the discovery of economical reserves. Storm endeavours to minimize finding risk by ensuring that:
- Where possible, prospects have multi-zone potential.
- Activity is focused in core regions where expertise and experience can be levered.
- Prospects are internally generated.
- Storm serves as operator where possible to maintain operational quality, timing and control.
- Geophysical techniques such as seismic are utilized where appropriate and available.
Commodity Price Fluctuations
Pricing for the Company's products is volatile and subject to a myriad of factors, largely out of the Company's control. Low prices, particularly for the Company's primary product, natural gas, have a material effect on the Company's re-investment capacity, and hence ultimate growth potential and profitability. Low prices also limit access to capital, both equity and debt. High netback production, a low cost structure, along with a stable balance sheet, helps to mitigate commodity price exposure. Periodically, Storm will secure price protection through hedging.
Adverse Well or Reservoir Performance
Changes in well performance in any one or a number of producing pools could result in termination or limitation of production, or acceleration of decline rates, resulting in reduced overall corporate volumes and revenues. In addition, new wells, particularly new wells at Parkland in the Company's Montney formation, tend to produce at high initial rates followed by rapid declines until a flattening decline profile emerges. Correspondingly, the timing of tie in of new wells may affect comparability of intra year production levels. Long life gas reserves, operated under prudent production practices, mitigate exposure to high decline wells or pools.
Field Operations
Storm's exploration, development and production activities involve the use of heavy equipment and the handling of potentially volatile liquids and gases. Catastrophic events such as well blowouts, explosions and fires within pipeline, gathering, or facility infrastructure, as well as failure of mechanical equipment, could lead to sour gas releases, spills, personal injuries and damage to the environment, as well as uncontrolled cost escalation. With support from suitably qualified external parties, the Company has developed and implemented policies and procedures to mitigate environmental, health and safety risks. These policies and procedures include the use of formal corporate policies, emergency response plans, and other policies and procedures reflecting best oil field practices. These policies and procedures are subject to periodic review. Storm also manages environmental and safety risks by maintaining its facilities to a high standard and complying with all provincial and federal environmental and safety regulations.
Storm maintains industry-specific insurance policies, including business interruption on certain facilities. Although the Company believes its current insurance coverage corresponds to industry standards, there is no guarantee that such coverage will be available in the future, and if it is, at a cost acceptable to the Company, or that existing coverage will necessarily extend to all circumstances or incidents resulting in loss. In addition, recent stress in credit markets may have unexpected effects on the solvency of insurance providers.
Industry Capacity Constraints
High levels of field activity can result in shortages of services, products, equipment, or manpower in many or all necessary components of the exploration and development cycle. Increased demand leads to higher land and service costs during peak activity periods. Competition in the Canadian oil and gas industry, particularly in recent years, has been considerable. Although current economic conditions suggest an easing of competitive conditions in the short and medium term, competition in the Company's most prospective areas continues to be intense. Storm's competitors include companies with far greater resources, including access to capital. Storm competes by maintaining a large inventory of self-generated exploration and development locations, by acting as operator where possible, and through facility access and ownership. Storm also seeks to mitigate such risks through careful management of key supplier relationships and by maintaining a balance of field activity throughout the year.
Capital Programs
Capital expenditures are designed to accomplish two main objectives, being the generation of short and medium term cash flow from development activities, and future cash flow from the discovery of reserves through exploration. Storm faces constant production declines from existing wells which have to be replaced by new production. Storm focuses its activity in core areas, which allows it to leverage its experience and knowledge, and acts as operator wherever possible. The Company uses farmouts to minimize risk on plays it considers higher risk or where total capital invested exceeds an acceptable level. In addition, Storm may enter into hedging agreements in support of capital programs, particularly when cash flow for any period is anticipated to be lower than capital expenditures. Capital programs are financed primarily through cash flow and constraints on cash flow resulting from lower commodity prices will result in a reduction in capital expenditures. In addition, credit availability from the Company's bankers is also necessary to support capital programs and any changes to credit availability may have an effect on both the size of the Company's capital program and the timing of expenditures.
Acquisitions
Storm's objective of rapid and controlled growth is, in part, supported through carefully selected and managed acquisitions. Acquisitions have to be acceptably priced and production should provide netbacks at least equivalent to the Company's existing production, or provide identifiable opportunities to increase value. An acquisition should also offer potential for near and medium term development and be in areas where Storm can readily add to the acquired land position. Processing and transportation infrastructure must also be in place, or within the Company's financial capacity to construct.
Reserve Estimates
Estimates of economically recoverable oil and natural gas reserves and natural gas liquids, and related future net cash flows, are based upon a number of variable factors and assumptions. These include commodity prices, production, future development and operating costs and potential changes to the Company's operations arising from regulatory or fiscal changes. All of these estimates may vary from actual results, with the result that estimates of recoverable oil and natural gas reserves attributable to any property are subject to revision. Storm's actual production, revenues, taxes, development and operating expenditures associated with its reserves may vary from such estimates, and such variances may be material.
The Company's independent engineering firm, Paddock Lindstrom & Associates Ltd. completes an evaluation of the Storm's reserves each year and reports to the Company's Reserves Committee.
Production
Production of oil and natural gas reserves at an acceptable level of profitability may not be possible during periods of low commodity prices. Storm attempts to mitigate this risk by focusing on high net back commodities and acts as operator where possible, thus allowing the Company to manage costs, timing, method and marketing of production. Production risk is also addressed by concentrating exploration efforts in regions where infrastructure is Storm owned or readily accessible at an acceptable cost.
Financial and Liquidity Risks
Storm faces a number of financial risks over which it has no control, such as commodity prices, exchange rates, interest rates, access to credit and capital markets, as well as changes to government regulations and tax and royalty policies. The Company uses the following guidelines to address financial exposure:
- Internally generated cash flow provides the initial source of funding on which the Company's annual capital expenditure program is based.
- Debt may be utilized to expand capital programs, including acquisitions, when it is deemed appropriate and where debt retirement can be controlled.
- Equity, including flow-through shares, if available on acceptable terms, may be raised to fund acquisitions.
- Farmouts of projects may be arranged if management considers that a project requires too much capital or where the project affects the Company's risk profile.
Marketing Risks
Markets for Storm's products are outside its capacity to control or influence, and can be affected by events such as weather, regional, national and international supply and demand imbalances, geopolitical events, currency fluctuation, introduction of new, or termination of existing supply arrangements, as well as downtime due to facility maintenance or damage. Storm attempts to mitigate these risks as follows: - Natural gas properties are developed in areas where there is suitable processing and pipeline infrastructure.
- Exploration efforts focus on light oil and liquids-rich natural gas reserves.
- Financial instruments may be used to manage commodity price volatility where Storm has capital programs, including acquisitions, whose cost exceeds near term projected cash flows.
Climate Change
Increasing public and political focus on climate change and its possible amelioration may cause changes in demand for Storm's products and the introduction of regulations which may result in changes to the Company's operating practices as well as additional and unforeseeable costs. The evolution of public policy over the next several years, and its effect on Storm, cannot be determined at this stage, but given that the Company is a producer of primary hydrocarbons it is likely that its business will be subject to increased regulation and potentially subject to additional taxes and costs.
Access to Debt and Equity
Storm's capital structure involves the use of bank debt and from time-to-time access to equity markets. The worldwide and unprecedented series of events in recent months has resulted in the collapse of, or losses reported by, major international financial institutions, along with severe curtailment of liquidity in debt markets and the injection of public money to support both debt and equity markets and financial institutions. Although the Canadian banking sector, in comparison to its international peers, has shown resilience in the face of these events, it has still incurred considerable losses and will be affected by any continuing weakness in credit markets. In view of these circumstances, the Company has reviewed its lending arrangements with its bankers and has received indications that existing credit arrangements will be maintained and that, other than the effect of changes in commodity pricing, criteria necessary to secure additional borrowing to support the Company's growth have not been changed. However, additional circumstances may emerge, including continuing declines in commodity prices, which could have the effect of reducing credit available to Storm, or being available only at an unacceptable cost, thus reducing the Company's ability to finance future growth. Further, access to equity markets may be negatively affected by recent events.
Storm's long-standing approach to financing operations through internally generated cash flow should mitigate the effect of any limitation in access to debt and equity markets. However, falling commodity prices will reduce cash flows; correspondingly the rate of growth of the Company's business may slow.
Recent events are likely to result in changed and increased regulation of debt and equity markets, which may also have an undeterminable effect on Storm's financial structure and cost of doing business.
Extraordinary Circumstances
Storm's operations and its financial condition may be affected by uncontrollable and unpredictable circumstances such as weather patterns, changes in contractual, regulatory or fiscal terms, exclusion from third party pipelines or facilities, or actions by certain groups such as industry organizations, local communities, or militant groups.
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 their evaluation, the CEO and CFO conclude that the design of ICFR is sufficiently effective as at December 31, 2008 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 circumstance suggesting a possible breach of disclosure controls was identified by the Disclosure Committee in the year ended December 31, 2008.
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 company year ends 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, means 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 between 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)
December 31, 2008 December 31, 2007
----------------- -----------------
----------------- -----------------
ASSETS
Current
Accounts receivable 14,274 11,949
Prepaid and other costs 2,916 1,945
----------------- -----------------
17,190 13,894
Property and Equipment - Net (Note 3) 290,944 237,738
Investments (Note 4) 20,242 9,275
----------------- -----------------
328,376 260,907
----------------- -----------------
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued
liabilities 34,076 24,103
----------------- -----------------
34,076 24,103
Bank Indebtedness (Note 5) 81,904 74,472
Asset Retirement Obligation (Note 6) 7,259 6,918
Future Income Taxes (Note 7) 22,875 10,519
----------------- -----------------
146,114 116,012
----------------- -----------------
Shareholders' Equity (Note 8)
Share capital 88,013 86,994
Contributed surplus 3,980 2,318
Retained earnings 90,269 55,583
Accumulated other comprehensive
income (deficit) - -
----------------- -----------------
182,262 144,895
----------------- -----------------
Commitments (note 13)
Subsequent event (note 14)
----------------- -----------------
328,376 260,907
----------------- -----------------
----------------- -----------------
Storm Exploration Inc.
Consolidated Statements of Income, Comprehensive
Income and Retained Earnings
($000s)
Year ended Year ended
December 31, 2008 December 31, 2007
----------------------------------------
----------------------------------------
Revenue
Production revenue 148,524 98,291
Royalties (31,021) (20,341)
-------------------------------
117,503 77,950
-------------------------------
Expenses
Production 17,065 14,908
Transportation 5,279 4,959
Interest 3,503 3,811
General and administrative 3,441 2,329
Stock based compensation 1,886 1,232
Provision for account receivable 725 -
Depletion, depreciation and accretion 42,089 34,852
-------------------------------
73,988 62,091
-------------------------------
Income before the following: 43,515 15,859
Investment gain (Note 4) 3,527 -
-------------------------------
Income before taxes 47,042 15,859
Future income taxes (Note 7) (12,356) (4,810)
-------------------------------
Net and comprehensive income for the year 34,686 11,049
Retained earnings, beginning of year 55,583 44,534
-------------------------------
Retained earnings, end of year 90,269 55,583
-------------------------------
-------------------------------
Net Income per share (Note 9) - basic 0.78 0.25
- diluted 0.76 0.25
Storm Exploration Inc.
Consolidated Statements of Cash Flows
($000s)
Year ended Year ended
December 31, 2008 December 31, 2007
-------------------------------------
-------------------------------------
Operating activities
Net and comprehensive income for
the year 34,686 11,049
Less: Investment gains (Note 4) (3,527) -
Add non-cash items:
Depletion, depreciation and accretion 42,089 34,852
Future income tax 12,356 4,810
Stock based compensation 1,886 1,232
--------------------------------
Funds from operations 87,490 51,943
Net change in non-cash working capital
items (Note 10) (1,518) 4,210
--------------------------------
85,972 56,153
--------------------------------
Financing activities
Issue of common shares - net of expenses 795 14,580
Increase (Decrease) in bank indebtedness 7,432 24,062
--------------------------------
8,227 38,642
--------------------------------
Investing activities
Increase in investments (7,440) -
Additions to property and equipment (99,934) (96,983)
Disposals of property and equipment 4,980 3,093
Net change in non-cash working capital
items (Note 10) 8,195 (905)
--------------------------------
(94,199) (94,795)
--------------------------------
Change in cash during the year - -
Cash, beginning of year - -
--------------------------------
Cash, end of year - -
--------------------------------
--------------------------------
STORM EXPLORATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2008 AND 2007
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
The consolidated financial statements of Storm have been prepared by management in accordance with accounting principles generally accepted in Canada. The significant accounting policies used in the preparation of these consolidated financial statements are as follows:
Property and Equipment
Petroleum and Natural Gas Properties and Equipment
The Company follows the full-cost method of accounting for petroleum and natural gas properties, whereby all costs associated with the exploration for and development of petroleum and natural gas reserves, whether productive or unproductive, are capitalized in a Canadian cost centre. Such costs include land acquisition, drilling of both productive and unproductive wells, geological and geophysical costs, the cost of production equipment and the present value of the future asset retirement obligation. General and administrative costs are not capitalized.
Depletion and Depreciation
Capitalized costs are depleted using the unit-of-production method based on estimated proved petroleum and natural gas reserves, before royalties, as determined by independent engineers. Production and reserves of natural gas are converted to equivalent barrels of crude oil on the basis of six thousand cubic feet of gas to one barrel of oil. Costs of acquiring and evaluating unproved properties are excluded from depletion calculations until it is determined whether proved reserves are attributable to the properties or impairment occurs. Proceeds from the sale of petroleum and natural gas properties and related equipment are applied against capitalized costs, with no gain or loss recognized, unless such a sale would result in a change in the rate of depletion of 20% or more.
Processing facilities and well equipment are depreciated on a straight-line basis over the estimated useful life of the facilities and equipment.
Impairment
Net capitalized costs of the Company's petroleum and natural gas properties are subject, at least annually, to a ceiling test to ensure that capitalized costs do not exceed an estimate of future net revenues. This latter amount is the aggregate of expected undiscounted future net cash flows from proved reserves and the lower of cost or market value of unproved properties. Future cash flows are estimated using expected future prices and costs. If the carrying amount is not fully recoverable, the amount of impairment is measured by comparing the carrying amounts of the capital assets to an amount equal to the estimated net present value of future cash flows from proved plus probable reserves. This impairment in the carrying amount would be recognized and charged to current operations as additional depletion. No such charges have been incurred by the Company.
Office Furniture and Equipment
Furniture and equipment is recorded at cost and is depreciated on a straight line basis over its expected useful life of 10 years.
Joint Operations
Significantly all of the Company's exploration and production activities are conducted through unincorporated joint ventures, under joint operating agreements. The accounts of the Company reflect its proportionate interest in such activities.
Investments
The Company holds shares in two private companies, Storm Gas Resource Corp. ("SGR") and Storm Ventures International Inc. ("SVI"), which are accounted for using the equity method and the cost method, respectively. Net income for SGR for the year ended December 31, 2008, was insignificant; correspondingly, the Company has not included in its consolidated statement of income any amount representing its equity interest in SGR's net income for the year end December 31, 2008.
Asset Retirement Obligation
The Company recognizes the fair value of the retirement obligation associated with properties in the period in which this liability arises and when reasonable estimates of fair value can be made. The fair value of the liability is calculated as the present value of the expected future costs of abandonment and reclamation. The obligation is recorded as a long term liability with a corresponding increase to the carrying amount of property and equipment. The liability is increased each reporting period through the accretion of interest up to the future amount of the liability. The charge for accretion is recorded as an expense in the Company's consolidated statement of income. The addition to the carrying amount of the asset is amortized on the same basis as property and equipment. Actual costs incurred on settlement of the abandonment obligation are charged against the liability.
Revenue Recognition
Revenues from the sale of crude oil, natural gas liquids and natural gas are recorded when title passes to a third party.
Income Taxes
Income taxes are calculated using the liability method of tax accounting. Temporary differences arising from the difference between the tax basis of an asset or liability and its carrying amount on the consolidated balance sheet are used to calculate future income tax assets and liabilities. Future income tax assets and liabilities are calculated using tax rates anticipated to apply in the periods that the temporary differences are expected to reverse.
Flow-Through Shares
Flow-through shares were issued in 2006 and 2007, with the proceeds used to fund qualifying exploration expenditures within a defined period. Expenditures funded by flow-through arrangements are renounced to investors in accordance with tax legislation. Share capital is reduced and the future tax liability is increased by the estimated future income tax cost of the renounced tax deductions at the time of renunciation to the shareholders.
Stock Based Compensation
The Company has issued performance warrants and options to acquire common shares to directors, officers and employees of the Company. These warrants and options are accounted for using the fair value method which estimates the value of the warrants and options at the date of the grant using the Black-Scholes option pricing model. The fair value thus established is recognized as an expense over the vesting period of the warrants and options with an equivalent increase to contributed surplus. All performance warrants expired in mid-2007; correspondingly, stock-based compensation reflects only options to acquire common shares.
Per Share Amounts
Net income per share is calculated using the weighted average number of shares outstanding during each reporting period. Diluted net income per share is calculated using the treasury stock method to determine the dilutive effect of performance warrants and stock options. The treasury stock method assumes that the proceeds received from the exercise of "in the money" stock options are used to purchase common shares at the market price at the end of the reporting period.
Measurement Uncertainty
The amounts recorded for depletion and depreciation of property and equipment, the provision for the asset retirement obligation and amounts used for ceiling test calculations are based on estimates of reserves, production rates and future commodity prices and costs. These estimates of reserves and related future cash flows are subject to measurement uncertainty and the effect on the consolidated financial statements of changes in such estimates in future periods could be material.
CHANGES IN ACCOUNTING POLICIES
On January 1, 2008, the Company adopted additional accounting pronouncements promulgated by the Canadian Institute of Chartered Accountants ("CICA"). The new accounting policies are set out in CICA Handbook Section 1535 "Capital Disclosures"; Section 3862 "Financial Instruments - Disclosures"; and Section 3863 "Financial Instruments - Presentation". As required by the new standards, prior periods have not been restated.
Capital Disclosures
This new accounting pronouncement requires companies to describe their objectives, policies and processes regarding management of capital. Information about what constitutes capital is also required, and the existence of any obligations relating to capital maintenance must be disclosed, along with the consequences of non-compliance. Note 12 to these consolidated financial statements provides the required disclosures.
Financial Instruments - Disclosures
This pronouncement is an expansion of existing standards relating to financial instruments and requires the disclosure of information about financial instruments to which the Company is a party. Information is provided about financial instruments and their actual or potential effect on the financial position and results of the Company. Further, information is provided about risks to which the Company is exposed through recognized and unrecognized financial instruments and how these risks are managed. See Note 11.
Financial Instruments - Presentation
This pronouncement enhances existing disclosure requirements and establishes presentation standards for financial instruments and non-financial derivatives. See Note 11.
The adoption of these pronouncements has had no effect on the Company's net income or funds from operations for the year.
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
December 31, 2008 December 31, 2007
--------------------------------------
Property and equipment $ 410,394 $ 315,587
Accumulated depletion and depreciation (119,450) (77,849)
--------------------------------------
$ 290,944 $ 237,738
--------------------------------------
--------------------------------------
At December 31, 2008, the depletion calculation excluded unproved properties of $23.3 million (December 31, 2007 - $21.0 million) and included future development costs of $140.3 million (December 31, 2007 - $23.1 million).
The prices used, in Canadian dollars, in the ceiling test evaluation of the Company's natural gas, crude oil and natural gas liquids reserves at December 31, 2008 were:
----------------------------------------------------------------------------
Annual
increase
2009 2010 2011 2012 2013 to 2024
----------------------------------------------------------------------------
Natural Gas ($/mcf) 7.80 8.71 9.18 9.57 10.23 2.5%
Crude Oil ($/barrel) 67.03 73.71 80.35 86.66 94.77 2.0%
Natural Gas Liquids
($/barrel) 58.29 63.95 69.48 74.84 81.79 2.2%
----------------------------------------------------------------------------
4. INVESTMENTS
December 31, 2008 December 31, 2007
--------------------------------------
Investment in Storm Gas Resource Corp. $ 9,717 $ -
Investment in Storm Ventures
International Inc. 10,525 9,275
--------------------------------------
$ 20,242 $ 9,275
--------------------------------------
--------------------------------------
The Company holds shares in a private company, Storm Gas Resource Corp. and accounts for its holding using the equity method. The Company's initial investment, comprising cash and lands transferred at fair value, totalled $1,250,000 and represented a 45% interest. In July 2008 the Company also participated in a private placement of common shares in SGR in the amount of $4,940,000. The terms of the private placement were such that the Company's ownership position was reduced from 45% to 22%. As the shares issued under the private placement were sold at a share price greater than the price of Storm's initial investment, the Company recognized a dilution gain of $3,527,000. The common shares of SGR are unlisted and the carrying amount of the Company's investment does not represent a market valuation of the Company's investment in SGR.
The Company holds shares in another private company, Storm Ventures International Inc. which is accounted for using the cost method. In July, 2008 the Company participated in a private placement of common shares of SVI in the amount of $1,250,000; as the Company's participation was not pro rata to its existing interest, the Company's ownership position in SVI was reduced from 13% to 12%. Subsequently, in December 2008, SVI issued additional common shares, reducing the Company's ownership position to 6%. The common shares of SVI are unlisted and the carrying amount of the Company's investment does not represent a market valuation of the Company's investment in SVI.
5. BANK INDEBTEDNESS
The Company has an extendible revolving bank facility in the amount of $110 million (December 31, 2007 - $94 million), based on the Company's producing reserves. The revolving facility is available to the Company until May 31, 2009, but may be extended at the Company's request until May 30, 2010, subject to the bank's review of the Company's reserve lending base. If the revolving facility is not renewed at the end of the current revolving phase, the facility moves into a term phase whereby the loan is to be retired with one payment on the 366th day following the last day of the revolving phase, in an amount equal to the outstanding principal. Interest is payable on the revolving facility at bank prime rate or banker's acceptance rates plus a stamping fee. Security comprises a floating charge demand debenture on the assets of the Company.
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 $13.0 million (December 31, 2007 - $13.1 million), which will be paid over the next 23 years, with the majority of costs incurred 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 $7.3 million (December 31, 2007 - $6.9 million).
The following table provides a reconciliation of the carrying amount of the obligation associated with the retirement of oil and gas properties:
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Asset retirement obligation, beginning of
year $ 6,918 $ 5,925
----------------------------------------------------------------------------
Liabilities incurred 108 657
----------------------------------------------------------------------------
Liabilities disposed (255) (126)
----------------------------------------------------------------------------
Accretion expense 488 462
----------------------------------------------------------------------------
--------------------------------------
Asset retirement obligation, end of year $ 7,259 $ 6,918
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. FUTURE INCOME TAXES
The future income tax liability is based on of the excess of the accounting amounts over the related tax bases of the Company's property and equipment and share capital.
The Company has tax pools associated with property and equipment, for accounting purposes, of approximately $202 million as well as capital losses of approximately $10 million, all of which are not subject to expiry.
Under the terms of a flow-through share issue in September 2007, the Company was obligated to incur Canadian Exploration Expenditures in the amount of $15.1 million prior to December 31, 2008. As at December 31, 2008 the Company had incurred the full amount of qualifying expenditures, and amounts renounced to subscribers at December 31, 2007 have been deducted from the Company's tax pool balance.
The provision for future income taxes is different from the amount computed by applying the combined statutory Canadian federal and provincial tax rates to pre-tax income for the period.
The differences are as follows:
2008 2007
--------------------------------------
Statutory combined federal and
provincial income tax rate 30% 32%
Expected income taxes $ 14,280 $ 5,126
Add (deduct) the income tax effect of:
Stock-based compensation 572 398
Investment gain (1,071) -
Rate adjustments (1,432) (719)
Other 7 5
--------------------------------------
Future Income Tax $ 12,356 $ 4,810
--------------------------------------
--------------------------------------
The significant components of the future income tax liability are as follows:
December 31, 2008 December 31, 2007
--------------------------------------
Property and equipment $ 25,331 $ 13,073
Asset retirement obligation (2,033) (2,006)
Share issue costs (423) (548)
--------------------------------------
Future income tax liability $ 22,875 $ 10,519
--------------------------------------
--------------------------------------
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, 2006 42,914 $ 76,285
Flow-through common shares issued (i) 1,400 15,050
Common shares issued under performance
warrant plan (ii) 131 127
Stock options exercised (iii) 87 518
Tax effect of flow-through share
renunciations (4,365)
Share issue costs (net of income tax
benefit) (621)
--------------------------------------
Balance as at December 31, 2007 44,532 86,994
Stock options exercised (iv) 171 1,019
--------------------------------------
Balance as at December 31, 2008 44,703 $ 88,013
--------------------------------------
--------------------------------------
i) On September 6, 2007, 1,400,000 flow-through common shares were issued
at a price of $10.75 per share for total proceeds of $15,050,000,
before commission and expenses. The terms of this share issue require
the Company to renounce to subscribers Canadian Exploration
Expenditures in the amount of $15,050,000, to be incurred prior to
December 31, 2008. The Company incurred all the required qualifying
expenditures related to these flow-through shares by December 31, 2008.
ii) On June 29, 2007, 170,834 warrants under the performance warrant plan
were exercised. Based on a closing price of $8.55, 131,000 common
shares were issued. Proceeds were one cent per share and related prior
stock compensation expense of $127,000 was added to share capital.
iii) During 2007, 87,000 stock options were exercised for proceeds of
$406,000 and related prior stock compensation expense of $112,000 was
added to share capital.
iv) During 2008, 171,000 stock options were exercised for proceeds of
$795,000 and related prior stock compensation expense of $224,000 was
added to share capital.
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 December 31, 2008 are as follows:
----------------------------------------------------------------------------
Weighted Average
Number of options Exercise Price
Outstanding at December 31, 2006 1,934 $ 5.10
Issued during year 378 $ 8.15
Forfeited during year (59) $ 5.92
Exercised during year (87) $ 4.72
----------------------------------------------------------------------------
Outstanding at December 31, 2007 2,166 $ 5.62
Issued during year 292 $ 8.35
Forfeited during year (20) $ 7.49
Exercised during year (171) $ 4.66
----------------------------------------------------------------------------
Outstanding at December 31, 2008 2,267 $ 6.03
----------------------------------------------------------------------------
December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Average remaining life (years) 2.6 3.3
Number exercisable at end of year
(000s) 1,001 670
Option prices $2.60 - $11.40 $2.60 - $8.57
----------------------------------------------------------------------------
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 1.2 $3.33 210 $3.27
$3.91 to $5.71 1,299 2.3 $5.46 668 $5.43
$6.03 to $8.57 694 3.7 $8.06 123 $7.61
$8.58 to $11.40 8 4.2 $11.40 - -
---------------------------------- -----------------------
2,267 2.6 $6.03 1,001 $5.25
---------------------------------- -----------------------
---------------------------------- -----------------------
Using the Black-Scholes pricing model, the weighted average fair value of the options granted in 2008 was estimated to be $8.68 (2007 - $2.75), using risk-free interest rates of 4.75-5.25%, 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
Year ended Year ended
December 31, 2008 December 31, 2007
--------------------------------------
Basic
Net income per share $ 0.78 $ 0.25
Weighted average number of shares
outstanding 44,654 43,449
Diluted
Net income per share $ 0.76 $ 0.25
Weighted average number of shares
outstanding 45,877 44,132
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
Year ended Year ended
December 31, 2008 December 31, 2007
--------------------------------------
Accounts receivable $ (2,325) $ 1,212
Prepaid and other costs (971) 563
Accounts payable and accrued
liabilities 9,973 1,530
--------------------------------------
Change in non-cash working capital $ 6,677 $ 3,305
--------------------------------------
--------------------------------------
Relating to:
Operating activities $ (1,518) $ 4,210
Financing activities - -
Investing activities 8,195 (905)
--------------------------------------
$ 6,677 $ 3,305
--------------------------------------
--------------------------------------
Interest paid during the year $ 3,503 $ 3,811
--------------------------------------
--------------------------------------
Income taxes paid during the year $ - $ -
--------------------------------------
--------------------------------------
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 has established risk limits and controls, and monitors these risks in relation to market conditions. In other circumstances, for example, extending credit to purchasers of the Company's products, the Board has delegated responsibility for credit assessment to management, but receives frequent financial and operating reports.
The Company's financial instruments recognized on the consolidated balance sheet consist of accounts receivable, bank indebtedness and accounts payable and accrued liabilities. The fair value of these financial instruments approximates their carrying amounts based on the short term to maturity.
Credit risk
A substantial portion of the Company's accounts receivable are concentrated with a limited number of purchasers of commodities and joint venture partners in the oil and gas industry and are subject to normal industry credit risk. Management considers 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.
However, one purchaser of the Company's products became insolvent in 2008, resulting in a pre tax loss of $725,000 and 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
The Company faces certain other financial risks as follows:
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. For the year ending December 31, 2008 the Company realized a hedging loss of $2.2 million (2007 - $2.6 million hedging gain). These amounts have been recorded as part of production revenues.
As at December 31, 2008, Storm had no hedges in place.
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 December 31, 2008 to reduce interest rate risk.
Foreign exchange
Although the Company's product revenues are denominated in Canadian dollars, the underlying market prices are affected by the exchange rate between the Canadian and the United States dollar. As at December 31, 2008 the Company had no contracts in place to reduce foreign exchange risk.
Using the Company's actual production volumes, royalty rates, income tax rates and debt levels for 2008 and 2007, the estimated after-tax effects that changes in certain factors would have on net income and net income per share is as follows:
----------------------------------------------------------------------------
2008 2007
Factor Change in Change in
Change in net income Change in net income
net income per share net income per share
----------------------------------------------------------------------------
$US 1.00/bbl change
in the price of WTI $223,000 $0.00 $163,000 $0.00
$0.10/mcf change in the
price of natural gas $749,000 $0.02 $611,000 $0.01
1% change in the
interest rate $562,000 $0.01 $518,000 $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 unexpected operating or capital cost increases. Liquidity difficulties could also occur if the Company's bankers were unable to continue to provide credit at a level, 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 during the fiscal year uses a non-GAAP measurement of net debt to cash flow to measure and control debt levels. This measurement is established as follows:
----------------------------------------------------------------------------
December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Current assets 17,190 13,894
----------------------------------------------------------------------------
Accounts payable and accrued
liabilities 34,076 24,103
----------------------------------------------------------------------------
--------------------------------------
Working capital deficiency 16,886 10,209
----------------------------------------------------------------------------
Bank indebtedness 81,904 74,472
----------------------------------------------------------------------------
--------------------------------------
Net debt 98,790 84,681
----------------------------------------------------------------------------
--------------------------------------
Funds from operations for the year 87,490 51,943
----------------------------------------------------------------------------
Net debt to cash flow ratio 1.1 : 1 1.6 : 1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The ratio of net debt to cash flow (defined as net debt divided by funds from operations) is subject to quarterly variations and is usually highest in the first and fourth quarter of each year, when capital expenditures normally exceed cash flow, with a resulting increase in net debt.
The Company's bank indebtedness is based on the Company's producing reserves. 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.
The Company may issue share capital when debt levels are high and potentially constrain operations.
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 129 58 14 - -
----------------------------------------------------------------
Gas transportation and
processing commitments 2,235 1,437 1,146 599 198
----------------------------------------------------------------
Total $3,175 $2,320 $1,998 $1,437 $ 617
----------------------------------------------------------------
----------------------------------------------------------------
14. SUBSEQUENT EVENT
On February 11, 2009 the Company entered into a bought-deal agreement with a syndicate of underwriters for the sale of 1,850,000 common voting shares of the Company under the short form prospectus rules at a price of $10.60 per share. Proceeds after commission and expenses are estimated to be $18,730,000. The closing of the offering is expected to occur on March 6, 2009.
Contact:
Brian Lavergne
Storm Exploration Inc.
President
(403) 264-3520
Donald McLean
Storm Exploration Inc.
Chief Financial Officer
(403) 264-3520
Website: www.stormexploration.com
Related Headlines
- Storm Exploration Inc. Is Pleased to Announce Its Financial and Operating Results for the Three and Nine Months Ended September 30, 2009 - CCNMatthews
- Storm Exploration Inc. to present at the FirstEnergy/Société Générale EnergyGrowth Conference in Toronto, ON - CNW Group
- Storm Exploration Inc. - Webcast from the Peters & Co. 2009 North American Oil & Gas Conference - September 16, 2009 - CNW Group
- Storm Exploration Inc. Is Pleased to Announce Its Financial and Operating Results for the Three and Six Months Ended June 30, 2009 - CCNMatthews
- Storm Exploration Inc. Is Pleased to Announce Its Financial and Operating Results for the Three Months Ended March 31, 2009 - CCNMatthews
Sponsored Links
-
Trade Stocks? Try Currency Trading
Trade in a highly trending market 24-hrs a day, 5.5 days a week. GFT. -
Earn From 1.90% to 2.20% Apply Online
With GE Capital Corporation. Not An Offer Of Securities For Sale.
-
Buy Stocks for $4
No account or investment minimums. No inactivity fees. Start Today. -
Super Cheap Car Insurance Quotes
Get Discount Auto Insurance Quotes Online - Rates from $15 / Month.
Tech Ticker Recent Posts
Add Alert Copyright © 2009 Marketwire. All rights reserved. All the news releases provided by Marketwire are copyrighted. Any forms of copying other than an individual user's personal reference without express written permission is prohibited. Further distribution of these materials is strictly forbidden, including but not limited to, posting, emailing, faxing, archiving in a public database, redistributing via a computer network or in a printed form.