Storm Exploration Inc. (TSX:SEO)
Consolidated Highlights
Thousands of Cdn$,
except volumetric Three Months Three Months Six Months Six Months
and per share to June 30, to June 30, to June 30, to June 30,
amounts 2010 2009 2010 2009
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FINANCIAL
Gas sales 20,504(1) 14,026 40,979(1) 35,633
NGL sales 8,054 2,028 15,443 3,904
Oil sales 1,198(1) 2,611(1) 2,447(1) 4,880(1)
Royalty income 21 47 78 114
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Production revenue 29,777(1) 18,712(1) 58,947(1) 44,531(1)
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Funds from
operations (2) 20,356 8,460 37,957 22,180
Per share
- basic ($) 0.43 0.18 0.81 0.48
Per share
- diluted ($) 0.42 0.18 0.79 0.47
Net income 6,105 (2,192) 9,145 (942)
Per share
- basic ($) 0.13 (0.05) 0.19 (0.02)
Per share
- diluted ($) 0.13 (0.05) 0.19 (0.02)
Capital
expenditures, net
of dispositions (43,702) 3,843 (6,863) 35,334
Debt, including
working capital
deficiency(3) 46,572 93,473 46,572 93,473
Weighted average
common shares
outstanding
(000s)
Basic 47,056 46,553 46,982 45,888
Diluted 47,928 47,637 47,854 46,959
Common shares
outstanding (000s)
Basic 47,202 46,554 47,202 46,554
Fully diluted 49,899 49,012 49,899 49,012
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OPERATIONS
Oil equivalent (6:1)
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Barrels of oil
equivalent (000s) 858 742 1,609 1,502
Barrels of oil
equivalent per day 9,423 8,153 8,888 8,296
Average selling
price (Cdn$ per
Boe) 34.60(1) 25.81(1) 36.51(1) 30.21(1)
Gas production
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Thousand cubic
feet (000s) 4,316 3,839 8,084 7,752
Thousand cubic
feet per day 47,434 42,185 44,663 42,831
Average selling
price (Cdn$ per
Mcf) 4.75 3.65 5.07 4.60
NGL Production
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Barrels (000s) 125 49 233 97
Barrels per day 1,372 533 1,290 538
Average selling
price (Cdn$ per
barrel) 64.52 41.77 66.15 40.11
Oil Production
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Barrels (000s) 13 54 28 112
Barrels per day 146 589 154 620
Average selling
price (Cdn$ per
barrel) 83.87(1) 57.76(1) 82.92(1) 53.22(1)
Wells drilled
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Gross 1.0 0.0 10.0 4.0
Net 1.0 0.0 8.7 2.8
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(1) Includes results of hedging activities.
(2) Funds from operations and funds from operations per share are non-GAAP
measurements. See MD&A
(3) Excludes unrealized asset/liability related to financial instruments.
President's Message
Second Quarter 2010 Highlights
- On June 9, 2010, Storm entered into an Arrangement Agreement whereby ARC will
acquire all of the existing and outstanding common shares of Storm in exchange
for either 0.57 of an ARC unit or, subject to adjustment, 0.201733 an ARC
Resources Ltd. exchangeable share. In addition, for each Storm common share,
shareholders will receive 0.3333 of a share in Storm Resources Ltd. (a new,
separate junior exploration and production company to be listed on the TSX-V),
0.1333 of a Storm Resources Ltd. Warrant, and a cash amount of $1.00 per Storm
share. Storm Resources Ltd. will be staffed with certain members of Storm's
management team with the primary asset being Storm's undeveloped land position
in the Horn River Basin. The shareholder meeting to approve the transaction is
scheduled for August 16, 2010 with closing to follow on August 17, 2010.
- Production in the second quarter averaged 9,423 Boe per day (16% oil and NGL),
a 16% increase from production of 8,153 Boe per day (14% oil and NGL) in the
second quarter of last year. This is a per-share increase of 14% using basic
shares outstanding at quarter end. Oil and NGL production increased 35% over the
same period to average 1,518 barrels per day which was due to the addition of a
liquids extraction ("refridge") plant at Parkland in mid-December 2009.
- During the quarter, one horizontal gas well (1.0 net) was successfully drilled
in our Montney discovery at Parkland and two horizontal Montney gas wells (1.35
net) were completed and tied in.
- Cash flow for the quarter was $20.4 million or $0.42 per diluted share, an
increase of 133% from $0.18 per diluted share in the prior year second quarter.
The year-over-year increase in cash flow was due to higher production, increased
oil and NGL pricing, hedging gains, lower operating costs and reduced royalties
due to British Columbia's Deep Royalty Credit Program for horizontal wells.
- The second quarter cash flow netback of $23.74 per Boe represents an increase
of 108% from the cash flow netback of $11.40 per Boe in the year earlier period.
The wellhead price per Boe increased by $8.79 which was due to hedging gains
plus higher oil and NGL production and pricing. In addition, total cash costs,
which include production costs, interest, transportation and general and
administrative costs, declined by $2.15 per Boe from the year earlier period to
average $7.79 per Boe in the second quarter. Production costs were $3.58 per Boe
in the quarter, a decline of 36% from the previous year.
- Net income for the quarter was $6.1 million, or $0.13 per diluted share, an
increase from the net loss of $0.05 per diluted share in the prior year period.
This was primarily due to a cash flow netback per Boe with charges for
depletion, depreciation and accretion, at $15.40 per Boe, being 7% higher than
the same period last year.
- Storm's oil sands leases at Surmont, Alberta were sold on June 10, 2010 for
gross proceeds totaling $53.75 million.
- Capital investment totaled $10.1 million in the quarter before the Surmont
disposition. Including the Surmont disposition, bank debt net of working capital
was reduced by $43.7 million and ended the quarter at $46.6 million, or 0.6
times annualized second quarter cash flow. Storm's revolving bank credit
facility is $140 million.
Boe Presentation - For the purpose of calculating unit revenues and costs,
natural gas is converted to a barrel of oil equivalent ("Boe") using six
thousand cubic feet ("Mcf") of natural gas equal to one barrel of oil unless
otherwise stated. Boe may be misleading, particularly if used in isolation. A
Boe conversion ratio of six Mcf to one barrel ("Bbl") is based on an energy
equivalency conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the wellhead. All Boe measurements and
conversions in this report are derived by converting natural gas to oil in the
ratio of six thousand cubic feet of gas to one barrel of oil. Mboe means 1,000
Boe.
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 7,939 Boe per day in the second quarter.
Current production from this area is approximately 8,100 Boe per day with 7,900
Boe per day from the Parkland property.
During the second quarter, activity was focused on the Parkland property and
included drilling one horizontal Montney well (1.0 net) into the upper sands,
plus completing and pipeline connecting two horizontal Montney wells (1.35 net)
which are also producing from the upper sands. Production rates on the new
horizontals averaged 4.2 Mmcf per day of raw gas per horizontal in the first 30
days of production.
In the second half of 2010, six to eight horizontals (4.7 to 5.4 net) are
expected to be drilled in the Montney formation at our Parkland property which
includes two more earning horizontals on the four section farm-in that was
entered into during the first quarter. In addition to this, one to two more
vertical Montney step-outs (1.0 to 1.6 net) will be drilled as part of our focus
on expanding the area where proved plus probable reserves have been assigned.
On the four section farm-in, the first earning horizontal was drilled in March,
completed with 8 fracture treatments in July, and has averaged 6.2 Mmcf per day
of gross raw gas since commencing production on July 16. Rigs are currently
drilling the next two earning horizontals with completion and tie in of both
being planned for early in the fourth quarter. Storm earns a 60% working
interest in the farm-in lands by paying 100% of the cost to drill, complete, and
tie in eight horizontal wells, and by paying 100% of the cost to drill two
vertical wells. All earning wells must be drilled before October 31, 2011. No
reserves were assigned to these lands in the 2009 year-end reserve evaluation.
The Upper Montney formation at Parkland is 80 to 110 metres thick and has been
sub-divided into the upper sands and the lower sands (see presentation on
Storm's website for type log illustration).
- In the upper sands of the Upper Montney formation, Discovered Petroleum
Initially in Place ("DPIIP")(1) is 1,331 Bcf of gross raw gas (928 Bcf net to
Storm) based on a productive area of 36.3 gross sections (23.5 net sections)
which includes the farm-in lands discussed above. In the 2009 year-end reserve
evaluation, 29.5 net proven plus probable undrilled horizontals were recognized
while, within the DPIIP area, there is potential for a total of 76 net undrilled
horizontals assuming a density of four horizontals per section. Currently, there
are 22 horizontal wells producing from the upper sands and first-year rates have
averaged approximately 2.4 Mmcf per day of raw gas (equal to 450 Boe per day of
total sales per well). Production rates have gradually improved as completions
have evolved from five fracture treatments on the early horizontals to nine
fracture treatments on the most recent horizontals. Fracture treatment size has
remained constant at 125 tons of sand per stage for the horizontals drilled in
the upper sands.
- In the lower sands, no reserves have been booked. The lower sands have been
separately completed and tested in six vertical wells with final test rates
ranging from 0.2 to 1.7 Mmcf per day. The completed vertical wells show that an
area of 9.5 gross sections (7.8 net) is potentially productive with estimated
net pay of 22 to 37 metres (3% sandstone scale cut-off) and average porosity of
5.8%. At four horizontals per section, there is potential for 31 net undrilled
horizontals in the lower sands in the productive area. The first horizontal in
the lower sands was drilled, completed with seven 50 ton fracs, and tied in for
a total cost of $4.5 million. No evidence of interference was observed during
the completion with the offsetting horizontal producing from the upper sands
which is 50 to 75 metres away laterally (based on pressure data and production
monitoring). Production commenced from this horizontal on April 15 and, over the
first 30 days, production averaged 1.4 Mmcf per day gross raw gas and has
declined to a current rate of 0.8 Mmcf per day. We are planning to drill a
second horizontal into the lower sands later in 2010 or early in 2011 (dependent
on discretionary cash flow), which will be completed with nine larger 75 ton
fracs to improve the production rate. No reserves were assigned to the lower
sands in the 2009 year-end reserve evaluation.
Discovered Petroleum Initially in Place ("DPIIP") - Is defined in the COGEH
handbook as the quantity of hydrocarbons that are estimated to be in place
within a known accumulation. Original Gas in Place ("OGIP") is a more commonly
used industry term when referring to gas accumulations. DPIIP is divided into
recoverable and unrecoverable portions, with the estimated future recoverable
portion classified as reserves and contingent resources. There is no certainty
that it will be economically viable or technically feasible to produce any
portion of this DPIIP except for those portions identified as proved or probable
reserves.
The combined capacity at our two Parkland facilities is now 53 Mmcf per day with
current throughput being 49 Mmcf per day of gross raw gas (90% average working
interest). A second electric drive compressor was installed at the 3-9
facility/refridge in July at a cost of $2.3 million which increased throughput
from 23 to 25 Mmcf per day of gross raw gas (10 Mmcf per day gas drive
compressor that was operational is now a 'spare'). In order to accommodate
future growth, an expansion of the 3-9 facility will be required in 2011 which
will likely include installing a second refridge facility plus additional
compression.
Financial results from our Parkland property showed further improvement in the
second quarter with an operating cost of $3.24 per Boe and a field netback of
$22.48 per Boe (before hedging gains). Production averaged 7,743 Boe per day
including 1,264 barrels per day of condensate and NGL (32 barrels per Mmcf of
raw gas). During the second quarter, condensate and NGL recoveries at the 3-9
facility with the refridge plant averaged 46 barrels per Mmcf of raw gas.
Horn River Basin ("HRB"), North East British Columbia
Storm's undeveloped land position in the HRB is prospective for Devonian shale
gas in the Muskwa, Otter Park, and Evie/Klua formations and currently includes
88 gross sections at a 40% working interest (23,110 net acres), with Storm Gas
Resource Corp. ("SGR") owning the remaining 60% working interest. One gross
section (40% working interest) was acquired at a Crown land sale during the
second quarter. Our land position combined with Storm's 22% equity ownership
position in SGR, gives us 53% exposure to this unconventional shale gas play.
Storm's initial efforts will be focused on proving commerciality and developing
the Muskwa and Otter Park shales within a 19 section core project area (7.6 net
sections). This area is the most prospective based on gross shale thickness
which averages 95 metres over this area (Muskwa and Otter Park only) and could
ultimately be developed with as many as 43 horizontals which would be 1,600 to
1,800 metres in length and completed with 12 or more fracture stimulations
(4,000 m3 fluid, 400 T sand per stimulation). Gross DPIIP within this core
project area is estimated to be 1.8 TCF of raw gas in the Muskwa and Otter Park
shales which is based on 95 metres average gross pay, 90 metres average net pay,
average porosity of 4.2%, gas content of 61 scf per ton, and an average
reservoir pressure of 26,000 kPa (internal estimates prepared by Storm
management). Two vertical wells (0.8 net) have been completed and tested in the
Devonian shales within this core project area, one of the vertical wells has
been cored, and there is 3-D seismic coverage over the entire core project area.
The core data and completion results from both vertical wells are very similar
to what has been reported by other operators in the area.
One horizontal well is planned for this summer (spud late August), with
completion planned for this fall. Possibly two more horizontals (0.8 net) will
be drilled this winter and completed in the summer of 2011. We are also working
at understanding and resolving a number of operational difficulties including
processing and transporting high temperature gas, sand production, source water,
and water disposal which could have a material impact on the total capital
required for larger scale development of the Muskwa and Otter Park shales. The
estimated cost to drill a horizontal well is $4 million while completion with 12
fracture stimulations is estimated to be $9 to $10 million. The cost for
associated infrastructure with 20 Mmcf per day of raw gas capacity to test
commerciality of the shales is $10 million which includes a wellsite facility,
gathering and sales pipelines, and a dehydration/compression facility. First gas
sales from a successful horizontal well is possible in early 2011 but, it is
likely to be later in 2011 before we have enough production data from one or
more horizontal wells and can determine the potential economics associated with
larger scale development.
Other Areas
In the second quarter, production from the Grande Prairie area of North West
Alberta averaged 1,089 Boe per day and production from the Cabin-Kotcho-Junior
area of North East British Columbia averaged 358 Boe per day.
In the Junior area of North East British Columbia, Storm has 33 net sections
which have potential to be developed with horizontal wells in the Jean Marie
formation. This is based on mapping and proximity to offsetting horizontals
which are producing from the Jean Marie formation. Two horizontal locations have
been licenced to test the economics associated with larger scale development,
and will be drilled when Storm has sufficient discretionary cash flow available,
which is primarily dependent on natural gas prices. The estimated cost to drill,
complete, and tie in a horizontal well is expected to be $2.1 million and, based
on offsetting wells, first-year rates are expected to average 800 to 1,400 Mcf/d
with 1.0 to 1.5 Bcf of recoverable raw gas per horizontal. Initial drilling
density would be one horizontal well per section.
At Umbach in North East British Columbia, one horizontal gas well (1.0 net) was
successfully drilled in July as part of a farm-in where Storm is paying 100% of
the cost to drill and complete in order to earn a 60% working interest. This
horizontal, combined with a vertical well drilled in the first quarter,
completed the earning phase of the farm-in and earned Storm 8,100 net acres. The
horizontal will be completed by mid-September with fracture treatments, each
with 100 T of sand.
INVESTMENTS
Storm Gas Resource Corp. ('SGR')
SGR is a private company formed in June 2007, to pursue unconventional gas
opportunities in the HRB and elsewhere. Storm's investment to date in SGR totals
$9.1 million and our share ownership position totals 2.5 million shares,
representing 22% ownership of SGR. Currently, SGR's land position in the HRB
totals 73.6 net sections (49,210 net acres). At the end of the first quarter of
2010, SGR's balance sheet showed a cash position of $27.0 million.
Chinook Energy Inc.
Storm owns 4.5 million shares of Chinook Energy Inc ("Chinook") which is a TSX
listed oil and gas exploration and production company (symbol 'CKE') based in
Calgary with operations focused in Tunisia and Western Canada. Chinook is the
result of a business combination between Iteration Energy Ltd. and Storm
Ventures International Inc. ("SVI") which was completed on June 29, 2010. Storm
had previously owned 4.5 million shares of SVI, a private Alberta-based oil and
gas exploration and production company. Chinook has current production of
approximately 16,700 Boe per day and a deep inventory of repeatable drilling
opportunities in both Western Canada and Tunisia. SVI issued approximately 52.1
million common shares and paid $225-million to acquire all of the issued and
outstanding common shares of Iteration. After giving effect to the combination,
Chinook has approximately 213.8 million common shares outstanding on a
non-diluted basis.
Bridge Energy Norge ASA ('Bridge')
On April 7, 2010, SVI's United Kingdom North Sea assets were combined with a
private company and Bridge was formed and subsequently listed as a public
company on the Oslo Stock Exchange. Bridge has production of approximately 1,500
Boe per day, is advancing several development opportunities in the UK sector of
the North Sea, and has a number of exploratory leads in the Norwegian sector of
the North Sea which offer longer-term upside. SVI received 28,776,000 common
shares of Bridge which were distributed to SVI shareholders and resulted in
Storm receiving approximately 1,050,000 common shares of Bridge.
Bellamont Exploration Ltd. ('Bellamont')
Storm holds 5.08 million shares of Bellamont as a result of a disposition of
non-core properties in the Grande Prairie area to Bellamont for proceeds
totaling $17.15 million which included $14 million cash plus 5.08 million shares
of Bellamont valued at $0.62 per share.
ARRANGEMENT AGREEMENT WITH ARC
Pursuant to the terms of the Arrangement Agreement ("Arrangement") entered into
between ARC and Storm on June 9, 2010, Storm shareholders will receive in
exchange for each common voting share or common non-voting share:
i. At their election, 0.57 of an ARC unit; or 0.201733 of an exchangeable share
of ARC Resources Ltd. (which number of exchangeable shares is based on the
anticipated exchange ratio for such exchangeable shares to ARC units as of
closing and is subject to adjustment to reflect the actual exchange ratio);
provided that Storm shareholders who are non-residents of Canada or tax-exempt
shareholders will not be entitled to elect to receive exchangeable shares.
ii. 0.3333 of a common share of Storm Resources Ltd. ("Storm Resources") which
was previously identified as "ExploreCo" in the Information Circular (the
"Circular") relating to the Arrangement.
iii. 0.1333 of a common share purchase warrant of Storm Resources which was
previously identified as an "ExploreCo Warrant" in the Circular relating to the
Arrangement. A whole warrant allows a Storm shareholder to acquire one share of
Storm Resources at the estimated net asset value ("NAV") as determined at
closing and is exercisable for a period of 15 business days after closing.
iv. Subject to adjustment, a cash payment of $1.00 per share at closing, which
represents the proceeds of the Surmont asset sale.
Assuming an estimated net asset value of approximately $1.47 per Storm share for
the Storm Resources assets as detailed in the press release dated June 9, 2010,
the total value of the consideration to be received under the Arrangement
represents a premium of approximately 25% to the closing trading price of $11.50
per Storm share on June 9 (using the ARC Trust unit price of $20.89 on June 9)
the last trading day prior to announcement of the Arrangement.
Storm shareholders will receive equity ownership in an entity with significantly
increased liquidity (based on daily trading volume), an immediate income stream
through monthly trust distributions (current yield approximately 5.8 per cent),
and a higher oil/liquids weighting (46 per cent based on first quarter
production) that mitigates the impact of natural gas price volatility. ARC's
portfolio of large-in-place resource properties preserves a similar level of
upside potential for Storm shareholders and also offers diversification into
different resource play types. In the Dawson area, ARC will have over 9 TCF of
GIP in the Montney to exploit including Storm's Parkland Montney field. At Ante
Creek (Montney) and Pembina (Cardium), ARC has seen encouraging results from
their initial horizontals and both properties offer the benefit of a much higher
oil and liquids weighting. Additionally, Storm shareholders will retain the
significant upside exposure associated with the Horn River Basin unconventional
shales through ownership in Storm Resources.
Storm Resources Ltd. is a new junior exploration and production company to be
led by Brian Lavergne as President and CEO, Don McLean as VP Finance and CFO,
and Rob Tiberio as VP Operations and COO along with other members of the Storm
senior management team. The primary asset to be transferred to the new entity is
undeveloped lands totaling approximately 117,200 net acres in the Horn River
Basin, Cabin/Kotcho/Junior and Umbach areas in northeastern British Columbia
plus undeveloped land in the Red Earth area of Alberta. In addition, Storm
Resources will retain Storm's share ownership positions in Storm Gas Resource
Corp, Bellamont Exploration Ltd., Bridge Energy Norge ASA and Chinook Energy
Inc. Storm Resources will also receive, subject to adjustment, cash of $5
million under the Arrangement, will have no debt, and will be able to spend $6.5
million drilling and completing wells on the undeveloped lands prior to the
closing of the Arrangement.
The Storm Resources Warrants will be exercisable until 15 business days after
closing of the transaction and will be priced at the estimated net asset value
of Storm Resources on the date of the Storm shareholder meeting. One whole
warrant allows a Storm shareholder to acquire one share of Storm Resources at
the estimated NAV as determined at closing and is exercisable for a period of 15
business days after closing as outlined in the press release of July 29, 2010.
The NAV per share of Storm Resources will be determined as being the lower of:
- the valuation of undeveloped land and pipeline interest using the methodology
set out in Storm's press release of June 9, 2010, plus the market value of
listed securities immediately prior to closing of the Arrangement, an assessment
of the value of Storm Resources' interest in privately owned Storm Gas Resource
Corp., plus cash to be transferred to Storm Resources on closing of the
Arrangement; all divided by the number of Storm Resources shares immediately
after closing (example attached which is updated to August 10, 2010; or,
- the value per share for Storm Resources implied by the volume weighted average
price per Storm share and ARC trust unit for the twenty trading days prior to
the closing of the Arrangement (July 19 to August 16, 2010), as adjusted for
other components of consideration to be received by Storm shareholders under the
Arrangement. Thus, to determine the per- share value of Storm Resources, the
volume weighted average share price for Storm for the twenty day period will be
reduced by 0.57 of the volume weighted average price of an ARC Trust Unit for
the same period, and further reduced by the cash payment of $1 per share,
subject to adjustment, to Storm shareholders on closing (example attached which
uses the period of July 19 and August 11, 2010).
In addition, and pending approval of Storm's shareholders, management and
insiders of Storm Resources have committed to acquire 2.3 million shares of
Storm Resources at the same price per share as the exercise price for the Storm
Resources Warrants. Proceeds from the arrangement warrants and the management
private placement will be used to fund the activities of Storm Resources over
the next 12 months.
Working Capital Shares Outstanding
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Transferred from Storm
at closing (1) $5.0 to $11.5 million 16.633 million
Management private
placement (1) (3) $7.7 million 2.300 million
Storm Resources Warrants (2) (3) $22.2 million 6.653 million
Shares issued to ARC as part
of the Arrangement Agreement (3) 0.658 million
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Total $35.1 to $41.4 million 26.244 million
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(1) Per Arrangement, $5.0 million cash (subject to adjustment) plus $6.5
million allowable capital expenditures on ExploreCo assets (if spending
is less than or more than $6.5 million, the cash going to ExploreCo at
closing will be adjusted by the difference).
(2) Assuming private placement to management is fully subscribed.
(3) Assuming Storm Resources Warrants issued pursuant to Arrangement are
fully subscribed.
(4) Using the value per share for Storm Resources of $3.33 per share which
is based on the implied volume weighted average price per Storm share
and price per ARC trust unit for the trading days from July 19 to
August 11, 2010.
Storm Resources plans to invest up to $43 million over the next 12 months, which
includes $12 million allocated for the acquisition of producing assets and
undeveloped land plus $31 million for drilling, completions, facilities, and
tie-ins. The drilling program will include up to seven gross wells (4.4 net)
which includes two horizontal wells (1.2 net) at Umbach, two horizontal wells
(2.0 net) in the Jean Marie formation at Junior, and two horizontal wells (0.8
net) plus one vertical delineation well (0.4 net) in the Muskwa/Otter Park
shales in the Horn River Basin.
OUTLOOK
Storm remains on track to meet guidance for 2010 which consists of:
- Capital investment of $85 million to $90 million which will include drilling
19 gross wells (15.8 net).
- Exit production, or production for the final quarter of 2010, of approximately
9,500 to 9,800 Boe per day.
- Operating costs for the year averaging $4.50 per Boe.
- General and administrative costs for the year of $1.30 per Boe.
- A corporate royalty rate of approximately 13% to 15% which includes the effect
of British Columbia's royalty incentive programs.
The majority of capital investment will be funded with cash flow which is
estimated to be approximately $75 million in 2010, assuming commodity prices
over the remainder of the year average $3.75 per GJ at AECO for natural gas and
Cdn $75.00 per barrel for oil at Edmonton.
Based on field estimates, corporate production in July was approximately 9,300
Boe per day and third quarter production is expected to average 9,300 to 9,600
Boe per day. Capital investment in the third quarter is expected to be
approximately $25 million and will include drilling one horizontal well at
Umbach (1.0 net), three horizontal Montney wells at Parkland (3.0 net) including
two farm-in horizontals, one vertical step-out at Parkland (1.0 net), and one
horizontal in the HRB (0.4 net).
It has been more than six years since 'Storm 3' started out with production of
900 Boe per day. Although significant upside remains in our Montney pool at
Parkland, it was difficult for us to ignore the potential benefits offered by
the transaction with ARC given the current market environment, especially for a
producer like Storm with a high natural gas weighting. ARC's size and higher
oil/liquids weighting offers a safe harbor for our shareholders and the depth
and quality of opportunities offered by ARC's asset base preserves a similar
level of upside exposure for Storm shareholders. Looking ahead, the large land
position we have accumulated that is prospective for Devonian shale gas in the
Horn River Basin provides us with exposure to a very large resource, however,
exploitation of these shales will be significantly more difficult as a result of
various operational challenges and the continued volatility in natural gas
prices. We look forward to reporting on our progress in Storm Resources (or
'Storm 4') after the transaction with ARC has closed.
Sincerely,
Brian Lavergne, President and Chief Executive Officer
August 12, 2010
Storm Resources Ltd. Share Price Based on Implied Trading Price - Updated to
August 11, 2010
The volume weighted average price ("VWAP") will be used for Storm's share price
and ARC's unit price for the twenty trading days commencing on July 19 and
ending on the Meeting Date of August 16, 2010.
Using the trading days to date (July 19, 2010 to August 11, 2010), ARC's VWAP is
$20.18 per trust unit and Storm's VWAP is $13.61 per share.
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Storm share price $13.61
Less 0.57 times ARC unit price ($11.50)
Less cash distribution to Storm shareholders ($ 1.00)
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Implied Storm Resources Ltd. net asset value,
per existing Storm share $ 1.11
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Implied Storm Resources Ltd. net asset value,
after consolidation (0.3333 Storm Resources Ltd.
share per existing Storm share) $ 3.33
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Storm Resources Ltd. Share Price Based on Net Asset Value Using Methodology
Detailed in Press Release Dated June 9, 2010 and Updated to August 11, 2010
Updated to include: public company share prices, revised SGR share price and
Storm Resources shares to be issued to ARC as part of the Arrangement.
$ Million
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Horn River Basin undeveloped land (22,850 net acres,
$737/acre includes capital spent to date and cost of
land acquired after December 1, 2009 (1) 16.8
Junior undeveloped land (30,480 net acres, $85/acre
from Seaton-Jordan) (1) 2.6
Umbach undeveloped land (9,487 net acres, $192/acre) (1) 1.8
Other areas undeveloped land (54,368 net acres, $89/acre) (1) 4.8
50% interest in pipeline at Junior 1.0
Chinook Energy Inc. shares (2) 10.4
Storm Gas Resource Corp shares (3) 13.9
Bellamont Exploration Ltd. Shares (4) 2.8
Bridge Energy Norge ASA (5) 2.3
Spending on Storm Resources Ltd. assets prior to closing
(if spending is less than or more than $6.5 million,
the cash proceeds received at closing will be
adjusted by the difference) 6.5
Cash proceeds received at closing 5.0
----------------------------------------------------------------------------
Storm Resources Ltd. net asset value 67.9
Value of shares issued to ARC as part of Arrangement (6) (2.9)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Storm Resources Ltd. net asset value after
accounting for shares to ARC 65.0
Fully diluted Storm Exploration shares 49.9 million
Storm Resources Ltd. net asset value per Storm
exploration share (pre-consolidation) $1.30
Number of Storm Resources Ltd. shares issued
to Storm Exploration shareholders 16.633 million
----------------------------------------------------------------------------
Net asset value per Exploreco/Storm Resources Ltd.
share (post-consolidation) $3.91
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Undeveloped land value from Seaton-Jordan evaluation December 1, 2009
plus actual cost of any land acquired after December 1, 2009 plus
actual capital invested since inception in drilling, completions,
seismic, and road construction (Seaton-Jordan values: HRB $5.67 MM,
Junior $2.59 MM, Umbach $0, Other $4.8 MM).
(2) Storm Ventures International Inc. was renamed Chinook Energy Inc. and
began trading on the Toronto Stock Exchange on July 6, 2010. 4.5
million shares valued using the closing share price of $2.30 on
August 11.
(3) 2.5 million shares of Storm Gas Resource Corp. valued at $5.58 per
share, using $737/acre for HRB lands, $25.1 MM estimated cash June
30,2010 and actual purchase price for remaining lands (same
methodology as used with Storm Resources Ltd. including same HRB
land value).
(4) 5.08 million shares of Bellamont Exploration Ltd. valued using the
closing share price of $0.56 on August 11.
(5) 1.053 million shares of Bridge Energy Norge ASA, which are listed on
the Oslo Stock Exchange and valued using August 11, 2010 closing share
price of NOK 13.0 or Canadian $2.20 per share (0.1696 exchange).
(6) $2.9 million of Storm Resources Ltd. shares to ARC as part of the
Arrangement.
Estimated Per-Share Net Asset Value of Storm Gas Resource Corp.
$ million
----------------------------------------------------------------------------
Horn River Basin undeveloped land (49,210 net acres @ $737/acre) $ 36.268
Other areas undeveloped land (12,515 net acres) $ 0.975
Cash (estimated June 30, 2010) $ 25.100
----------------------------------------------------------------------------
SGR net asset value $ 62.340
----------------------------------------------------------------------------
MM shares outstanding 11.18
----------------------------------------------------------------------------
SGR net asset value per share $ 5.58
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Management's Discussion and Analysis
Set out below is management's discussion and analysis ("MD&A") of financial and
operating results for Storm Exploration Inc. ("Storm" or the "Company") for the
three and six months ended June 30, 2010. It should be read in conjunction with
the unaudited consolidated financial statements for the three and six months
ended June 30, 2010, the audited consolidated financial statements for the year
ended December 31, 2009 and other operating and financial information included
in this report. In addition, readers are directed to the discussion below
regarding Forward-Looking Statements, Boe Presentation and Non-GAAP
Measurements.
This management's discussion and analysis is dated August 12, 2010.
PLAN OF ARRANGEMENT WITH ARC ENERGY TRUST
On June 9, 2010, the Company announced its participation in a plan of
arrangement (the "Plan") with ARC Energy Trust ("ARC"), ARC Resources Ltd. and
1541229 Alberta Ltd. Under the Plan, ARC will acquire Storm with Storm
shareholders receiving units of ARC Energy Trust and/or exchangeable shares in
ARC Resources Ltd., cash in the amount of approximately $1.00 per common share
and shares in 1541229 Alberta Ltd., renamed Storm Resources Ltd. ("SRL"). Under
the Plan, ARC will acquire Storm's operating business and SRL will acquire
Storm's undeveloped lands and its corporate investments. Information regarding
the Plan was provided in press releases dated June 9, 2010, July 29, 2010 and
August 11, 2010, and in the Information Circular dated July 16, 2010 which was
distributed to shareholders and posted on SEDAR.
INTRODUCTION AND LIMITATIONS
Basis of Presentation - Financial data presented below have largely been derived
from the Company's unaudited consolidated financial statements for the three and
six months ended June 30, 2010, prepared in accordance with Canadian Generally
Accepted Accounting Principles ("GAAP"). Accounting policies adopted by the
Company are set out in Note 2 to the unaudited consolidated financial statements
for the three and six months ended June 30, 2010 and in Note 2 to the Company's
audited consolidated financial statements for the year ended December 31, 2009.
The reporting and the measurement currency is the Canadian dollar. Unless
otherwise indicated, tabular financial amounts, other than per share and per Boe
amounts, are in thousands.
Forward-Looking Statements - Certain information set forth in this document,
including management's assessment of Storm's future plans and operations,
contains 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 revenues or costs or revenues or costs per commodity unit;
- future capital expenditures and their allocation to specific 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 or time periods by which certain geographical areas will be developed;
- changes to any of the foregoing; and
- the effect on financial reporting in future periods resulting from the
adoption of International Financial Reporting Standards on January 1, 2011.
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 as incorporated by reference in the December 31,
2009 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 "Production Costs"; "Field
Netbacks", "Interest", "General and Administrative Costs" and "Future Income
Taxes"; under the "Investment and Financing" section hereof, under the headings
"Working Capital", "Capital Expenditures", "Bank Debt, Liquidity and Capital
Resources", "Investments", "Future Income Taxes", "Asset Retirement Obligation",
"Share Capital" and "Contractual Obligations"; 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, which are 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 elsewhere in this
report. The forward-looking statements contained herein are expressly qualified
by this cautionary statement. Assessment of the effect of forward-looking
statements has to be made in the context of the Plan of Arrangement entered into
by the Company and ARC and other parties, which will result in the sale of the
Company to ARC which will own the operating assets of the Company in the future.
Boe Presentation - For the purpose of calculating unit revenues and costs,
natural gas is converted to a barrel of oil equivalent ("Boe") using six
thousand cubic feet ("Mcf") of natural gas equal to one barrel of oil unless
otherwise stated. Boe may be misleading, particularly if used in isolation. A
Boe conversion ratio of six Mcf to one barrel ("Bbl") is based on an energy
equivalency conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the wellhead. All Boe measurements and
conversions in this report are derived by converting natural gas to oil in the
ratio of six thousand cubic feet of gas to one barrel of oil.
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", "field netbacks",
"cash costs" and "recycle ratio" as well as any "per Boe" amounts, do not have
any standardized meaning as prescribed by GAAP in Canada and are regarded as
non-GAAP measures. It is likely that these non-GAAP measurements may not be
comparable to the calculation of similar amounts for other entities. In
particular, funds from operations is not intended to represent, or be equivalent
to, cash flow from operating activities calculated in accordance with Canadian
GAAP which appears on the Company's consolidated statements of cash flows. Funds
from operations and similar non-GAAP terms are used to benchmark operations
against prior periods and peer group companies. Non-GAAP funds from operations
is also used to determine debt to cash flow ratios 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:
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Cash flow from operating activities $ 18,110 $ 9,092 $ 31,799 $ 23,725
Net change in non-cash working
capital items 2,246 (632) 6,158 (1,545)
----------------------------------------------------------------------------
Non-GAAP funds from operations $ 20,356 $ 8,460 $ 37,957 $ 22,180
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-GAAP 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. Non-GAAP field netbacks equals total revenue net of
hedging gains or losses, plus royalty income, less royalties paid, production
and transportation costs, calculated on a Boe basis for the reporting period.
Non-GAAP cash flow netback equals field netback less interest and general and
administrative costs, also calculated on a Boe basis. Total Boe is calculated by
multiplying the daily production by the number of days in the reporting period.
Non-GAAP cash costs per Boe are the total of production costs, transportation
costs, interest and general and administrative costs. Recycle ratio is
calculated by dividing the field netback by finding costs.
OPERATIONAL AND FINANCIAL RESULTS
Production and Revenue
Average Daily Production
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Natural gas (Mcf/d) 47,434 42,185 44,663 42,831
Natural gas liquids (Bbls/d) 1,372 533 1,290 538
Crude oil (Bbls/d) 146 589 154 620
----------------------------------------------------------------------------
Total (Boe/d) 9,423 8,153 8,888 8,296
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Boe production for the second quarter of 2010 increased by 16% when
compared to the second quarter of 2009 and increased by 13% when compared to the
immediately prior quarter. Increased drilling activity in the first and second
quarters of 2010 resulted in the year-over-year and quarter-over-quarter uplift
in production. In particular, natural gas liquids production showed a
considerable increase in the first and second quarters of 2010. In part, the
increase is due to investment in facilities at Parkland late in 2009, which has
resulted in a higher liquids capture for the Company. In addition, about 330
Bbls of condensate, previously included with oil production has, effective
January 1, 2010, been included in natural gas liquids production. The
disposition of 220 Boe per day, primarily light oil, late in 2009, also
contributed to the decrease in oil production. Production increases came from
the Company's core Parkland area.
Daily production per million shares outstanding in the second quarter of 2010
averaged 200 Boe, compared to 175 Boe in the second quarter of 2009, an increase
of 14%.
For the six months ended June 30, 2010, production increased by 7% when compared
to the equivalent period in 2009, or an increase of 4% per million shares
outstanding for each period.
Production Profile and Per-Unit Prices
Three Months to June 30, 2010 Three Months to June 30, 2009
----------------------------------------------------------------------------
Average Selling Average Selling
Percentage of Price Before Percentage of Price Before
Total Boe Transportation Total Boe Transportation
Production Costs Production Costs
----------------------------------------------------------------------------
Natural gas - Mcf 84% $ 4.05 86% $ 3.65
Natural gas
liquids - Bbl 15% $ 64.52 7% $ 41.77
Crude oil - Bbl 1% $ 73.43 7% $ 63.63
----------------------------------------------------------------------------
Per Boe $ 30.93 $ 26.23
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per-unit prices do not include adjustments for hedging gains or losses.
Six Months to June 30, 2010 Six Months to June 30, 2009
----------------------------------------------------------------------------
Average Selling Average Selling
Percentage of Price Before Percentage of Price Before
Total Boe Transportation Total Boe Transportation
Production Costs Production Costs
----------------------------------------------------------------------------
Natural gas - Mcf 84% $ 4.75 86% $ 4.60
Natural gas
liquids - Bbl 15% $ 66.15 7% $ 40.11
Crude oil - Bbl 1% $ 75.79 7% $ 56.49
----------------------------------------------------------------------------
Per Boe $ 34.81 $ 30.55
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per-unit prices do not include adjustments for hedging gains or losses.
Storm's production base is largely natural gas and associated liquids. In
addition, Storm's prospect inventory is largely focused on liquids rich natural
gas and, based on exploitation of the Company's existing asset base, in the
short and medium term crude oil will not materially increase as a percentage of
total Boe production. Growth in gas production year-over-year and
quarter-over-quarter came largely from the Parkland area in British Columbia, in
particular from the Company's Montney discovery.
Storm's gas production in Alberta and British Columbia is sold at prices which
reflect both the benchmark AECO daily index pricing and Station 2 daily index
pricing. Prices for natural gas fell throughout 2009, until the final months
when a modest improvement became apparent, which continued into the first
quarter of 2010. However, since April 2010, prices for natural gas have fallen
considerably due in part to high storage levels, weak industrial demand and
continued high production levels. The widely recognized benchmark average AECO
index price for the second quarter of 2010 was $3.66 per GJ, compared to $3.47
per GJ for the second quarter of 2009, and to $5.08 per GJ for the immediately
preceding quarter. In addition, for the second quarter of 2010, the average
Station 2 daily index price, which applied to approximately 46% of Storm's gas
production in the quarter, was about 5% lower than the average AECO index price.
Storm's corporate average realized price per Mcf for natural gas for the second
quarter of 2010 was higher than the equivalent AECO index price due to high heat
content natural gas produced from the Montney formation at Parkland.
Pricing by quarter in 2009 and into 2010 was as follows:
----------------------------------------------------------------------------
Storm AECO C Station 2
Realized Price Monthly Average Daily Average
($/Mcf)(1) ($/GJ)(1) ($/GJ)(1)
----------------------------------------------------------------------------
Q2 2009 $ 3.65 $ 3.47 $ 3.06
Q3 2009 $ 3.30 $ 2.87 $ 2.75
Q4 2009 $ 5.03 $ 4.01 $ 4.24
Q1 2010 $ 5.56 $ 5.08 $ 4.53
Q2 2010 $ 4.05 $ 3.66 $ 3.47
----------------------------------------------------------------------------
(1) Storm realized price is measured in Mcf; Index prices in GJ.
(2) Per-unit prices do not include adjustments for hedging gains or losses.
Production by Area - Boe/d
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Fort St. John/Parkland - BC 7,939 6,016 7,370 6,060
Grande Prairie - AB 1,089 1,470 1,094 1,535
Cabin-Kotcho-Junior - BC 358 620 386 649
Other 37 47 38 52
----------------------------------------------------------------------------
Total 9,423 8,153 8,888 8,296
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The above table sets out the average production from each of Storm's main
producing areas. For the three months ended June 30, 2010, Parkland production
increased by 32% year over year, while Grande Prairie production fell by 26%,
reflecting the focus of Storm's investment program. For the six month period,
Parkland production increased by 22% and Alberta production fell by 29%.
Production Revenue
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Natural gas $ 17,495 $ 14,026 $ 38,448 $ 35,633
Natural gas liquids 8,053 2,028 15,443 3,904
Crude oil 975 3,412 2,111 6,339
Royalty income 21 47 78 114
----------------------------------------------------------------------------
Revenue from product sales 26,544 19,513 56,080 45,990
Hedging gains (losses) 3,233 (801) 2,867 (1,459)
----------------------------------------------------------------------------
Total production revenue $ 29,777 $ 18,712 $ 58,947 $ 44,531
----------------------------------------------------------------------------
----------------------------------------------------------------------------
A reconciliation of revenue from product sales between the quarters ended
June 30, 2010 and 2009 is as follows:
Natural Gas Royalty
Natural Gas Liquids Crude Oil Income Total
----------------------------------------------------------------------------
Revenue from
product sales
- 2009 $ 14,026 $ 2,028 $ 3,412 $ 47 $ 19,513
Effect of
production changes
year over year 1,729 3,185 (2,567) (30) 2,317
Effect of changing
product prices
year over year 1,740 2,840 130 4 4,714
----------------------------------------------------------------------------
Revenue from
product sales - 2010 $ 17,495 $ 8,053 $ 975 $ 21 $ 26,544
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The year-over-year increase in revenues is largely due to increased production
and a 54% price increase in natural gas liquids.
Hedging
Crude Oil:
Storm entered into a fixed price sale contract in respect of 450 barrels of
crude oil per day, at a price of $83.45 per barrel for the period January 1 to
June 30, 2010. For the three and six months to June 30, 2010, the Company
recognized on the Consolidated Statements of Income and Retained Earnings, a
realized gain of $0.1 million and $0.2 million, respectively. Accounting for
crude oil derivative contracts follows mark-to-market rules.
Natural Gas:
For 2010, Storm entered into fixed price natural gas sales contracts for the
period January 1, 2010 to September 30, 2010. The Company realized a hedging
gain of $3.0 million on these contracts for the quarter ended June 30, 2010 and
a similar gain of $2.5 million for the six months to June 30, 2010. Contracts
outstanding at June 30, 2010 were as follows:
Volume Price Term
----------------------------------------------------------------------------
Collar - 7,000 GJ/day $ 5.00 to $5.70 July 2010 - September 2010
Swap - 5,000 GJ/day $5.20 July 2010 - September 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company uses hedge accounting rules for these contracts and recognized an
unrealized hedging gain in the amount of $3.3 million on the Consolidated
Statements of Comprehensive Income and Accumulated Other Comprehensive Income in
respect of contracts outstanding at June 30, 2010.
Royalties
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Charge for period $ 2,661 $ 3,360 $ 7,118 $ 8,613
Royalties as a percentage of
Revenue from product sales
before hedging 10.0% 17.3% 12.7% 18.8%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per Boe $ 3.10 $ 4.53 $ 4.42 $ 5.74
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Royalties are paid primarily to the provincial governments in Alberta and
British Columbia. The year-over-year reduction in the royalty rate is due to
expanded royalty incentive programs in both provinces.
Production Costs
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Charge for period $ 3,067 $ 4,160 $ 6,654 $ 8,621
Percentage of revenue from
product sales before hedging 11.6% 21.4% 11.9% 18.8%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per Boe $ 3.58 $ 5.61 $ 4.14 $ 5.74
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarterly year-over-year per-Boe production costs fell by approximately 36%. The
introduction of the refridge plant at Parkland in late 2009, plus Storm's
constant focus on cost control, resulted in a steadily downward cost profile
over the last several quarters. In addition, the second quarter of 2010
benefited from adjustments of approximately $673,000 in respect of 2005 to 2008
non-operated facility operating costs amounting to $0.78 per Boe. Costs for the
quarter would otherwise have been $4.36 per Boe.
Storm's cash costs per Boe, which comprise production, transportation, interest
and general and administrative costs, amounted to $7.79 for the second quarter
of 2010, compared to $9.40 for the first quarter of 2010 and to $9.95 for the
second quarter of 2009.
For the six month periods to June 30, per Boe cash costs amounted to $8.54 in
2010 and $9.87 in 2009.
Transportation Costs
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Charge for period $ 1,429 $ 1,125 $ 2,706 $ 2,527
Percentage of revenue from
product sales before hedging 5.4% 5.8% 4.8% 5.5%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per Boe $ 1.67 $ 1.52 $ 1.68 $ 1.68
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total and per-unit transportation costs for the quarter increased slightly year
over year. The modest increase in the second quarter of 2010, compared to the
prior year, is due to higher transportation costs associated with trucking of
increased volumes of natural gas liquids at Parkland. Storm's low per-unit
production and transportation costs reflect Storm's high level of operatorship
as well as facility control and ownership and reasonable proximity to major
pipelines.
Field Netbacks
Details of field netbacks per commodity unit are as follows:
Three Months to June 30, 2010
----------------------------------------------------------------------------
Natural
Gas Natural
Crude Oil Liquids Gas Total
($/Bbl) ($/Bbl) ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $ 73.43 $ 64.52 $ 4.05 $ 30.93
Hedging gain realized 10.44 - 0.71 3.67
Royalty income 0.54 0.02 - 0.02
Royalties (9.14) (10.73) (0.27) (3.10)
Production costs (1) (6.93) - (0.69) (3.58)
Transportation (2.97) (5.64) (0.16) (1.67)
----------------------------------------------------------------------------
Field netback $ 65.37 $ 48.17 $ 3.64 $ 26.28
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months to June 30, 2009
----------------------------------------------------------------------------
Natural
Gas Natural
Crude Oil Liquids Gas Total
($/Bbl) ($/Bbl) ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $ 63.63 $ 41.77 $ 3.65 $ 26.23
Hedging loss realized (5.87) - - (0.42)
Royalty income 0.17 0.07 0.01 0.07
Royalties (9.23) (9.65) (0.62) (4.53)
Production costs (1) (7.76) - (0.98) (5.61)
Transportation (5.36) (3.73) (0.17) (1.52)
----------------------------------------------------------------------------
Field netback $ 35.58 $ 28.46 $ 1.89 $ 14.22
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six Months to June 30, 2010
----------------------------------------------------------------------------
Natural
Gas Natural
Crude Oil Liquids Gas Total
($/Bbl) ($/Bbl) ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $ 75.79 $ 66.15 $ 4.75 $ 34.81
Hedging gain realized 7.14 - 0.31 1.70
Royalty income 0.41 0.01 0.03 0.03
Royalties (7.92) (11.60) (0.52) (4.42)
Production costs (1) (7.17) - (0.80) (4.14)
Transportation (3.49) (5.32) (0.17) (1.68)
----------------------------------------------------------------------------
Field netback $ 64.76 $ 49.25 $ 3.60 $ 26.30
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six Months to June 30, 2009
----------------------------------------------------------------------------
Natural
Gas Natural
Crude Oil Liquids Gas Total
($/Bbl) ($/Bbl) ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $ 56.49 $ 40.11 $ 4.60 $ 30.55
Hedging loss realized (3.27) - - (0.24)
Royalty income 0.14 0.08 0.01 0.08
Royalties (8.35) (9.22) (0.87) (5.74)
Production costs (1) (7.68) - (1.00) (5.74)
Transportation (5.20) (3.81) (0.20) (1.68)
----------------------------------------------------------------------------
Field netback $ 32.13 $ 27.16 $ 2.54 $ 17.23
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Production costs for natural gas liquids are included with natural gas
costs.
Field netbacks for the second quarter of 2010 increased by 85% year over year.
Revenue per Boe after hedging adjustments increased by 34% and direct costs fell
by 28%.
For the six months to June 30, 2010, field netbacks increased by 53% year over year.
Based on an all-in proved plus probable finding cost for the last three calendar
years of $11.99, Storm's recycle ratio (field netback divided by finding costs)
for the second quarter of 2010 was 2.2.
Interest
Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Charge for period $ 1,164 $ 824 $ 2,402 $ 1,402
Per Boe $ 1.36 $ 1.11 $ 1.49 $ 0.93
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest is paid on Storm's revolving bank facility. The Company normally
borrows using bankers' acceptances plus a stamping fee. Although the interest
rate paid on bankers' acceptances fell year over year, the stamping and other
fees payable by the Company increased considerably upon the renewal of the
Company's banking agreement, on May 1, 2009. Higher debt levels were also
responsible for the 41% year-over-year increase in borrowing costs. Proceeds on
sale of Storm's Surmont properties, in the amount of $53.75 million, were
received late in the quarter and had limited effect on average borrowings during
the quarter.
General and Administrative Costs
Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
Total Costs 2010 2009 2010 2009
----------------------------------------------------------------------------
Gross general and administrative
charge for period $ 1,437 $ 1,436 $ 3,293 $ 3,305
Capital and operating recoveries (422) (167) (1,321) (1,025)
----------------------------------------------------------------------------
Net general and administrative
costs for period $ 1,015 $ 1,269 $ 1,972 $ 2,280
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
Costs per Boe 2010 2009 2010 2009
----------------------------------------------------------------------------
Gross general and administrative
charge for period $ 1.68 $ 1.94 $ 2.05 $ 2.20
Capital and operating recoveries (0.50) (0.23) (0.82) (0.68)
----------------------------------------------------------------------------
Net general and administrative
for period $ 1.18 $ 1.71 $ 1.23 $ 1.52
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross general and administrative costs for the quarter and six months ended June
30, 2010, were largely unchanged when compared to the prior year. Higher field
activity levels, when compared to 2009, resulted in higher capital recoveries
with a corresponding reduction in net general and administrative costs per Boe
for the three and six months to June 30, 2010. Further, higher production in
2010 has resulted in lower per-Boe costs.
Storm does not capitalize general and administrative costs.
Stock-Based Compensation Costs
Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Charge for period $ 679 $ 405 $ 1,352 $ 801
Per Boe $ 0.79 $ 0.55 $ 0.84 $ 0.53
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock-based compensation costs are non-cash charges which reflect the estimated
value of stock options issued to Storm's directors and employees. The value of
the award is recognized as an expense over the period from the grant date to the
date of vesting of the award. The increase in the charge for the second quarter
and for the first half of 2010, compared to the prior year, is a result of stock
options being issued in 2009 and 2010 at a price higher than the historical
average price, net of certain prior year awards being fully expensed.
Depletion, Depreciation and Accretion
Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Depletion and depreciation
charge for period $ 13,088 $ 10,587 $ 24,573 $ 21,754
Accretion charge for period 114 122 226 241
----------------------------------------------------------------------------
Total $ 13,202 $ 10,709 $ 24,799 $ 21,995
----------------------------------------------------------------------------
Per Boe $ 15.40 $ 14.43 $ 15.42 $ 14.65
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The increase in the total charge for depletion, depreciation and accretion for
the second quarter and first half of 2010 compared to the equivalent periods of
2009, is a consequence of higher production volumes, as the depletion component
of the charge is based on a cost per Boe.
The increase in the charge for depletion and depreciation per Boe for the second
quarter and first half of 2010 when compared to the equivalent periods of 2009
is 7% and 5%, respectively. The increase is attributable to proved oil and gas
reserves being added in 2009 at a cost higher than in prior periods. Accretion
is the increase for the reporting period in the present value of the Company's
asset retirement obligation, which is discounted using an interest rate of 8%.
Investment Loss
As described in Note 4 to the consolidated financial statements, Storm accounts
for its investment in Storm Gas Resource Corp. ("SGR") using the equity method,
in accordance with which the Company's pro rata share of changes in SGR's equity
is included in the determination of the Company's net income for the period. The
investment loss recorded in the second quarter of 2010 represents Storm's share
of changes in SGR's equity for the period.
Future Income Taxes
For the three months ended June 30, 2010, Storm recorded a provision for future
income taxes of $0.39 million compared to a recovery of future income taxes of
$0.95 million for the three months ended June 30, 2009 reflecting the Company's
return to profitability. For the six month period ended June 30, 2010, the
future income tax provision amounted to $2.49 million compared to a future
income tax recovery of $0.77 million for the same period of 2009. The statutory
combined federal and provincial rate applicable to income in 2010 is 28%,
compared to 29% for 2009.
At June 30, 2010, Storm had tax pools carried forward estimated to be $175
million. In addition, Storm has a capital loss in the amount of $9.7 million
available for application against future capital gains.
Net Income (Loss) and Net Income (Loss) Per Share
The Company generated net income of $6.1 million for the second quarter of 2010,
compared to a net loss of $2.2 million for the second quarter of 2009. For the
six months ended June 30, 2010, net income amounted to $9.1 million compared to
net loss of $0.9 million for the same period in the prior year.
Three Months to Three Months to Six Months to Six Months to
June 30, 2010 June 30, 2009 June 30, 2010 June 30, 2009
----------------------------------------------------------------------------
Per Per Per Per
diluted diluted diluted diluted
share share share share
----------------------------------------------------------------------------
Net income
(loss) $6,105 $0.13 $ (2,192) $(0.05) $9,146 $0.19 $(942) $ (0.02)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-GAAP Funds from Operations and Funds from Operations per Share
Three Months to Three Months to Six Months to Six Months to
June 30, 2010 June 30, 2009 June 30, 2010 June 30, 2009
----------------------------------------------------------------------------
Per Per Per Per
diluted diluted diluted diluted
share share share share
----------------------------------------------------------------------------
Funds from
operations $20,356 $0.42 $ 8,460 $0.18 $37,957 $0.79 $22,180 $0.47
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-GAAP funds from operations is not a measure recognized by GAAP in Canada,
although it is widely used by analysts and other financial statement users. It
is also used by the Company's bankers to measure debt to cash flow ratios, which
determines interest costs under the Company's banking agreement. The most
directly comparable measure under GAAP is cash flows from operating activities,
as set out below.
Cash Flows from Operating Activities and Cash Flows from Operating
Activities per Share
Three Months to Three Months to Six Months to Six Months to
June 30, 2010 June 30, 2009 June 30, 2010 June 30, 2009
----------------------------------------------------------------------------
Per Per Per Per
diluted diluted diluted diluted
share share share share
----------------------------------------------------------------------------
Cash flows from
operating
activities $18,110 $0.38 $9,092 $0.19 $31,799 $0.68 $23,725 $0.51
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comprehensive Income (Loss)
Under GAAP, comprehensive income (loss) comprises unrealized gains and losses
resulting from the mark-to-market valuation of certain assets and liabilities.
For the second quarter of 2010, Storm's comprehensive income comprised the
following:
- unrealized hedging gains or losses on contracts to which hedge accounting
rules are deemed to apply; for Storm, natural gas hedging contracts follow hedge
accounting rules
- unrealized gains or losses on investments which are considered to be available
for sale.
INVESTMENT AND FINANCING
Working Capital
Receivables comprise production revenue receivables and accruals, and
receivables in respect of operating and capital costs. Investments included in
current assets comprise 5.1 million shares of Bellamont Exploration Ltd., a
junior oil and gas corporation, whose shares trade on the Toronto Stock
Exchange. As the shares of this corporation are regarded as being available for
sale, under GAAP the investment is carried at fair value, determined using the
period end market price. Prepaid charges and other current assets include
unamortized insurance premiums, deposits, prepayments and certain inventory
equipment items.
Accounts payable and accrued liabilities include operating, administrative and
capital costs payable. Estimates of amounts owing but not yet invoiced to the
Company have been included in accounts payable.
Excluding an unrealized financial instrument gain, Storm had working capital of
$3.3 million at June 30, 2010, compared to a working capital deficiency of $1.5
million at June 30, 2009 and $6.3 million at December 31, 2009. The working
capital position at each period end reflects the seasonality of Storm's field
operations. The Company usually operates with a working capital deficiency which
is cyclical and is usually highest at the end of the first quarter of each year
and lowest at the end of second quarter.
Capital Expenditures
Capital costs incurred were as follows:
Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Land and lease $ 121 $ 1,013 $ 1,225 $ 1,819
Seismic 52 478 946 1,142
Drilling and completions 8,587 571 35,348 16,373
Facilities and equipment 1,273 1,651 9,300 8,417
Other 10 - 55 -
----------------------------------------------------------------------------
Field expenditures 10,043 3,713 46,874 27,751
Property acquisitions 8 130 16 9,145
Property dispositions (53,753) - (53,753) (1,562)
----------------------------------------------------------------------------
Total $ (43,702) $ 3,843 $ (6,863) $ 35,334
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the quarter ended June 30, 2010 the Company drilled one successful
horizontal gas well at Parkland. Two horizontal Montney wells were also
completed and tied in during the quarter. Also during the quarter, Storm sold
its oil sands leases at Surmont, Alberta for proceeds of $53.75 million. No gain
or loss was recognized on the disposition of this asset.
Bank Debt, Liquidity and Capital Resources
Storm has a revolving borrowing base bank credit facility which is renewable
annually but subject to mid-year review. The facility was renewed effective
April 30, 2010 and amounts to $140 million, an increase of $20 million over the
prior facility. The amount drawn on the facility at June 30, 2010 amounted to
$49.9 million, or 36% of the new facility. Total debt, including working capital
(less unrealized financial instrument losses), amounted to $46.6 million at June
30, 2010, resulting in a ratio of debt to annualized funds from operations for
the second quarter of 0.6 times.
The reduction in the amount drawn on the facility when compared to prior
quarters is due to the receipt of proceeds from the sale of the Surmont
property.
The Company normally funds its bank borrowings by drawing bankers' acceptances
plus a stamping fee. The renewal of Storm's banking facility in 2009 included a
large increase in stamping fees, standby fees and other costs. The renewal of
the bank facility in 2010 resulted in a modest decrease in fees and costs;
nevertheless, they remain at an historically high level. In part, the high fee
structure is offset by low core interest rates.
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, in the ordinary course, capital expenditures in the first and fourth
quarters of the year will exceed cash flow, compensated by lower capital
expenditures in the second and third quarters. In quarters of high field
activity, Storm operates with a substantial working capital deficit, which is
reduced in quarters of lower field activity. The Company's capital budget is set
by management at the beginning of the calendar year and approved by the Board of
Directors. It is updated regularly with major changes subject to approval by the
Board of Directors.
Capital programs were funded as follows:
Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Non-GAAP funds from operations $ 20,356 $ 8,460 $ 37,957 $ 22,180
Non-cash working capital (15,883) (11,460) (10,113) (15,354)
Issue of common shares - net
of expenses 1,108 (204) 2,197 18,471
Increase (decrease) in bank
indebtedness (49,283) 7,047 (36,904) 10,037
Proceeds from property sales 53,753 - 53,753 1,562
----------------------------------------------------------------------------
Cash available for investment $ 10,051 $ 3,843 $ 46,890 $ 36,896
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Field expenditures $ 10,043 $ 3,713 $ 46,874 27,751
Property acquisitions 8 130 16 9,145
----------------------------------------------------------------------------
Total cost of investment programs $ 10,051 $ 3,843 $ 46,890 $ 36,896
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Investments
Bellamont Exploration Ltd.
In November 2009, the Company sold certain producing properties to Bellamont
Exploration Ltd. ("Bellamont") for proceeds totaling $17.2 million, comprised of
$14.0 million in cash and 5.08 million shares in Bellamont. The shares are
considered available for sale by management and are carried at fair value,
determined with reference to the published share price, with the corresponding
holding gain recognized in other comprehensive income.
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 owns 2,500,000 shares,
equal to 22% of the outstanding shares. The investment in SGR is made up as
follows:
----------------------------------------------------------------------------
Cash invested $ 8,698
Land transferred 417
Dilution gain on equity issue 3,527
Equity loss (986)
----------------------------------------------------------------------------
Total $ 11,656
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Including the dilution gain and equity loss, the carrying amount of Storm's
2,500,000 common shares of SGR is $4.66 per share. This amount should not be
regarded as representative of the value of Storm's investment in SGR. Total cash
invested, plus property transferred to SGR, amounts to $9.1 million, or $3.65
per SGR share. In addition to its investment in SGR, Storm has a direct 40%
working interest in undeveloped lands jointly acquired with SGR in the Horn
River Basin of northeastern British Columbia. This interest, together with
Storm's investment in SGR, provides the Company with 53% exposure to the
potential upside in the Horn River Basin lands.
Storm provides management services to SGR at cost. Amounts charged by Storm to
SGR in the three months ended June 30, 2010 were $0.07 million (six months to
June 30, 2010 - $152,000).
Chinook Energy Inc. (formerly Storm Ventures International Inc.)
At June 30, 2010, the Company's investment in Chinook Energy Inc. ("Chinook")
comprised 4,500,000 common shares. The carrying amount of Chinook on Storm's
consolidated balance sheet approximates $2.16 per 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.
Subsequent to March 31, 2010, Chinook entered into the following transactions:
- The transfer, in exchange for shares, of assets in the UK sector of the North
Sea to a corporation, Bridge Energy Norge ASA, listed on the Oslo Stock
Exchange.
- A business combination with Iteration Energy Ltd., an intermediate oil and gas
producer listed on the Toronto Stock Exchange. The combined entity was listed on
the Toronto Stock Exchange on July 6, 2010. Chinook will have approximately
17,000 Boe of daily production and a land inventory of 775,000 acres in western
Canada. It will also have 800 Boe of daily production in Tunisia along with a
substantial onshore and offshore prospect inventory in that country.
Asset Retirement Obligation
Storm's asset retirement obligation represents the present value of estimated
future costs to be incurred to abandon and reclaim the Company's wells and
facilities. Changes in amount of the obligation between December 31, 2009 and
June 30, 2010 comprise the present value of additional obligations accruing to
the Company as a result of field activity and acquisitions and dispositions
during the quarter, less costs paid in settlement of abandonment obligations,
plus the increase in the present value of the obligation. The discount rate used
to establish the present value is 8%. Future costs to abandon and reclaim
Storm's properties are based on an internal evaluation of each of the Company's
properties, supported by external data from industry sources.
Share Capital
Details of outstanding share capital and dilutive elements:
As at and As at and As at and
for the for the six for the
three months ended months ended year ended
June 30, 2010 June 30, 2010 December 31, 2009
----------------------------------------------------------------------------
Common shares outstanding
- end of period 47,202 47,202 46,743
Unexercised stock options 2,697 2,697 3,014
----------------------------------------------------------------------------
Fully diluted common shares
- end of period 49,899 49,899 49,757
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common
shares - basic 47,056 46,982 46,711
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common
shares - diluted 47,928 47,854 47,857
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock options outstanding are exercisable over five years on various dates
beginning September 2005 at prices ranging from $5.14 to $12.60.
QUARTERLY RESULTS
Summarized information by quarter for the two years ended June 30, 2010 appears
below:
Jun. 30, Mar. 31, Dec. 31, Sep. 30,
Quarter Ended 2010 2010 2009 2009
----------------------------------------------------------------------------
Production revenue ($000s) 29,777 29,170 24,903 19,436
Funds from operations ($000s) 20,356 17,601 13,798 8,618
Per share
- basic ($) 0.43 0.38 0.30 0.18
- diluted ($) 0.42 0.37 0.29 0.18
Net income (loss) ($000s) 6,105 3,040 2,147 (1,522)
Per share
- basic ($) 0.13 0.06 0.05 (0.03)
- diluted ($) 0.13 0.06 0.05 (0.03)
Average daily production - Boe 9,423 8,346 7,890 8,030
Average field netback ($/Boe) 26.28 26.35 22.48 14.49
Capital expenditures - net ($000s) (43,702) 36,839 5,844 14,430
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Jun. 30, Mar. 31, Dec. 31, Sep. 30,
Quarter Ended 2009 2008 2008 2008
----------------------------------------------------------------------------
Production revenue ($000s) 18,712 25,819 35,447 40,215
Funds from operations ($000s) 8,460 13,720 20,432 24,290
Per share
- basic ($) 0.18 0.30 0.46 0.54
- diluted ($) 0.18 0.30 0.45 0.53
Net income (loss) ($000s) (2,192) 1,250 5,968 12,829
Per share
- basic ($) (0.05) 0.03 0.13 0.28
- diluted ($) (0.05) 0.03 0.13 0.28
Average daily production - Boe 8,153 8,441 8,161 7,107
Average field netback ($/Boe) 14.22 20.15 30.35 39.77
Capital expenditures - net ($000s) 3,843 31,491 35,342 27,057
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
Financial amounts included in the Company's Management's Discussion and Analysis
and in the unaudited consolidated financial statements for the three months and
six months ended June 30, 2010 are based on accounting policies, estimates and
judgment which reflect information available to management at the time of
preparation. Information with respect to the accounting policies selected by the
Company and the use of estimates is set out in the Company's audited
consolidated financial statements for the year ended December 31, 2009 and the
unaudited consolidated financial statements for the three and six months ended
June 30, 2010.
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 and others are specific to Storm. Information with respect to such
risks is set out in the Company's year-end report for the year ended December
31, 2009.
REPORTING CONTROLS
The Company's Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO") are responsible for establishing and maintaining disclosure controls and
procedures ("DC&P") and internal controls over financial reporting ("ICFR").
Storm has codified and distributed to staff its policies, controls and
procedures with respect to disclosure to third parties of information concerning
the Company's operations and results. In addition, DC&P are designed to provide
reasonable assurance that material information is made known to the CEO and CFO
on a timely basis and that information required to be disclosed by the Company
in its annual filings, interim filings or other reports filed or submitted by it
under securities legislation is recorded, processed, summarized and reported
within the time periods specified in securities legislation. The CEO and CFO
have evaluated, or caused to be evaluated under supervision, the effectiveness
of Storm's DC&P and have concluded that Storm's DC&P are effective as at June
30, 2010, based on that evaluation.
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 June 30, 2010, 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 establish
internal control documentation and, effective December 31, 2008, to test the
operating effectiveness of such controls. In 2009 and 2010, the Company updated
its documentation and tested internal controls using internal resources.
Based on this evaluation, the CEO and CFO concluded that the design of ICFR was
effective as at June 30, 2010 to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with Canadian GAAP. Further, the Company is
required to disclose herein any change in the design of the Company's ICFR that
occurred during the quarter ended June 30, 2010 that has materially affected, or
is reasonably likely to materially affect, the Company's ICFR. No material
changes in the Company's design of ICFR were made or were identified during such
period that have materially affected, or are reasonably likely to materially
affect, the Company's ICFR. No circumstances suggesting a possible breach of
disclosure controls were identified during the three months ended June 30, 2010.
Because of inherent limitations, disclosure controls and procedures and internal
controls over financial reporting cannot prevent or identify all
mismeasurements, errors and fraud.
FINANCIAL REPORTING UPDATE
Future Accounting Changes
The CICA has issued Handbook Sections 1582 "Business Combinations", 1601
"Consolidated Financial Statements" and 1602 "Non-Controlling Interests", all of
which replace existing Handbook standards and are effective on or after January
1, 2011. See Note 2 to the consolidated financial statements for further
details.
International Financial Reporting Standards
Canada's Accounting Standards Board has confirmed January 1, 2011 as the date
that International Financial Reporting Standards ("IFRS") will replace existing
Canadian GAAP for all publicly accountable enterprises in Canada. The Company
will begin reporting under IFRS in the first quarter of 2011, with restatement,
for comparative purposes, of amounts reported on the Company's opening IFRS
balance sheet as at January 1, 2010 and of quarterly amounts reported by the
Company during 2010.
The Company has completed an initial assessment of the effects of adopting IFRS
and identified the following as having the greatest potential to change the
Company's accounting policies and procedures, financial reporting and
information systems upon conversion to IFRS.
Financial Effect on Financial
Statement Category Change Under IFRS Statements of Storm
----------------------------------------------------------------------------
Property and Equipment Existing full-cost Certain costs attributable
pool to be divided to areas with no future
into exploration development potential will
and evaluation and be charged to retained
development and earnings on transition.
producing segments. Future depletion charges
Test for impairment will be reduced
at transition. accordingly.
----------------------------------------------------------------------------
Property and Equipment Development and Additional depletion
producing segments calculations will be
to be allocated required at
into CGUs and each reporting period.
depleted at a
lower level.
----------------------------------------------------------------------------
Property and Equipment Depletion can be Use of proved plus
calculated using probable reserves in
either proven or depletion calculation
proved plus probable will reduce depletion
reserves. expense.
----------------------------------------------------------------------------
Property and Equipment Gains and losses Gains and losses on
on dispositions property sales will be a
will be measured frequent income statement
and recognized in item, leading to a more
the income statement. erratic earnings profile.
There is no de
minimis rule as
exists under current
GAAP.
----------------------------------------------------------------------------
Property and Equipment Impairment test will Impairment of CGUs
be calculated at the from existing asset base
CGU level plus changes is unlikely to be
to the impairment an issue.
Calculation
methodology.
----------------------------------------------------------------------------
Financial Instruments Hedge accounting All future hedges
requirements have will be marked-to-market
become significantly and gains or losses
more stringent will be included in the
income statement.
----------------------------------------------------------------------------
Asset Retirement A market-based discount Effect not yet determinable.
Obligation rate will be used
instead of using a
credit-adjusted
risk-free rate.
----------------------------------------------------------------------------
Borrowing Costs Interest costs relating Likely no effect on Storm,
to the financing of assets based on existing assets.
with a long ready-for-use
time frame to be
capitalized.
----------------------------------------------------------------------------
Cash Flow Statement To focus on cash More a presentation than
measurements only, a measurement issue.
with no adjustment for However, non-GAAP
working capital funds from operations
components. will be harder to measure and
may disappear from
common usage.
----------------------------------------------------------------------------
Share-Based Payments Stock options that No material effect likely.
vest in installments
should be valued
separately.
----------------------------------------------------------------------------
The Company's staff has begun to design and document the changes required to
accounting policies, financial reporting, internal controls over financial
reporting, information technology and systems, business processes, and staff
education and training. Staff continue to participate in meetings with peers in
the industry and accounting and information system service providers to identify
the practices that will be used to obtain the most relevant and comparable
financial information upon conversion to IFRS.
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.
Consolidated Balance Sheets
June 30, December 31,
($000s) (unaudited) 2010 2009
----------------------------------------------------------------------------
ASSETS
----------------------------------------------------------------------------
Current
Accounts receivable $ 12,608 $ 10,919
Investments (Note 4) 3,048 3,607
Prepaids and other 4,233 4,861
Fair value of financial instruments (Note 11) 1,415 -
----------------------------------------------------------------------------
21,304 19,387
Property and equipment - net (Note 3) 271,750 303,053
Investments (Note 4) 24,149 22,492
----------------------------------------------------------------------------
$ 317,203 $ 344,932
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------
Current
Accounts payable and accrued liabilities $ 16,607 $ 25,661
Fair value of financial instruments (Note 11) - 1,855
----------------------------------------------------------------------------
16,607 27,516
Bank indebtedness (Note 5) 49,854 86,758
Asset retirement obligation (Note 6) 7,944 7,584
Future income taxes (Note 7) 23,722 20,478
----------------------------------------------------------------------------
98,127 142,336
----------------------------------------------------------------------------
Shareholders' equity (Note 8)
Share capital 110,704 107,852
Contributed surplus 6,392 5,719
Retained earnings 99,098 89,952
Accumulated other comprehensive income (deficit) 2,882 (927)
----------------------------------------------------------------------------
219,076 202,596
----------------------------------------------------------------------------
$ 317,203 $ 344,932
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated Statements of Income and Retained Earnings
Three Three Six Six
Months to Months to Months to Months to
($000s except per-share amounts) June 30, June 30, June 30, June 30,
(unaudited) 2010 2009 2010 2009
----------------------------------------------------------------------------
Revenue
Revenue from product sales $ 26,544 $ 19,198 $ 56,080 $ 45,623
Realized gain on financial
instruments (Note 11) 3,148 - 2,730 -
Unrealized gain (loss) on
financial instruments (Note 11) 85 (486) 137 (1,092)
Royalties (2,661) (3,360) (7,118) (8,613)
----------------------------------------------------------------------------
27,116 15,352 51,829 35,918
----------------------------------------------------------------------------
Expenses
Production 3,067 4,160 6,654 8,621
Transportation 1,429 1,125 2,706 2,527
Interest 1,164 824 2,402 1,402
General and administrative 1,015 1,269 1,972 2,280
Stock-based compensation 679 405 1,352 801
Depletion, depreciation and
accretion 13,202 10,709 24,799 21,995
----------------------------------------------------------------------------
20,556 18,492 39,885 37,626
----------------------------------------------------------------------------
Income (loss) before the
following: 6,560 (3,140) 11,944 (1,708)
Investment loss (Note 4) (66) - (311) -
----------------------------------------------------------------------------
Income (loss) before taxes: 6,494 (3,140) 11,633 (1,708)
Future income taxes (Note 7) (389) 948 (2,487) 766
----------------------------------------------------------------------------
Net income (loss) for the period 6,105 (2,192) 9,146 (942)
Retained earnings, beginning of
period 92,993 91,519 89,952 90,269
----------------------------------------------------------------------------
Retained earnings, end of period $ 99,098 $ 89,327 $ 99,098 $ 89,327
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per share
(Note 9)
- basic $ 0.13 $ (0.05) $ 0.19 $ (0.02)
- diluted $ 0.13 $ (0.05) $ 0.19 $ (0.02)
Consolidated Statements of Comprehensive Income (Loss) and Accumulated Other
Comprehensive Income (Deficit)
Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
($000s) (unaudited) 2010 2010 2010 2009
----------------------------------------------------------------------------
Net income (loss) for the period $ 6,105 $ (2,192) $ 9,145 $ (942)
Unrealized hedging gain (loss)
(Note 11) (3,317) - 3,133 -
Unrealized gain on shares available
for sale (Note 4) 1,510 - 1,409 -
Related income tax 935 - (733) -
----------------------------------------------------------------------------
Other comprehensive income (loss) (872) - 3,809 -
----------------------------------------------------------------------------
Comprehensive income (loss) for the
period $ 5,233 $ (2,192) 12,954 $ (942)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated other comprehensive
income (deficit), beginning of
period $ 3,754 $ - $ (927) $ -
Other comprehensive income (loss)
for the period (872) - 3,809 -
----------------------------------------------------------------------------
Accumulated other comprehensive
income, end of period $ 2,882 $ - $ 2,882 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
($000s) (unaudited) 2010 2009 2010 2009
----------------------------------------------------------------------------
Operating activities
Net income for the period $ 6,105 $ (2,192) $ 9,145 $ (942)
Non-cash items:
Investment loss (Note 4) 66 - 311 -
Depletion, depreciation and
accretion 13,202 10,709 24,799 21,995
Unrealized loss (gain) on
financial instruments
(Note 11) (85) 486 (137) 1,092
Future income tax 389 (948) 2,487 (766)
Stock-based compensation 679 405 1,352 801
----------------------------------------------------------------------------
Funds from operations 20,356 8,460 37,957 22,180
Net change in non-cash working
capital items (Note 10) (2,246) 632 (6,158) 1,545
----------------------------------------------------------------------------
18,110 9,092 31,799 23,725
----------------------------------------------------------------------------
Financing activities
Issue of common shares - net of
expenses 1,108 (204) 2,197 18,471
Increase (decrease) in bank
indebtedness (49,283) 7,047 (36,904) 10,037
----------------------------------------------------------------------------
(48,175) 6,843 (34,707) 28,508
----------------------------------------------------------------------------
Investing activities
Additions to property and equipment (10,051) (3,843) (46,890) (36,896)
Disposals of property and equipment 53,753 - 53,753 1,562
Net change in non-cash working
capital items (Note 10) (13,637) (12,092) (3,955) (16,899)
----------------------------------------------------------------------------
30,065 (15,935) 2,908 (52,233)
----------------------------------------------------------------------------
Change in cash during the period - - - -
Cash, beginning of period - - - -
----------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
Three and six months ended June 30, 2010 and 2009
Tabular amounts in thousands, except per share amounts
(unaudited)
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.
On June 9, 2010 Storm announced a proposed Plan of Arrangement under which ARC
Energy Trust ("ARC") would acquire all of the issued and outstanding shares of
Storm. The expected closing date is August 17, 2010. (See Note 13.)
2. SIGNIFICANT ACCOUNTING POLICIES
These interim unaudited consolidated financial statements of Storm have been
prepared by management in accordance with accounting principles generally
accepted in Canada ("GAAP"), following the same accounting policies and methods
of computation as used in the audited consolidated financial statements for the
year ended December 31, 2009. The interim unaudited consolidated financial
statement note disclosures do not include all disclosures applicable for annual
audited financial statements. Accordingly, the interim unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto contained in the Company's year-end
report for the year ended December 31, 2009.
Future Accounting Changes
Business Combinations
The CICA issued Handbook Section 1582 "Business Combinations" that replaces the
previous business combinations standard. Under this guidance, the purchase price
used in a business combination is based on the fair value of shares exchanged at
the market price at acquisition date. Under the current standard, the purchase
price used is based on the market price of shares for a reasonable period before
and after the date the acquisition is agreed upon and announced. In addition,
the guidance generally requires all transaction costs to be expensed. Current
standards allow for the capitalization of these costs as part of the purchase
price. This standard applies prospectively to business combinations on or after
January 1, 2011.
Consolidated Financial Statements and Non-Controlling Interest
The CICA issued Handbook Sections 1601 "Consolidated Financial Statements", and
1602 "Non-controlling Interests", which replaces the existing guidance under
Section 1600 "Consolidated Financial Statements". Section 1601 establishes
standards for the preparation of Consolidated Financial Statements. Section 1602
provides guidance on accounting for a non-controlling interest in a subsidiary
in Consolidated Financial Statements subsequent to a business combination. These
standards will be effective for Storm for business combinations occurring on or
after January 1, 2011.
International Financial Reporting Standards
The CICA has confirmed January 1, 2011 as the effective date for the conversion
of Canadian GAAP to International Financial Reporting Standards ("IFRS"). IFRS
uses a conceptual framework similar to Canadian GAAP; however, there will be
significant differences in recognition, measurement and disclosures.
3. PROPERTY AND EQUIPMENT
June 30, December 31,
2010 2009
----------------------------------------------------------------------------
Property and equipment $ 459,114 $ 465,843
Accumulated depletion and depreciation (187,364) (162,790)
----------------------------------------------------------------------------
$ 271,750 $ 303,053
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At June 30, 2010, the depletion calculation excluded unproved properties of
$30.2 million (December 31, 2009 - $29.2 million) and included future
development costs of $117.3 million (December 31, 2009 - $117.3 million).
Effective June 10, 2010, the Company sold certain oil sands leases for proceeds
of $53.75 million. The properties sold had no associated reserves. Proceeds were
applied in reduction of the total cost of plant and equipment as the effect of
the disposition did not change the rate of depletion by 20% or more, the
threshold amount for recognition of a gain or loss.
4. INVESTMENTS
June 30, December 31,
2010 2009
----------------------------------------------------------------------------
Investment in Bellamont Exploration Ltd. $ 3,048 $ 3,607
----------------------------------------------------------------------------
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Long-term investments:
Investment in Storm Gas Resource Corp. $ 11,656 $ 11,967
Investment in Chinook Energy Inc. (formerly
Storm Ventures International Inc.) 9,704 10,525
Bridge Energy ASA 2,789 -
----------------------------------------------------------------------------
$ 24,149 $ 22,492
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In November 2009, the Company sold certain producing properties to Bellamont
Exploration Ltd. ("Bellamont") for proceeds totaling $17.2 million, comprised of
$14.0 million in cash and 5.08 million shares in Bellamont. This investment in
Bellamont shares is carried at the fair value of $3.0 million, determined with
reference to the published share price, with the resulting holding loss of $0.5
million and $0.6 million for the three and six months ended June 30, 2010,
respectively, recognized in other comprehensive income.
The Company's long-term investments include interests in two private companies,
Storm Gas Resource Corp. ("SGR") and Chinook Energy Inc. ("Chinook") (formerly
Storm Ventures International Inc. ("SVI") and one public company, Bridge Energy
ASA ("Bridge").
In the quarter to June 30, 2010 SVI changed its name to Chinook and distributed
all of the common shares of Bridge it held on the basis of 0.23398 of a Bridge
share for each SVI share. The distribution of 1,052,910 Bridge shares to Storm
was treated as a return of capital in the amount of $0.8 million. This
investment in Bridge shares is carried at the fair value of $2.8 million,
determined with reference to the published share price on the Oslo stock
exchange, with the resulting holding gain of $2.0 million for the three and six
months ended June 30, 2010 recognized in other comprehensive income.
On July 6, 2010, the shares of Chinook began trading on the Toronto Stock
Exchange. The value of the Company's 4.5 million shares in Chinook using the
closing price on August 11, 2010 is $10.35 million. At June 30, 2010, the
Company's interest in Chinook is accounted for using the cost method.
Storm's 22% interest in SGR is accounted for using the equity method, with
recorded investment losses representing Storm's pro-rata share of changes in
SGR's equity. 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.
The Company provided management services to SGR at a cost of $76,000 and
$152,000 for the three and six months ended June 30, 2010, respectively (2009 -
$65,000 and $130,000 for the three and six months then ended). The Company and
SGR are also 40:60 joint venture participants in certain undeveloped lands.
5. BANK INDEBTEDNESS
The Company has an extendible revolving bank facility in the amount of $140
million, based on the Company's producing reserves. The revolving facility is
available to the Company until April 29, 2011, but may be extended at the
Company's request until April 28, 2012, subject to the bank's review of the
Company's reserve lending base. If the revolving facility is not renewed at the
end of the current revolving phase, the facility moves into a term phase whereby
the loan is to be retired with one payment on the 366th day following the last
day of the revolving phase, in an amount equal to the outstanding principal.
Interest is paid on the revolving facility at banker's acceptance rates plus a
stamping fee. Security comprises a floating charge demand debenture on the
assets of the Company.
6. ASSET RETIREMENT OBLIGATION
The estimated future asset retirement obligation is based on the Company's net
ownership interest in wells and facilities, the estimated costs to abandon and
reclaim the wells and facilities and the estimated timing of the costs to be
incurred in future periods. The total estimated undiscounted amount required to
settle the Company's asset retirement obligations is approximately $13.7 million
(December 31, 2009 - $12.8 million), which will be paid over the next 21 years,
with the majority of costs paid between 2015 and 2031. A credit adjusted
risk-free rate of eight percent was used to calculate the present value of the
asset retirement obligations, amounting to $7.9 million (December 31, 2009 -
$7.6 million).
The following table provides a reconciliation of the carrying amount of the
obligation associated with the retirement of oil and gas properties:
Six Months Ended Year Ended
June 30, December 31,
2010 2009
----------------------------------------------------------------------------
Asset retirement obligation, beginning of
period $ 7,584 $ 7,259
Liabilities incurred 260 741
Liabilities disposed (126) (900)
Accretion expense 226 484
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Asset retirement obligation, end of period $ 7,944 $ 7,584
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7. FUTURE INCOME TAXES
The future income tax liability is based on the excess of the accounting amounts
over the related tax bases of the Company's property and equipment, asset
retirement obligation, share capital and unrealized financial instrument
gains/losses.
The Company has tax pools associated with property and equipment of
approximately $175 million as well as capital losses of approximately $10
million.
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:
Three Months Three Months Six Months Six Months
to June 30, to June 30, to June 30, to June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Statutory combined
federal and provincial
income tax rate 28% 29% 28% 29%
Expected income taxes $ 1,836 $ (927) $ 3,289 $ (504)
Add (deduct) the income
tax effect of:
Stock-based compensation 192 119 382 236
Equity loss (gain) 19 88
Rate adjustments 332 (39) 419 (491)
Benefit of losses not
previously recognized (1,509) - (1,509) -
Other (481) (101) (182) (7)
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Future income taxes $ 389 $ (948) $ 2,487 $ (766)
----------------------------------------------------------------------------
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The components of the future income tax liability are as follows:
June 30, December 31,
2010 2009
----------------------------------------------------------------------------
Property and equipment $ 25,318 $ 23,253
Asset retirement obligation (2,042) (1,942)
Share issue costs (287) (499)
Fair value of financial instruments
733 (334)
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Future income tax liability $ 23,722 $ 20,478
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8. SHAREHOLDERS' EQUITY
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, 2009 46,743 107,852
Private placement of flow-through common
shares (1) 8 95
Stock options exercised (2) 451 2,781
Tax effect of flow-through share
renunciations (24)
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Balance as at June 30, 2010 47,202 110,704
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(1) On March 19, 2010, 8,000 flow-through common shares were issued to a
director at a price of $11.86 per share for total proceeds of $95,000.
The terms of this share issue require the Company to renounce to the
subscriber Canadian Exploration Expenditures in the amount of $95,000,
to be incurred prior to December 31, 2010.
(2) During 2010, 451,000 stock options were exercised for proceeds of
$2,102,000 and related prior stock compensation expense of $679,000
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 maximum of 8% of the issued and
outstanding common shares have been reserved for issuance. Details of the
options outstanding at June 30, 2010 are as follows:
Weighted Average
Number of options Exercise Price
----------------------------------------------------------------------------
Outstanding at December 31, 2009 3,014 $ 8.04
Issued during period 160 11.81
Exercised during period (451) 4.66
Forfeited during period (26) 10.66
----------------------------------------------------------------------------
Outstanding at June 30, 2010 2,697 $ 8.81
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
$ 5.14 to $5.39 85 0.3 $ 5.24 85 $ 5.24
$ 5.67 to $8.27 1,497 1.5 $ 6.63 960 $ 6.42
$ 8.57 to $12.60 1,115 3.4 $ 12.00 45 $ 11.78
----------------------------------------------------------------------------
2,697 2.5 $ 8.81 1,090 $ 6.55
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Using the Black-Scholes pricing model, the weighted average fair value of the
options granted in 2010 was estimated to be $3.79 (2009 - $3.70), using
risk-free interest rates of 4.5%, volatility of 40% and an expected average
vesting period of 30 months. The amortized cost of the options is charged as
stock-based compensation in the consolidated statement of income (loss) with an
equivalent offset to contributed surplus.
9. PER SHARE AMOUNTS
Three Months Three Months Six Months Six Months
to June 30, to June 30, to June 30, to June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Basic
Net income per share $ 0.13 $ (0.05) $ 0.19 $ (0.02)
Weighted average number
of shares outstanding
(000s) 47,056 46,553 46,982 45,888
Diluted
Net income per share $ 0.13 $ (0.05) $ 0.19 $ (0.02)
Weighted average number
of shares outstanding
(000s) 47,928 47,637 47,854 46,959
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The reconciling items between basic and diluted weighted average common
shares are stock options described in Note 8.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash working capital
Three Months Three Months Six Months Six Months
to June 30, to June 30, to June 30, to June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Accounts receivable $ 1,725 $ 3,013 $ (1,688) $ 7,132
Prepaids and other (314) (1,556) 629 (1,827)
Accounts payable and
accrued liabilities (17,294) (12,917) (9,054) (20,659)
----------------------------------------------------------------------------
Change in non-cash
working capital $ (15,883) $ (11,460) $ (10,113) $ (15,354)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Relating to:
Operating activities $ (2,246) $ 632 $ (6,158) $ 1,545
Financing activities - - - -
Investing activities (13,637) (12,092) (3,955) (16,899)
----------------------------------------------------------------------------
$ (15,883) $ (11,460) $ (10,113) $ (15,354)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest paid during the
period $ 1,164 $ 824 $ 2,403 $ 1,402
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income taxes paid during
the period $ - $ - $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. FINANCIAL INSTRUMENTS
Financial Instrument Classification and Measurement
The Company's financial instruments carried on the Consolidated Balance Sheet
are carried at amortized cost with the exception of its investment in derivative
contracts and its investment in Bellamont and Bridge, which are carried at fair
value. There were no significant differences between the carrying value of
financial instruments and their estimated fair values as at June 30, 2010 with
the exception of our investments in Chinook and SGR which are carried at
adjusted cost.
The Company's investments in Bellamont and Bridge and its derivative contracts
are transacted in active markets. Storm classifies the fair value of these
transactions according to the following hierarchy based on the amount of
observable inputs used to value the instrument.
- Level 1 - Quoted prices are available in active markets for identical assets
or liabilities as of the reporting date. Active markets are those in which
transactions occur in sufficient frequency and volume to provide pricing
information on an ongoing basis.
- Level 2 - Pricing inputs are other than quoted prices in active markets
included in Level 1. Prices in Level 2 are either directly or indirectly
observable as of the reporting date. Level 2 valuations are based on inputs,
including quoted forward prices for commodities, time value and volatility
factors, which can be substantially observed or corroborated in the marketplace.
- Level 3 - Valuations in this level are those with inputs for the asset or
liability that are not based on observable market data.
The Company's investments in Bellamont and Bridge and its derivative contracts
have been assessed on the fair value hierarchy described above. The investments
in Bellamont and Bridge are classified as Level 1 and the derivative contracts
as Level 2. Assessment of the significance of a particular input to the fair
value measurement requires judgment and may affect the placement within the fair
value hierarchy level.
Risk Management
The Company holds various financial instruments. These financial instruments
expose the Company to the following risks:
- credit risk;
- market risk;
- liquidity risk.
Management has primary responsibility for monitoring and managing financial
instrument risks under direction from the Board of Directors, which has overall
responsibility for establishing the Company's risk management framework. In
certain circumstances, for example, hedging of future production revenue, the
Board has established policies and risk limits and controls, and monitors these
risks in relation to market conditions. In other circumstances, for example,
extending credit to purchasers of the Company's products, the Board has
delegated responsibility for credit assessment to management, but receives
frequent financial and operating reports.
The Company's financial instruments recognized on the consolidated balance sheet
consist of accounts receivable, investments, bank indebtedness, accounts payable
and accrued liabilities and unrealized financial instrument provision. The fair
value of these financial instruments approximates their carrying amounts with
the exception of our investments in Chinook and SGR which are carried at
adjusted cost.
Credit risk
A substantial portion of the Company's accounts receivable is concentrated with
a limited number of purchasers of commodities and joint venture partners in the
oil and gas industry and are subject to normal industry credit risk. Management
considers this concentration of credit risk to be limited, as commodity
purchasers are major industry participants, and receivables from partners are
protected by effective industry standard legal remedies. In addition, the
Company's high working interest in its major operating properties mitigates the
risk of partner default. The Company requires cash calls from its partners on
major field projects in advance of commencement. Receivables related to the sale
of the Company's production are normally collected on the 25th day of the month
following delivery. Nevertheless, the widespread disruption of credit markets
over the last two years, together with falling commodity prices, has exposed 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 the control of the Company:
- commodity prices;
- interest rates;
- foreign exchange.
Commodity prices
The Company is constantly exposed to the risk of declining prices for its
products with a corresponding reduction in cash flow. Reduced cash flow may
result in lower levels of capital being available for field activity, thus
compromising the Company's capacity to grow production while at the same time
replacing continuous production declines from existing properties. 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 and thus predictable debt
reduction. These contracts reduce the fluctuation in production revenue by
fixing prices of future deliveries of oil and natural gas. Such arrangements are
made in accordance with the Company's risk management policy and the Company
does not use these instruments for trading or speculative purposes. The Company
formally documents all relationships between derivative instruments and hedged
items, as well as the risk management objectives and strategy for undertaking
hedge transactions. Certain derivative instruments used by the Company qualify
for hedge accounting treatment. Realized gains and losses on these contracts are
recognized as revenue in the same period in which the revenues associated with
the hedged transactions are recognized. The Company also assesses, both at the
contract's inception and on an ongoing basis, whether the contract is highly
effective in offsetting the changes in fair values or cash flows of hedged
items. However, certain derivative instruments, relating to crude oil, in place
during the reporting periods, did not satisfy hedge accounting criteria. As a
result, these financial instruments have been valued on a mark-to-market basis
and the resulting gain or loss recognized in income.
For the three and six months ended June 30, 2010, the Company realized gains on
financial instruments of $3.1 million and $2.7 million, respectively (2009 -
$nil).
As at June 30, 2010, Storm has the following derivative contracts in place,
which meet hedge accounting criteria. The fair market value of these contracts
of $1.4 million is included under current assets and the resulting unrealized
mark-to-market loss of $3.3 million for the three months ended June 30, 2010
(2009 - $nil) and unrealized mark-to-market gain of $3.1 million for the six
months ended June 30, 2010 (2009 - $nil) is recognized in other comprehensive
income.
Volume Price Term
----------------------------------------------------------------------------
Natural Gas Swaps
5,000 GJ/day $5.20 July 2010 September 2010
Collar
7,000 GJ/day $ 5.00 - $5.70 July 2010 September 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest rates
Interest on the Company's revolving bank facility varies with changes in
interest rates, and is most commonly based on bankers' acceptance rates plus a
stamping fee. The Company is thus exposed to increased borrowing costs during
periods of increasing interest rates, with a corresponding reduction in both
cash flows and project economics.
Foreign exchange
Although the Company's product revenues are denominated in Canadian dollars, the
underlying market prices are affected by the exchange rate between the Canadian
and the United States dollar. As at June 30, 2010, the Company had no contracts
in place to reduce foreign exchange risk.
Sensitivities
Using the Company's actual production volumes, royalty rates, income tax rates
and debt levels for the three months ended June 30, 2010 and 2009, the estimated
after-tax effects that changes in certain factors would have on net income and
net income per share is as follows:
2010
----------------------------------------------------------------------------
Change in Net Change in Net
Factor Income Income Per Share
----------------------------------------------------------------------------
US$ 1.00/Bbl change in the price of WTI $ 163 $ 0.00
$0.10/Mcf change in the price of natural gas $ 520 $ 0.01
1% change in the interest rate $ 528 $ 0.01
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liquidity risk
Liquidity difficulties would emerge if the Company was unable to meet its
financial obligations as they fell due within normal credit terms. This may be
the consequence of diminished cash flows resulting from lower product prices,
production interruptions, or operating or capital cost increases. Liquidity
difficulties could also occur if the Company's bankers were unable to continue
to provide credit at a level, cost and on terms compatible with the Company's
capital requirements. Generally, the Company will, over a reasonable period of
time, limit its capital programs to cash flow from operations. In addition, the
Company endeavours to maintain its debt at a level less than the maximum amount
of its total bank facility to ensure financial flexibility to deal with
unforeseen or rapidly changing circumstances.
12. CAPITAL MANAGEMENT
Capital management is fundamental to the Company's objective of cost-effective
production growth, while simultaneously replacing continuous production
declines. The Company's capital comprises shareholders' equity, bank
indebtedness and working capital. Capital management involves the preparation of
an annual budget, which may only be implemented after approval by the Company's
Board of Directors. As the Company's business evolves during the fiscal year,
the budget may be amended; however, any changes are again subject to approval by
the Board of Directors. As part of the budget process, and as part of capital
management control procedures, the Company continuously uses a non-GAAP
measurement of net debt to cash flow to measure and control debt levels during
the fiscal year. Debt to cash flow is also used by the Company's bankers to set
the stamping fee applicable to the Company's bank indebtedness.
The measurement is established as follows:
As at and for As at and for
6 months ending 12 months ending
June 30, 2010 December 31, 2009
----------------------------------------------------------------------------
Current assets, less fair value of
financial instruments $ 19,889 $ 19,387
Accounts payable and accrued liabilities 16,607 25,661
----------------------------------------------------------------------------
Working capital (deficiency) 3,282 (6,274)
Bank indebtedness 49,854 86,758
----------------------------------------------------------------------------
Net debt $ 46,572 $ 93,032
Year-to-date annualized funds from
operations $ 75,914 $ 44,596
Net debt to non-GAAP funds from
operations 0.6:1 2.1:1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The above measurement is subject to quarterly variations and is usually highest
in the first and fourth quarter of each year, when capital expenditures normally
exceed cash flow, with a resulting increase in net debt. The decrease in this
ratio at June 30, 2010 is a result of increased cash flow in 2010 due to higher
commodity prices.
The Company's credit availability is based on the Company's producing reserves.
The non-GAAP measurement of net debt to funds from operations 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. The Company's bankers
completed a year-end evaluation of the Company's borrowing base and have
increased the bank facility to $140 million.
From time to time, the Company may enter into hedging arrangements if capital
programs or acquisition costs result in a high net debt to cash flow ratio. Such
arrangements provide for stability of cash flow during periods when the Company
applies cash flow to reduce its net debt.
Increased debt levels arising from acquisitions, or capital programs exceeding
cash flow, may be addressed by reduced capital expenditures, disposal of
non-core assets or the issue of common shares.
13. PLAN OF ARRANGEMENT WITH ARC ENERGY TRUST
On June 9, 2010, the Company announced a Plan of Arrangement with ARC Energy
Trust which will result in all of the Company's common shares being acquired by
ARC. Under the Plan, Storm shareholders will receive for each Storm share:
- 0.57 of a unit of ARC Energy Trust or, at the election of the shareholders
resident for tax purposes in Canada, that part of an exchangeable share of
equivalent value in ARC's wholly owned subsidiary, ARC Resources Ltd.;
- $1.00 per common share in cash;
- 0.3333 of a common share in a new exploration-focused corporation listed on
the TSX Venture Exchange, Storm Resources Ltd.;
- 0.1333 of a warrant to purchase a common share of Storm Resources Ltd.
Senior Management
Brian Lavergne Harry Ediger
President & CEO Vice President, Land
Robert S. Tiberio Eric Blakely
Chief Operating Officer Vice President, Exploration
Donald G. McLean John Devlin
Vice President, Finance & CFO Controller
----------------------------------------------------------------------------
Directors
Matthew J. Brister (1) (2) Brian Lavergne
CEO
John A. Brussa (3)
Gregory G. Turnbull (3)
Mark Butler (3) Corporate Secretary
Stuart G. Clark (1) P.Grant Wierzba (2)
Chairman
James K. Wilson (1)
(1) Member, Audit Committee
(2) Member, Reserves Committee
(3) Member, Compensation, Governance and Nomination Committee
----------------------------------------------------------------------------
Stock Exchange Listing Registrar & Transfer Agent
Toronto Stock Exchange Alliance Trust Company
Trading Symbol SEO Calgary, Alberta
Solicitors Executive Offices
McCarthy TTtrault LLP Suite 800, 205 5(th) Avenue S.W.
Burnet Duckworth & Palmer LLP Calgary, Alberta, T2P 2V7 Canada
Calgary, Alberta Tel: (403) 264-3520 Fax: (403)
264-3552
Auditors www.stormexploration.com
PricewaterhouseCoopers LLP Bankers
Calgary, Alberta
CIBC, Oil & Gas Group
Reserve Engineers Bank of Montreal
Union Bank
Paddock Lindstrom & Associates Ltd. ATB Financial
Calgary, Alberta Calgary, Alberta
----------------------------------------------------------------------------
Abbreviations
3-D Three-dimensional
API American Petroleum Institute
ARTC Alberta Royalty Tax Credit
Bbls Barrels of oil or natural gas liquids
Bbls/d Barrels per day
Bcf Billions of cubic feet
Bcfe Billions of cubic feet equivalent
Boe Barrels of oil equivalent
Boe/d Barrels of oil equivalent per day
Bopd Barrels of oil per day
Cdn$ Canadian dollar
DPIIP Discovered Petroleum Initially in Place
ETAP Entreprise Tunisienne d ActivitTs PTtroliFres
FPSO Floating, Production, Storage, Offloading vessel
GJ Gigajoules
GJ/d Gigajoules per day
Mbbls Thousands of barrels
Mboe Thousands of barrels of oil equivalent
----------------------------------------------------------------------------
Mcf Thousands of cubic feet
Mcf/d Thousands of cubic feet per day
Mmbbls Millions of barrels
Mmbtu Millions of British Thermal Units
Mmbtu/d Millions of British Thermal Units per day
Mmcf Millions of cubic feet
Mmcf/d Millions of cubic feet per day
Mstb Thousand stock tank barrels
NAV Net Asset Value
NGL Natural gas liquids
NPV Net present value
OGIP Original Gas in Place
OPEC Organization of Petroleum Exporting Countries
Scf/ton Standard cubic foot per ton
STOOIP Stock Tank Original Oil in Place
Tcf Trillions of cubic feet
TSX Toronto Stock Exchange
US$ United States dollar
WTI West Texas Intermediate
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