Storm Resources Ltd. (TSX VENTURE:SRX)
PRESIDENT'S MESSAGE
HIGHLIGHTS
-- On August 17, 2010, Storm Resources Ltd. ("Storm" or the "Company")
commenced operations after certain assets were transferred to Storm
under the Plan of Arrangement involving the sale of Storm Exploration
Inc. to ARC Energy Trust. The assets transferred to Storm included
approximately 117,200 net acres of undeveloped land in the Horn River
Basin, Cabin/Kotcho/Junior and Umbach areas in North East British
Columbia and in the Red Earth area of Alberta. In addition, Storm
received share ownership positions in Storm Gas Resource Corp.,
Bellamont Exploration Ltd., Bridge Energy ASA and Chinook Energy Inc.
plus a cash payment of $9.4 million.
-- Also on August 17, 2010, Storm completed a private placement of 2.3
million common shares, at a price of $3.28 per share, with directors,
officers, and employees, for proceeds totaling $7.5 million.
-- On September 21, 2010, 6.6 million warrants which had been issued to
Storm Exploration Inc. shareholders under the Plan of Arrangement with
ARC Energy Trust, were exercised at a price of $3.28 per share for
proceeds totaling $21.5 million. This represented approximately 99% of
the warrants outstanding. All warrants have either been exercised or
have expired.
-- During the quarter, capital expenditures totaled $3.4 million which
included completing a horizontal well at Umbach (1.0 net) and
preparatory work for the first Horn River Basin horizontal (0.4 net)
which was spudded early in October.
-- At September 30, 2010, funds available for investment totaled $34.4
million and the publicly listed securities owned by Storm had an
estimated market value of $16.2 million (proceeds from the possible
future sale of these securities may also be used to finance the
company's capital programs).
OPERATIONS REVIEW
In the Horn River Basin ("HRB") of North East British Columbia, the first
horizontal well (0.4 net) has been cased at A-11-A/94-O-9 after drilling 1,800
metres laterally into the Muskwa and Otter Park shales (spudded October 6). The
rig will move to drill a second horizontal (0.4 net) from an adjacent surface
location which is expected to spud in late November. Drilling each horizontal is
estimated to cost between $4.0 and $5.5 million ($1.6 to $2.2 million net).
Completion of the first horizontal with 12 fracture stimulations is planned for
early December and the second horizontal will be completed next summer depending
on results from the first horizontal and natural gas prices. As a result of
rainy weather delaying the drilling of the first horizontal, the completion of
this well in December has increased the estimated completion cost to $12.0 to
$14.0 million ($4.8 to $5.6 million net). Cost of completing the second
horizontal next summer with 12 fracture stimulations is estimated to be $9.0 to
$10.0 million ($3.6 to $4.0 million net). An additional $10.0 million ($4.0
million net) will be invested this winter to construct associated infrastructure
including roads, a wellsite facility, pipelines and a dehydration/compression
facility with capacity for 20 Mmcf per day of raw gas. A total of $40 to $50
million gross is expected to be invested over the next 12 months to validate the
commerciality of Storm's HRB shale lands which total 25,000 net undeveloped
acres. First gas sales from a successful horizontal well is possible by March
2011, but it will be several months later before we have enough production
history to determine the economics associated with larger scale development.
At Umbach in North East British Columbia, the horizontal gas well (1.0 net) that
was drilled in July was completed in September with 7 fracture treatments, each
with 100 tons of sand. Results from the completion are currently being
evaluated. This completion fulfilled a farm-in commitment and by so doing Storm
has earned 8,100 net acres of undeveloped land (27 gross sections with Storm
average working interest of 43%).
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. The estimated cost to drill,
complete, and tie in a horizontal well on our lands 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
well. Initial drilling density would be one horizontal well per section. Two
horizontal locations have been licensed to test the economics associated with
larger scale development. Both will be drilled when sufficient discretionary
cash flow is available which is primarily dependent on an improvement in natural
gas prices. No activity is planned for this area at this time.
At Red Earth, Storm is participating at a 20% working interest in two horizontal
wells (0.4 net) targeting light oil in the Slave Point formation. Expected gross
cost to drill, complete and equip each horizontal is $4.2 million. Based on the
performance of offsetting horizontals, production in the first year could
average 80 to 100 barrels per day.
INVESTMENTS
Storm has share ownership positions in one private company and three publicly
traded companies. These shareholdings were transferred to Storm under the Plan
of Arrangement with ARC Energy Trust. The value of the share positions in the
three public companies totaled $16.2 million at the end of the third quarter and
these securities could possibly be sold in the future with the proceeds being
used to finance the Company's capital programs.
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 share ownership position totals
2.5 million shares, representing 22% ownership of SGR. Currently, SGR's land
position totals 83,644 acres with 53,065 acres in the HRB. At the end of the
third quarter of 2010, SGR's balance sheet showed a cash position of $24.6
million.
Chinook Energy Inc. ("Chinook")
Storm holds 4.5 million shares of Chinook which is a TSX-listed oil and gas
exploration and production company (symbol 'CKE') based in Calgary with
operations focused in Tunisia and Western Canada. Storm Exploration Inc. had
previously owned 4.5 million shares of Storm Ventures International Inc. ("SVI")
which were converted into shares of Chinook when SVI and Iteration Energy Ltd.
completed a business combination on June 29, 2010.
Bridge Energy ASA ("Bridge")
Storm holds 1.05 million common shares of Bridge (symbol 'Bridge' on the Oslo
Stock Exchange), a Norwegian based exploration and production company with
production of approximately 1,500 Boe per day, several development opportunities
in the UK sector of the North Sea, and a number of exploratory leads in the
Norwegian sector of the North Sea. Bridge is the result of a business
combination whereby SVI's United Kingdom North Sea assets were combined with a
private Norwegian based company in March 2010. SVI received 28,776,000 common
shares of Bridge which were then distributed to SVI shareholders, including SEO.
Bellamont Exploration Ltd. ("Bellamont")
Storm holds 5.08 million shares of Bellamont, a TSX-listed oil and gas
exploration and production company, as a result of a disposition of non-core
properties by Storm Exploration Inc. in the Grande Prairie area in November
2009.
OUTLOOK
Capital investment in 2010 from August 17 to December 31 is expected to total
$18.0 million with $2.5 million allocated to land and asset acquisitions and
$15.5 million for drilling, completions, facilities, and tie-ins. In 2011,
capital investment is expected to total $19.0 million with $3.5 million
allocated to undeveloped land and asset acquisitions and $15.5 million for
drilling, completions, facilities, and tie-ins. This level of capital investment
is expected to result in production averaging 1,000 Boe per day in the fourth
quarter of 2011. Up to four gross wells (1.8 net) are planned for 2010 and three
gross wells (1.8 net) in 2011. Ultimately, capital allocation and the size of
the drilling program will depend on results, natural gas prices, and the size of
any asset or undeveloped land acquisitions. Our cash general and administrative
budget will be approximately $2.5 million per year. The current cash balance and
the possible sale of our share positions in the three public companies listed on
stock exchanges will be used to fund planned 2010 and 2011 capital expenditures.
Storm's undeveloped land position prospective for Devonian shales in the HRB
represents a substantial resource but exploitation will not be quick or easy
given the associated higher cost structure, various operational challenges, and
the continued volatility in natural gas prices. A core project area has been
identified which consists of 19 gross sections with an estimated 1.7 to 2.1
gross TCF of DPIIP in the Muskwa and Otter Park shales (internal estimate by
Storm management). Our near-term objective is to prove commerciality of this
core project area with two horizontal wells while longer term exploitation will
depend on natural gas prices.
In addition to advancing projects on our existing undeveloped lands, we have
been reviewing asset acquisition opportunities with a focus on adding near term
exploitation upside and cash flow to fund exploitation activities on our
existing asset base. Any potential asset acquisition would be funded in part
with existing unallocated cash, debt if available, and the possible sale of our
public company share positions.
Storm Resources Ltd. is the fourth 'Storm' and, as in the previous Storm
entities, our objective will be to generate accretive, per-share growth which
will involve pursuing specific opportunities based on finding and development
costs, netback, and rate of return. Although Storm is at an early stage, we have
significant capital resources ($50 million including cash and publicly listed
securities) which will be used to advance current projects and to fund potential
new ventures or acquisitions.
Respectfully,
Brian Lavergne, President and Chief Executive Officer
November 10, 2010
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.
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.
Forward-Looking Statements - such statements made in this press release are
subject to the limitations set out in the Management's Discussion and Analysis
for the period to September 30, 2010.
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
Set out below is management's discussion and analysis ("MD&A") of financial and
operating results for Storm Resources Ltd. ("Storm" or the "Company") for the
period ended September 30, 2010. It should be read in conjunction with the
unaudited financial statements for the period from June 8, 2010 to September 30,
2010 and other operating and financial information included in this press
release. In addition, readers are directed to the discussion below regarding
Forward-Looking Statements, Boe Presentation and Non-GAAP Measurements.
The Company was incorporated on June 8, 2010 as 1541229 Alberta Ltd. with
nominal share capital and was inactive until August 17, 2010 when the Company
participated in a Plan of Arrangement (the "Arrangement") along with Storm
Exploration Inc ("SEO"), ARC Energy Trust ("ARC") and ARC Resources Ltd. The
Arrangement resulted in the sale of SEO to ARC and the spin out of the Company
as a junior exploration and development company. As part of the series of
transactions associated with the Arrangement, the Company issued shares in
exchange for certain assets as more fully described in Note 4 to the unaudited
financial statements as at and for the period ended September 30, 2010. On
August 31, 2010 the Company began trading on the TSX Venture Exchange under the
symbol "SRX". As operations began following the completion of the Arrangement,
the discussion of operations in this MD&A is for the approximate six week period
ended September 30, 2010.
This management's discussion and analysis is dated November 10, 2010. Unless
otherwise indicated all dollar amounts are in thousands.
LIMITATIONS
Basis of Presentation - Financial data presented below have largely been derived
from the Company's unaudited financial statements for the period from June 8,
2010 until September 30, 2010, prepared in accordance with International
Financial Reporting Standards ("IFRS"). Accounting policies adopted by the
Company are set out in Note 3 to the unaudited financial statements for the
period ended September 30, 2010. The reporting and the measurement currency is
the Canadian dollar. Unless otherwise indicated, tabular financial amounts,
other than per share amounts, are in thousands.
The Company's use of IFRS in the unaudited financial statements for the period
ended September 30, 2010 anticipates the mandatory adoption of IFRS in Canada,
effective for reporting periods ending after December 31, 2010. The Company has
received the necessary regulatory approvals for early adoption of IFRS.
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;
-- future earnings;
-- future asset acquisitions or dispositions;
-- future sources of funding for capital program;
-- future decommissioning costs;
-- 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; and
-- changes to any of the foregoing.
Statements relating to "reserves" or "resources" are forward-looking statements,
as they involve the implied assessment, based on estimates and assumptions, that
the reserves and resources described exist in the quantities predicted or
estimated, and can be profitably produced in the future.
The forward-looking statements are subject to known and unknown risks and
uncertainties and other factors which may cause actual results, levels of
activity and achievements to differ materially from those expressed or implied
by such statements. Such factors include the material risks described in this
MD&A under "Risk Assessment" and the material assumptions described under the
headings "Production and Revenue"; "Share-based Payments"; "Depreciation";
"Accretion"; Comprehensive Income (Loss)"; "Cash"; "Investments"; "Investment in
Associate"; "Accounts Payable and Accrued Liabilities"; "Decommissioning
Liability"; 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 prices for natural gas and the condition of financial
institutions and markets, each of which is outside the control of the Company.
Readers are advised that the assumptions used in the preparation of such
information, although considered reasonable at the time of preparation, may
prove to be imprecise and, as such, undue reliance should not be placed on
forward-looking statements. Storm's actual results, performance or achievement,
could differ materially from those expressed in, or implied by, these
forward-looking statements. Storm disclaims any intention or obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required under securities
law. References to forward-looking information are made in the press release
dated November 10, 2010 this MD&A forms part of. The forward-looking statements
contained herein are expressly qualified by this cautionary statement.
Boe Presentation - 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, there may
be references made to terms which are not recognized under GAAP. Specifically,
"funds from operations", "funds from operations per share" and netbacks do not
have any standardized meaning as prescribed by GAAP 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 GAAP which appears on the
Company's statement of cash flows. Funds from operations and similar non-GAAP
terms are used to benchmark operations against prior periods and peer group
companies.
A reconciliation of funds from operations to cash flows from operating
activities is as follows:
June 8 to September 30, 2010
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Cash flow from operating activities $ (245)
Net change in non-cash working capital items (3)
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Non-GAAP funds from operations $ (248)
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OPERATIONAL AND FINANCIAL RESULTS
Production and Revenue
During the period to September 30, 2010, the Company had no production and no
production revenue.
Interest Income
Interest is received on cash on deposit with the Company's bankers, ATB Financial.
General and Administrative Costs
Compensation costs accounted for 68% of the charge for the period, with
accommodation costs accounting for an additional 19%.
Share-Based Payments
Share-based payments are non-cash charges which reflect the estimated value of
stock options issued to Storm's directors, officers 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. During the period options in respect of
approximately two million shares were issued with an exercise price of $3.28.
This issue, considerable in size, formed part of the initial compensation
program put in place for directors, officers and staff for the newly established
business.
Depreciation
The charge for depreciation for the period relates to office equipment which is
depreciated over its estimated useful life. No depletion or depreciation is
provided in respect of intangible and tangible field assets as the Company has
no production and no facilities in use.
Accretion
Accretion represents the time value increase of the Company's decommissioning
liability for the period.
Investment Loss
As described in Notes 3 and 7 to the unaudited financial statements for the
period to September 30, 2010, the Company accounts for its investment in Storm
Gas Resource Corp. ("SGR") using the equity method, where the Company's pro rata
share of changes in SGR's equity is included in the determination of the
Company's net loss for the period. The investment loss recorded in the period
represents Storm's share of changes in SGR's equity from the date of completion
of the Arrangement to September 30, 2010.
Income Taxes
Due to uncertainty of realization, no deferred income tax asset has been set up
in respect of potential future income tax reductions resulting from the use of
the taxable loss for the period.
Comprehensive Income (Loss)
Comprehensive income (loss) comprises net loss for the period plus the
unrealized gains and losses resulting from the mark-to-market valuation of
certain assets and liabilities. For the period to September 30, 2010, Storm's
comprehensive income included adjustments to reflect the period end
mark-to-market valuation of listed securities as follows:
Gain(Loss) for Period
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Bellamont Exploration Ltd. $ -
Bridge Energy ASA 469
Chinook Energy Inc. 450
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Total $ 919
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INVESTMENT AND FINANCING
Cash
The Company has cash on deposit derived from the following transactions:
Transaction Date Amount
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Received under Arrangement August 17, 2010 $ 9,370
Proceeds of private placement August 17, 2010 7,544
Proceeds from exercise of warrants September 22, 2010 21,522
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Total cash received 38,436
Cash outlays in period August 17 to
September 30, 2010 (606)
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Cash at end of period $ 37,830
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Cash has been placed on deposit with the Company's bankers, ATB Financial.
Protection of principal is paramount; correspondingly the Company does not seek
to maximize interest and other income from investment of cash surplus to
immediate operating requirements. Monies on deposit with ATB Financial are
guaranteed by the Government of Alberta, which has a triple A credit rating.
Investments
The Company owns listed securities as set out below which are valued at the
closing price on the relevant stock exchange at September 30, 2010.
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Value at
Number of Closing September
Holding Shares Exchange Price 30, 2010
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Bellamont Class A 5,080,645 TSX-V $ 0.53 $ 2,693
Exploration Ltd. Common
Shares
Bridge Energy ASA Common 1,052,910 Oslo Bors $ 2.45 2,575
Shares Axess
Chinook Energy Inc. Common 4,500,001 TSX $ 2.42 10,890
Shares
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$ 16,158
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Capital Outlays
Additions to exploration and evaluation assets in the period to
September 30, 2010 were as follows:
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Fair value of exploration and evaluation assets transferred
under Arrangement $ 19,041
Land and lease 177
Drilling 480
Completions 2,579
Facilities 66
Acquisitions 2
Administrative equipment 120
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Total capital expenditures in period 22,465
Decommissioning costs 998
Accumulated depreciation (2)
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Total $ 23,461
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Investment in Associate
The company owns 2,500,000 common shares of Storm Gas Resources Corp,
representing a 22% interest. The Company accounts for its interest in SGR using
the equity method. The carrying amount of the Company's interest in SGR at
September 30, 2010 is $5.57 per share, representing the transfer amount under
the Arrangement, plus the Company's share of SGR's loss since August 17, 2010.
This amount should not be regarded as representative of the value of Storm's
investment in SGR. 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. The Company also provides
management services to SGR and the amount billed for such services totaled
$33,000 for the period ended September 30, 2010.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities include operating, administrative and
capital costs payable. Net payables in respect of cash calls issued to partners
regarding capital projects and estimates of amounts owing but not yet invoiced
to the Company have been included in accounts payable.
Decommissioning Liability
The Company's decommissioning liability represents the present value of
estimated future costs to be incurred to abandon and reclaim wells drilled on
lands transferred to the Company under the Arrangement. Changes in amount of the
liability between the Arrangement date and September 30, 2010, comprise the
present value of additional liabilities accruing to the Company as a result of
field activity during the period, less costs paid in settlement of abandonment
obligations, plus the time related increase in the present value of the
liability. The discount rate used to establish the present value is 4%. Future
costs to abandon and reclaim the Company's properties are based on an internal
evaluation, supported by external data from industry sources.
Shareholders' Equity
Details of share issuances in the period to September 30, 2010 are as follows:
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Price
Number of per Gross
Nature of Transaction Shares Share Proceeds
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June 8, 2010 Issued upon incorporation 1 $ 1.00 $ -
August 17,
2010 Issued to ARC Resources Ltd. 884,173 $ 3.28 2,900
August 17,
2010 Issued under the Arrangement 16,631,240 $ 3.28 54,700
August 17,
2010 Issued under private placement 2,300,000 $ 3.28 7,544
September 22,
2010 Issued upon exercise of warrants 6,561,556 $ 3.28 21,522
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Total 26,376,970 $ 86,666
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CONTRACTUAL OBLIGATIONS
In the course of its business, Storm enters into various contractual
obligations, including the following:
-- purchase of services;
-- royalty agreements;
-- operating agreements;
-- processing agreements;
-- right of way agreements; and
-- lease obligations for accommodation, office equipment and automotive
equipment.
All such contractual obligations reflect market conditions at the time of
contract and do not involve related parties except that SGR subleases office
space from the Company at the same rate as the Company's head lease. At present
the Company has no obligations with a term longer than twelve months.
CRITICAL ACCOUNTING ESTIMATES
Financial amounts included in this Management's Discussion and Analysis and in
the unaudited financial statements for the period ended September 30, 2010 are
based on accounting policies, estimates and judgments which reflect information
available to management at the time of preparation. Certain financial amounts
are derived from a fully completed transaction cycle, or are validated by events
subsequent to the end of the reporting date, or are based on established and
effective measurement and control systems. However, other amounts, as described
below, are based on estimations using information that involves a high degree of
measurement uncertainty which could have a material effect on Storm's operating
results and financial position.
Acquisition of Net Assets
The carrying amount of net assets acquired by the Company under the Arrangement
is based on management's estimate of the fair value of the net assets at the
time of closing of the Arrangement. The fair value of certain assets can be
established by reference to objective third party data, for example, cash and
listed securities. However, the estimated fair value of other assets acquired
under the Arrangement is based on management judgment which, in part, will
include references to third party data. Management's estimate of fair value may
differ from estimates of fair value determined by third parties and such
differences could be material.
Exploration and Evaluation Assets
At present the Company has no production and recovery of the Company's
investment in oil and gas properties is dependent on the future identification,
development and sale of hydrocarbons at a price sufficient to recover and
provide an acceptable return on the Company's existing and future investment.
The Company's properties are gas prone and recovery of the Company's investment
and the establishment of profitable operations is dependant on pricing for
natural gas increasing considerably from current levels.
Decommissioning Liability
Storm records as a liability the estimated fair value of obligations associated
with the decommissioning of field assets. Although the Company had no production
in the quarter to September 30, 2010, a provision is required for certain
standing wells, as well as an interest in a currently unused pipeline. The
carrying amount of exploration and evaluation assets is increased by an amount
equivalent to the liability. The decommissioning liability reflects estimated
costs to complete the abandonment and reclamation of field assets as well as the
estimated timing of the costs to be incurred in future periods. The liability is
increased each reporting period to reflect the passage of time, with the
accretion charged to earnings. The liability is also adjusted to reflect changes
in the amount and timing of the future retirement obligation and is reduced by
the amount of any costs incurred in the period. The amount of the
decommissioning liability, the charge for accretion and the charge for depletion
of the amount added to exploration and evaluation assets are subject to
uncertainty of estimation.
Income Taxes
The measurement of Storm's tax pools, losses and deferred tax assets and
liabilities requires interpretation of complex laws and regulations. All tax
filings and compliance with tax regulations are subject to audit and
reassessment, potentially several years after the initial filing. Accordingly,
actual income tax assets or liabilities may differ significantly from the
amounts initially estimated.
Share-Based Payments
To determine the charge for share-based payments, the Company estimates the fair
value of stock options at time of issue using assumptions regarding the life of
the option, dividend yields, interest rates and the volatility of the security
under option. Although the assumptions used to value a specific option remain
unchanged throughout the life of the option, assumptions may change with respect
to subsequent option grants. In addition, the assumptions used may not properly
represent the fair value of stock options at any time; as no alternative
valuation model is applied, the difference between the Company's estimation of
fair value and the actual value of the option is not measurable.
RISK ASSESSMENT
There are a number of risks facing participants in the Canadian oil and gas
industry. Some risks are common to all businesses while others are specific to
the industry. The following reviews a number of the identifiable business risks
faced by the Company. Business risks evolve constantly and additional risks
emerge periodically. The risks below are those identified by management at the
date of completion of this report, and may not describe all of the business
risks faced by the Company.
Exploration
Storm's exploration program requires sophisticated and scarce technical skills
as well as capital and access to land and equipment to generate and test
exploration ideas. Further, the drilling of an exploratory prospect frequently
does not result in the discovery of economical reserves. Storm endeavours to
minimize finding risk by ensuring that:
-- Where possible, prospects have multi-zone potential.
-- Activity is focused in core regions where expertise and experience can
be levered.
-- Prospects are internally generated.
-- Geophysical techniques such as seismic are utilized where appropriate
and available.
Commodity Price Fluctuations
In the event that the Company identifies hydrocarbons of sufficient quantity and
quality and successfully brings them on stream, it will face a pricing
environment which is volatile and subject to a myriad of factors, largely out of
the Company's control. Low prices, particularly for the Company's expected
primary product, natural gas, will have a material effect on the Company's
re-investment capacity, and hence ultimate growth potential and profitability.
Low prices will also limit access to capital, both equity and debt.
Adverse Well or Reservoir Performance
Changes in productivity in wells and pools developed and brought on stream by
the Company in future periods could result in termination or limitation of
production, or acceleration of decline rates, resulting in reduced overall
corporate volumes and revenues. In addition, new wells, particularly new wells
in the Horn River Basin, the Company's primary investment focus, tend to produce
at high initial rates followed by rapid declines until a flattening decline
profile emerges. There is a risk that the sustainable decline profile which
eventually emerges is sub-economic. In addition, the Horn River Basin is in the
early stage of development and there is a risk that circumstances may emerge
which will adversely affect reservoir performance.
Field Operations
Storm's current and future exploration, development and production activities
involve the use of heavy equipment and the handling of potentially volatile
liquids and gases. Catastrophic events such as well blowouts, explosions and
fires within pipeline, gathering, or facility infrastructure, as well as failure
of mechanical equipment, could lead to releases of liquids or gases, spills,
personal injuries and damage to the environment, as well as uncontrolled cost
escalation. With support from suitably qualified external parties, the Company
has developed and implemented policies and procedures to mitigate environmental,
health and safety risks. These policies and procedures include the use of formal
corporate policies, emergency response plans, and other policies and procedures
reflecting best oil field practices. These policies and procedures are subject
to periodic review. Storm also manages environmental and safety risks by
maintaining its operations to a high standard and complying with all provincial
and federal environmental and safety regulations.
The Company's primary investment focus, the Horn River Basin in northeastern
British Columbia, is a remote and climatically hostile area. As a relatively new
area of activity for the oil and gas industry in Canada, access and production
facilities require considerable new investment to support expansion of
production, which is not necessarily applicable to more mature producing areas.
In addition, supervision and maintenance of production facilities is likely to
be more expensive than in existing and more southerly producing areas.
Storm maintains industry-specific insurance policies, including, in future,
business interruption on production facilities. Although the Company believes
its current insurance coverage corresponds to industry standards, there is no
guarantee that such coverage will be available in the future, and if it is, at a
cost acceptable to the Company, or that existing coverage will necessarily
extend to all circumstances or incidents resulting in loss.
Environmental
The Company's operations are subject to extensive environmental regulation which
are addressed through formal polices and procedures and application of best
field practices. In addition, the Company's primary area of focus, the Horn
River Basin in northeastern British Columbia, involves the exploitation of,
potentially, several shale gas formations. Development of shale gas is
relatively new and involves horizontal drilling and fracturing applications
specific to shale formations. Fracturing involves the use of large quantities of
liquids and chemicals, whose use and subsequent disposal has resulted in the
emergence of environmental concerns, primarily in more heavily populated areas
elsewhere in North America. In addition, exploitation of shale gas in the Horn
River Basin suggests that management of carbon dioxide volumes produced
concurrently with natural gas may become an operational issue.
The evolution of environmental regulation, in particular as it relates to shale
gas exploitation, cannot be predicted at this stage. Nevertheless it is
reasonable to expect that management of environmental issues and societal
expectations will become an increasingly important part of the Company's
business, with a corresponding effect on costs.
In Company-specific environmental concerns, increasing public and political
focus on climate change and its possible amelioration may cause changes in
demand for the Company's products and the introduction of regulations which may
result in changes to the Company's operating practices as well as additional and
unforeseeable costs. Changes in public policy over the next several years, and
the effect on the Company, cannot be determined at this stage, but given that
the Company is a producer of primary hydrocarbons it is likely that its business
will be subject to increased regulation and potentially subject to additional
taxes and costs.
Industry Capacity Constraints
High levels of field activity can result in shortages of services, products,
equipment, or manpower in many or all necessary components of the exploration
and development cycle. Increased demand leads to higher land and service costs
during peak activity periods. Competition in the Canadian oil and gas industry,
particularly in recent years, has been considerable. Although current economic
conditions suggest an easing of competitive conditions in the short and medium
term, competition in the Company's most prospective areas continues to be
intense. Storm's competitors include companies with far greater resources,
including access to capital. Storm competes by maintaining a large inventory of
self-generated exploration and development locations, by acting as operator
where possible, and through facility access and ownership. Storm also seeks to
mitigate such risks through careful management of key supplier relationships.
Capital Programs
Capital expenditures are designed to accomplish two main objectives, being the
generation of short and medium term cash flow from development activities, and
expansion of future cash flow from the discovery of reserves through
exploration. The Company focuses its activity in core areas, which allows it to
leverage its experience and knowledge, and will act as operator wherever
possible. The Company uses farmouts to minimize risk on plays it considers
higher risk or where total capital invested exceeds an acceptable level. In
addition, Storm may enter into hedging agreements in support of capital
programs, particularly when cash flow for any period is anticipated to be lower
than capital expenditures. Current capital programs are being financed from
existing cash resources. Failure to develop producing wells and an acceptable
level of cash flow will result in the exhaustion of available cash or near cash
resources and will require the Company to seek additional capital which may not
be available, or only available on terms dilutive to existing shareholders. In
addition, although the Company at present has no bank debt, future credit
availability from the Company's bankers will also be necessary to support
capital programs and any changes to credit availability may have an effect on
both the size of the Company's future capital program and the timing of
expenditures.
Acquisitions
The Company's objective of rapid and controlled growth is, in part, supported
through carefully selected and managed acquisitions. Acquisitions have to be
acceptably priced and production should provide acceptable netbacks, or provide
identifiable opportunities to increase value. Under current natural gas prices,
properties providing a reasonable netback are difficult to identify. An
acquisition should also offer potential for near and medium term development and
be in areas where the Company can readily add to the acquired land position.
Processing and transportation infrastructure must also be in place, or within
the Company's financial capacity to construct.
Reserve Estimates
Estimates of economically recoverable oil and natural gas reserves and natural
gas liquids, and related future net cash flows, are based upon a number of
variable factors and assumptions. These include commodity prices, production,
future development and operating costs and potential changes to the Company's
operations arising from regulatory or fiscal changes. All of these estimates may
vary from actual results, with the result that estimates of recoverable oil and
natural gas reserves attributable to any property are subject to revision. In
future the Company's actual production, revenues, taxes, development and
operating expenditures associated with its reserves may vary from such
estimates, and such variances may be material.
Production
Production of oil and natural gas reserves at an acceptable level of
profitability may not be possible during periods of low commodity prices. The
Company will attempt to mitigate this risk by focusing on high netback
opportunities and will act as operator where possible, thus allowing the Company
to manage costs, timing, method and marketing of production. Production risk is
also addressed by concentrating exploration efforts in regions where
infrastructure will be Storm owned or readily accessible at an acceptable cost.
Financial and Liquidity Risks
The Company faces a number of financial risks over which it has no control, such
as commodity prices, exchange rates, interest rates, access to credit and
capital markets, as well as changes to government regulations and tax and
royalty policies. The Company uses the following guidelines to address financial
exposure:
-- Internally available cash and marketable securities provide the initial
source of funding on which the Company's capital expenditure program is
based.
-- Debt, if available, may be utilized to expand capital programs,
including acquisitions, when it is deemed appropriate and where debt
retirement can be controlled.
-- Equity, including flow-through shares, if available on acceptable terms,
may be raised to fund acquisitions.
-- Farmouts of projects may be arranged if management considers that a
project requires too much capital or where the project affects the
Company's risk profile.
Marketing Risks
Markets for future production of oil and natural gas are outside the Company's
capacity to control or influence and can be affected by events such as weather,
regional, national and international supply and demand imbalances, geopolitical
events, currency fluctuation, introduction of new, or termination of existing
supply arrangements, as well as downtime due to facility maintenance or damage.
The Company will attempt to mitigate these risks as follows:
-- Natural gas properties are developed in areas where there is or will be
suitable processing and pipeline infrastructure.
-- Financial instruments may be used to manage commodity price volatility
when the Company has capital programs, including acquisitions, whose
cost exceeds near term projected cash flows.
-- The Company will delay tie in of new wells or shut in production if an
acceptable netback cannot be realized.
Access to Debt and Equity and Going Concern
The Company's cash and potential proceeds from the sale of listed securities are
sufficient to fund our existing capital budget. Nevertheless, available cash is
finite and investment must result in production being brought on stream, the
generation of cash flow, and the identification of proven and probable reserves.
The Company's current asset base cannot be used as security for bank financing,
which for junior oil and gas companies like Storm, is conventionally a loan,
renewable annually, which is based on anticipated future cash flows.
Correspondingly, the emergence of profitable operations, from investment of
existing cash and proceeds from the sale of listed securities, is essential if
the Company is to receive bank financing to expand future operations. Proceeds
from the sale of listed securities are dependent on a continuing liquid market
for the shares of each company. It should also be recognized that the size of
the Company's holdings in each entity may make the shareholdings difficult to
sell within a reasonable time, or saleable only at a significant discount to
quoted prices.
Concurrent with the completion of the Arrangement, the Company completed two
equity placements. The first was a private placement of the maximum amount of
2.3 million shares to directors, officers and employees, with the second being
the issue of 6.6 million shares upon the exercise of warrants issued to existing
shareholders. The take up of the warrants was 99%. Both transactions were priced
at $3.28 per share and aggregate gross proceeds amounted to $29 million.
Although these share sales show considerable support for the Company in the
equity markets, such support will only be sustainable if the Company can execute
a successful investment program. Even if profitable operations do emerge, the
Company will be exposed to changes in the equity markets, which could result in
equity not being available, or only available under conditions which are
dilutive to existing shareholders. The inability of the Company to develop
profitable operations, with the consequent exclusion from debt and equity
markets, will result in the Company being unable to continue as a going concern.
Extraordinary Circumstances
Storm's operations and its financial condition may be affected by uncontrollable
and unpredictable circumstances such as weather patterns, changes in
contractual, regulatory or fiscal terms, exclusion from third party pipelines or
facilities, or actions by certain groups such as industry organizations, local
communities, or militant groups.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
The Canadian Institute of Chartered Accountants, the primary source for
accounting standards in Canada, proposes to implement International Financial
Reporting Standards ("IFRS") as part of Canadian GAAP. Such standards have been
established cooperatively by many countries and have widespread application to
financial reporting throughout the world. The effective date of introduction for
IFRS in Canada is proposed for reporting periods beginning after December 31,
2010. Rather than apply existing Canadian GAAP to financial statements for the
reporting periods ended September 30, 2010 and December 31, 2010, then adopt
IFRS for all subsequent reporting periods, the Company elected to adopt IFRS
with immediate effect, as permitted under NI 51-107 and has applied for and
received the necessary regulatory approvals for early adoption.
With respect to implementation of IFRS, the Company recruited appropriately
qualified staff and identified external resources to assist in the process. Key
elements of the implementation plan to IFRS included: staff education; choosing
among policies permitted under IFRS; evaluating the effect of adoption on the
Company's information technology and data systems and internal control over
financial reporting and disclosure controls and procedures; alignment of
internal and outsourced processes, applications and internal controls; external
and internal communications; and liaison with peers, industry groups and
professional advisors.
As discussed in Note 2, the Company elected to adopt IFRS at inception. The
following table provides a brief summary of the primary financial statement line
items affected by IFRS and the impact on Storm's financial statement
presentation, measurement and disclosure:
Financial Statement Effect on Financial
Category Change Under IFRS Statements of Storm
----------------------------------------------------------------------------
Exploration and Under Canadian GAAP, E&E New line item on the
evaluation ("E&E") assets were accounted for Statement of Financial
assets using the full-cost rules Position
and grouped with property
and equipment. Exploration More disclosure required
and evaluation in both Accounting
expenditures are now Policies and &E notes to
segregated from the financial statements
development and producing
assets until commercial
production commences, at
which time, the assets are
tested for impairment and
the recoverable amount
transferred to property
and equipment.
----------------------------------------------------------------------------
Exploration and E&E assets are only tested If an indicator of
evaluation ("E&E") for impairment when impairment exists, assets
assets indicators of impairment in that area must be
exist. written down to their net
recoverable amount and the
Under full-cost rules, difference charged as
E&E assets were excluded impairment expense on the
from the ceiling test statement of income.
calculation.
More note disclosure
required in the event of
a write-down
----------------------------------------------------------------------------
Property and Development and producing Multiple depletion
Equipment assets to be allocated calculations will be
into cash generating units required at each reporting
("CGUs") and depleted at period once production
the CGU level. commences.
----------------------------------------------------------------------------
Property and Depletion can be Use of proved plus
Equipment calculated using either probable reserves in
proven or proved plus depletion calculation will
probable reserves. reduce depletion expense.
----------------------------------------------------------------------------
Property and Gains and losses on Gains and losses on
Equipment dispositions will be property sales may be a
measured and recognized in frequent income statement
the statement of income. item, leading to a more
There is no de minimis erratic earnings profile.
rule as previously existed
under Canadian GAAP.
----------------------------------------------------------------------------
Property and Impairment test will be Impairment tests will be
Equipment calculated at the CGU more difficult to pass as
level. Changes to the less profitable areas can
impairment calculation no longer be sheltered by
methodology are also more successful ones.
required.
----------------------------------------------------------------------------
Share-Based Payments Stock options that vest in The graded vesting rules
installments are valued result in higher share-
separately. based payment expense in
the earlier years of the
amortization period.
----------------------------------------------------------------------------
ADDITIONAL INFORMATION
Additional information relating to the Company can be viewed at www.sedar.com or
on the Company's website at www.stormresourcesltd.com. Information can also be
obtained by contacting the Company at Storm Resources Ltd., 800, 205 - 5th
Avenue SW, Calgary, Alberta, T2P 2V7.
Statement of Financial Position
($000s) (unaudited) September 30, 2010
----------------------------------------------------------------------------
ASSETS
----------------------------------------------------------------------------
Current
Cash $ 37,830
Accounts receivable 195
Investments (Note 6) 16,158
Prepaids and other 274
----------------------------------------------------------------------------
54,457
Investment in associate (Note 7) 13,925
Exploration and evaluation assets (Note 5) 23,461
----------------------------------------------------------------------------
$ 91,843
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------
Current
Accounts payable and accrued liabilities $ 3,620
----------------------------------------------------------------------------
3,620
Decommissioning liability (Note 8) 1,003
----------------------------------------------------------------------------
4,623
----------------------------------------------------------------------------
Shareholders' equity
Share capital (Note 10) 86,581
Contributed surplus (Note 11) 126
Retained earnings (deficit) (406)
Accumulated other comprehensive income (deficit) 919
----------------------------------------------------------------------------
87,220
----------------------------------------------------------------------------
$ 91,843
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Statement of Comprehensive Income (Loss)
Inception,
June 8, 2010 to
($000s except per-share amounts) (unaudited) September 30, 2010
----------------------------------------------------------------------------
Revenue
Interest income $ 19
----------------------------------------------------------------------------
19
----------------------------------------------------------------------------
Expenses
General and administrative 267
Share-based payments 126
Depreciation 2
Accretion 5
----------------------------------------------------------------------------
400
----------------------------------------------------------------------------
Income (loss) before the following: (381)
Investment gain (loss) (Note 7) (25)
----------------------------------------------------------------------------
Net income (loss) for the period (406)
Unrealized gain (loss) on investments available for sale
(Note 6) 919
----------------------------------------------------------------------------
Other comprehensive income 919
----------------------------------------------------------------------------
Comprehensive income (loss) for the period $ 513
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per share (Note 12)
- basic $ (0.05)
- diluted $ (0.05)
Statement of Changes in Equity
Inception, June 8, 2010 to
($000s) (unaudited) September 30, 2010
----------------------------------------------------------------------------
Accumulated
Retained Other
Share Contributed Earnings Comprehensive Total
Capital Surplus (Deficit) Income Equity
----------------------------------------------------------------------------
Balance, beginning of
period $ - $ - $ - $ - $ -
Net loss for the period - - (406) - (406)
Issue of common shares
(Note 10) 86,666 - - - 86,666
Share issue costs (Note
10) (85) - - - (85)
Share-based payments
(Note 11) - 126 - - 126
Unrealized gain on
investments available
for sale (Note 13) - - - 919 919
----------------------------------------------------------------------------
Balance, end of period $86,581 $ 126 $ (406) $ 919 $87,220
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Statement of Cash Flows
Inception,
June 8, 2010 to
($000s) (unaudited) September 30, 2010
----------------------------------------------------------------------------
Operating activities
Net income (loss) for the period $ (406)
Non-cash items:
Investment loss (gain) (Note 7) 25
Depreciation and accretion 7
Share-based payments 126
----------------------------------------------------------------------------
Funds from operations (248)
Net change in non-cash working capital items (Note 16) 3
----------------------------------------------------------------------------
(245)
----------------------------------------------------------------------------
Financing activities
Cash transferred under Plan of Arrangement (Notes 1 and 4) 9,370
Issue of common shares - net of expenses 28,981
----------------------------------------------------------------------------
38,351
----------------------------------------------------------------------------
Investing activities
Additions to exploration and evaluation assets (Note 5) (3,424)
Net change in non-cash working capital items (Note 16) 3,148
----------------------------------------------------------------------------
(276)
----------------------------------------------------------------------------
Change in cash during the period 37,830
Cash, beginning of period -
----------------------------------------------------------------------------
Cash, end of period $ 37,830
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS
From inception, June 8, 2010 to September 30, 2010
Tabular amounts in Cdn$ thousands, except per share amounts
(unaudited)
1. REPORTING ENTITY
Storm Resources Ltd. (the "Company" or "Storm"), is an oil and gas exploration
and development company incorporated in the province of Alberta, Canada on June
8, 2010 and is listed on the TSX Venture Exchange under the symbol "SRX". The
Company operates in the provinces of Alberta and British Columbia and its office
is located at 800, 205 - 5th Avenue S.W., Calgary, Alberta.
The Company became a reporting issuer pursuant to a plan of arrangement (the
"Arrangement") involving ARC Energy Trust ("ARC"), ARC Resources Ltd., Storm
Exploration Inc. ("SEO") and the Company. Under the Arrangement, which was
completed on August 17, 2010, 884,173 common shares were issued to ARC and
16,631,241 common shares and 6,653,161 warrants to purchase common shares of the
Company were issued to shareholders of SEO in exchange for undeveloped lands and
facility interests in northeastern British Columbia and Alberta, various
corporate investments and $9.4 million in cash (see Note 4).
2. BASIS OF PRESENTATION
Statement of Compliance
The financial statements have been prepared in accordance with International
Financial Reporting Standards ("IFRS") as issued by the International Accounting
Standards Board ("IASB") and Interpretations of the International Financial
Reporting Interpretations Committee ("IFRIC") and adopted by the Canadian
Institute of Chartered Accountants ("CICA"), including IAS 34. The Company
received approval from the Canadian Securities Administrators under National
Instrument 52-107, Acceptable Accounting Principles, Auditing Standards and
Reporting Currency ("NI 52-107") to adopt IFRS as of June 8, 2010, the date of
Storm's incorporation.
The financial statements were authorized for issue by the Board of Directors on
November 10, 2010.
Going Concern
These financial statements have been prepared on a going concern basis, which
implies the Company will continue to realize its assets and discharge its
liabilities in the normal course of business. Although the Company has, at
September 30, 2010, considerable cash reserves and various marketable
securities, its continuance as a going concern is dependent upon the ability of
the Company to attain profitable operations or to obtain additional financing.
The outcome of these matters cannot be predicted at the present time. These
financial statements do not include any adjustments to the recoverability and
classification of recorded asset amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
The emergence of profitable operations requires that reserves in economic
quantities be identified and brought into production and sold at an acceptable
price. This will require the dedication of part or all of the Company's existing
cash resources and, if required, additional equity, to be raised under future
market conditions. As part of management of capital, the Company prepares an
annual budget, periodically updated, for approval of the Board of Directors,
which aligns spending programs with available cash resources and identifies
future capital requirements.
Basis of Measurement
The Company's financial statements have been prepared on the historical cost
basis, except for certain financial assets and financial liabilities, which are
measured at fair value, as explained in Note 13.
Use of Estimates and Judgements
The preparation of the financial statements in accordance with IFRS requires
management to make judgements, estimates and assumptions that affect the
reported amounts of assets, liabilities, income and expenses. Actual results may
differ from these estimates.
Estimates and underlying assumptions are continuously reviewed. Changes to
accounting estimates are recognized in the period in which the estimates are
revised.
Information about critical judgments in applying accounting policies that have
the most significant effect on the amounts recognized in the financial
statements is included in the following notes to the financial statements:
-- Note 3 - Classification and valuation of exploration and evaluation
assets
-- Note 8 - Decommissioning liability
-- Note 9 - Valuation and utilization of tax losses
-- Note 11 - Measurement of share-based payments
-- Note 13 - Valuation of financial instruments
3. SIGNIFICANT ACCOUNTING POLICIES
Jointly Controlled Assets and Operations
Substantially all of the Company's exploration and production activities are
conducted under joint operating agreements, whereby two or more parties jointly
control the assets. These financial statements reflect only the Company's share
of these jointly controlled assets and, once production commences, a
proportionate share of the relevant revenue and related costs.
Investment in Associates
An associate is an entity over which the Company has significant influence, but
not control, over financing and operations. The investment in associated
companies is initially recognized at cost and subsequently accounted for using
the equity method, with the Company's share of changes in equity of associates
recognized in the statement of income.
The Company assesses at each reporting period whether there is any objective
evidence that its interests in associates are impaired. If impaired, the
carrying value of the Company's share of the underlying assets of associates is
written down to its estimated recoverable amount and the amount of the
write-down charged to the statement of income.
Oil and Gas Exploration and Evaluation Expenditures
Oil and gas exploration and evaluation ("E&E") expenditures are accounted for in
accordance with IFRS 6, Exploration for and Evaluation of Mineral Resources,
whereby costs associated with the exploration for and evaluation of oil and gas
reserves are accumulated on an area-by-area basis and are capitalized as either
tangible or intangible E&E assets when incurred. Costs incurred in advance of
land acquisition are charged to the statement of income; however, all other
costs, including directly attributable general and administrative costs, are
added to E&E assets.
At each reporting date, E&E assets are reviewed for indicators of impairment
and, if circumstances suggest that the carrying amount of a particular area
exceeds its recoverable amount, the associated cost is written down to its
estimated recoverable amount and the difference is accounted for as impairment
expense on the statement of income. Once commercial production commences in a
specific area, the associated E&E assets are tested for impairment and the
estimated recoverable amount is transferred to property and equipment. If, at
any time, it is determined that the Company has no future exploration plans and
commercial production cannot be achieved in relation to an area, the associated
costs are written down to the estimated recoverable amount or fully
de-recognized and the amount of the write-down is expensed as impairment on the
statement of income.
No depletion or depreciation is provided for exploration and evaluation assets.
Property and Equipment
Property and equipment, which includes oil and natural gas development and
production assets, represents costs incurred in developing oil and natural gas
reserves and maintaining or enhancing production from such reserves. Future
decommissioning costs, related to producing assets, are also capitalized to
property and equipment. Property and equipment is carried at cost, less
accumulated depletion and depreciation and accumulated impairment losses.
Gains and losses on disposal of property and equipment are determined as the
difference between proceeds from disposal and the carrying amount of the asset
sold and are recognized as other income or other expense in the statement of
income.
Depletion and Depreciation
The net carrying value of the intangible oil and gas assets is depleted using
the unit-of-production method based on estimated proven and probable oil and
natural gas reserves, taking into account the future development costs required
to produce the reserves.
Proven and probable reserves are determined by independent engineers in
accordance with Canadian National Instrument 51-101. Production and reserves of
natural gas are converted to equivalent barrels of crude oil on the basis of six
thousand cubic feet of gas to one barrel of oil. Changes in estimates used in
prior periods, such as proved and probable reserves, that affect the
unit-of-production calculations do not give rise to prior year adjustments and
are dealt with on a prospective basis.
Processing facilities and well equipment will be depreciated on a straight-line
basis over the estimated useful life of the facilities and equipment. Where
facilities and equipment includes major components having different useful
lives, they are depreciated separately.
Depreciation rates, useful lives and residual values are reviewed at each
reporting date.
Impairment
The carrying amounts of property and equipment are reviewed at each reporting
date to determine whether there is any indication of impairment. If such an
indication exists, the estimated recoverable amount is calculated. For the
purpose of impairment testing, property and equipment assets are grouped
together into the smallest group of assets that generates cash inflows that are
largely independent of the cash flows of other assets or group of assets (the
"cash generating unit" or "CGU"). The recoverable amount of an asset or CGU is
the greater of its value in use and its fair value less cost to sell. In
assessing value in use, the estimated future cash flows are adjusted for the
risks specific to the asset group and are discounted to their present value
using a pre-tax discount rate that reflects current market assumptions regarding
the time value of money. Fair value less costs to sell is the amount obtainable
from the sale of an asset or CGU in an arm's length transaction between
knowledgeable, willing parties, less the costs of disposal. An impairment loss
is recognized in the statement of income if the carrying amount of an asset or
CGU exceeds its estimated recoverable amount.
Impairment losses previously recognized are assessed at each reporting date for
indications that the loss has decreased or no longer exists. An impairment loss
is reversed to the extent that the asset's new carrying amount does not exceed
the original carrying amount, net of related accumulated depletion and
depreciation, if there has been an increase in the estimate of the recoverable
amount.
Decommissioning Liability
Decommissioning liabilities are measured as the present value of management's
best estimate of the expenditure required to settle the decommissioning
liability at the reporting date using a risk-free discount rate. This estimate
is recognized when a legal or constructive obligation arises and is capitalized
as part of E&E assets or property and equipment. The amount capitalized to
property and equipment is amortized on a unit-of-production basis as part of
depreciation and depletion. Subsequent to the initial measurement, the
obligation is adjusted at the end of each period to reflect the passage of time
and changes in the estimated future costs underlying the obligation. The
increase in the balance due to the passage of time is charged to accretion
expense whereas increases or decreases due to changes in the estimated future
costs are capitalized. Actual costs incurred upon settlement of the
decommissioning obligations are charged against the liability or expensed if
greater than the liability.
Share-Based Payments
The Company has issued options to acquire common shares to directors, officers
and employees of the Company. These options are accounted for using the
fair-value method which estimates the value of the options at the date of the
grant using the Black-Scholes option pricing model. The fair value thus
established is recognized as compensation expense over the vesting period of the
options with an equivalent increase to contributed surplus. A forfeiture rate is
estimated on the grant date and is subsequently adjusted to reflect the actual
number of options that vest.
Financial Instruments
Financial assets and liabilities are recognized when the Company becomes a party
to the contractual provisions of the instrument. Financial assets are
derecognized when the rights to receive cash flows from the assets have expired,
or when the Company has transferred substantially all risks and rewards of
ownership.
Financial assets and liabilities are offset and the net amount reported in the
statement of financial position when there is a legally enforceable right to
offset the recognized amounts, and there is an intention to settle on a net
basis, or realize the asset and settle the liability simultaneously.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and other short-term highly
liquid investments. Due to the short-term nature of cash and cash equivalents,
its carrying value approximates fair value.
Trade receivables, loans and other receivables
Trade receivables, loans and other receivables, which are non-derivative
financial assets that have fixed or determinable payment terms and are not
quoted in an active market, are classified as loans and receivables. They are
included in current assets, except for maturities greater than 12 months after
the reporting date, which are classified as non-current assets. The Company's
loans and receivables comprise accounts receivables in the statement of
financial position.
Loans and receivables are recognized initially at fair value and subsequently
measured at amortized cost using the effective interest rate method, net of any
impairment.
A provision for impairment of trade receivables is established when there is
objective evidence that the Company will not be able to collect all amounts due
according to the original terms of the receivables. Significant financial
difficulties of the debtor, probability that the debtor will enter bankruptcy or
financial reorganization, and default or significant delinquency in payments are
considered indicators that a trade receivable is impaired.
Investments
The Company's investments in publicly-listed companies are classified as
available-for-sale investments. Available-for-sale financial instruments are
non-derivatives that are either designated in this category or not classified in
any of the other categories.
Investments in publicly-listed companies are recognized initially at fair value
and subsequently are fair valued using marked-to-market principles. Gains or
losses arising from changes in fair value are recognized in the statement of
comprehensive income.
The investment in the associated company is initially recognized at cost and
subsequently accounted for using the equity method of accounting, with the
Company's share of the investee's income or loss for the period recorded as
investment income (loss) on the statement of income.
Available-for-sale investments are classified as current, unless the investment
does not mature or management does not expect to dispose of the investments
within twelve months. When an available-for-sale investment is sold or impaired,
the accumulated gains or losses are transferred from accumulated other
comprehensive income to the statement of income and included in other gains and
losses.
Trade payables
Trade payables are obligations to pay for goods or services that have been
acquired in the ordinary course of business from suppliers. Accounts payable are
classified as current liabilities if payment is due within one year or less.
Trade payables are measured at amortized cost using the effective interest
method.
Impairment of financial assets
At each reporting date, the company assesses whether there is objective evidence
that a financial asset is impaired. If such evidence exists, the company
recognizes an impairment loss, as follows:
i. Financial assets carried at amortized cost: The amount of the impairment
is the difference between the amortized cost of the loan or receivable
and the present value of the estimated future cash flows, discounted
using the original effective interest rate. The carrying amount of the
asset is reduced and the amount of the loss is recognized in the
statement of income.
ii. Available-for-sale financial assets: The impairment loss is the
difference between the original cost of the asset and its fair value at
the measurement date, less any impairment losses previously recognized
in the statement of income.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash in hand and other short-term highly
liquid investments.
Borrowing Costs
Borrowing costs attributable to the acquisition, construction or production of
assets that require a considerable period of time to be ready for their intended
use are added to the cost of those assets, until such time as the assets are
substantially ready for their intended use. All other borrowing costs are
recognized as interest expense in the statement of income in the period in which
they are incurred.
Income Tax
Income tax comprises current and deferred taxes. Income tax is recognized in the
statement of income except to the extent that it relates to items recognized
directly in other comprehensive income or elsewhere in shareholders' equity, in
which case the related income tax expense or recovery is also recognized
directly in other comprehensive income or elsewhere in shareholders' equity.
Current tax expense is the expected cash tax payable on the taxable income for
the year, using tax rates enacted, or substantively enacted, at the end of the
reporting period, and any adjustment to tax payable in respect of previous
years.
In general, deferred tax expense and related liability is recognized in respect
of temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts in the financial statements. Deferred income tax is
determined on a non-discounted basis using tax rates and laws that have been
enacted or substantively enacted at the reporting date and are expected to
continue to apply when the deferred tax asset or liability is settled. Deferred
tax assets are recognized to the extent that it is probable that the assets can
be recovered. Deferred income tax assets and liabilities are presented as
non-current.
Tax on income in interim periods is accrued using the tax rate that would be
applicable to expected total annual earnings.
Share Capital
Proceeds from the issuance of common shares are classified as equity.
Incremental costs directly attributable to the issuance of shares are recognized
as a deduction from equity.
Net Income (Loss) Per Share
Net income (loss) per share is calculated by dividing the net income (loss) for
the period attributable to equity owners by the weighted average number of
common shares outstanding during the period.
Diluted net income (loss) per share is calculated by adjusting the weighted
average number of common shares outstanding for dilutive instruments. The
Company's potentially dilutive common shares comprise stock options granted to
employees and directors. The number of shares included with respect to options
is computed using the treasury stock method.
Changes in Accounting Policies
International Financial Reporting Standard 9, Financial Instruments ("IFRS 9"),
was issued in November 2009. It addresses classification and measurement of
financial assets and replaces the multiple category and measurement models in
IAS 39 for debt instruments with a new mixed measurement model having only two
categories: amortized cost and fair value . IFRS 9 also replaces the models for
measuring equity investments; such investments are either recognized at fair
value through profit or loss or at fair value through other comprehensive
income. Where such equity instruments are measured at fair value through other
comprehensive income, dividends, to the extent not clearly representing a return
of investment, are recognized in profit or loss; however, other gains and losses
(including impairments) associated with such instruments remain in accumulated
comprehensive income indefinitely. This standard is required to be applied for
accounting periods beginning on or after January 1, 2013, with earlier adoption
permitted. The Company has not yet assessed the impact of the standard or
determined whether it will adopt the standard early.
4. ACQUISITION OF ASSETS
Under the Arrangement referred to in Note 1, the Company issued common shares to
ARC and to the former shareholders of SEO in exchange for certain assets, being
approximately 117,200 net acres of undeveloped land and facility interests in
northeastern British Columbia and Alberta, as well as share ownership positions
in Storm Gas Resource Corp. ("SGR"), Chinook Energy Inc. ("Chinook"), Bridge
Energy Norge ASA ("Bridge") and Bellamont Exploration Ltd. ("Bellamont") and
$9.4 million in cash as follows:
----------------------------------------------------------------------------
Cash $ 9,370
Investment in SGR 13,950
Investment in Chinook 10,440
Investment in Bridge 2,106
Investment in Bellamont 2,693
Exploration and evaluation assets 19,041
----------------------------------------------------------------------------
Net assets acquired and share capital issued $ 57,600
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The assets were transferred to the Company from SEO at the estimated fair
values on the date of transfer as follows:
-- Investment in SGR - private company, estimated fair value of SGR's net
assets
-- Investment in Chinook - listed security, at market value
-- Investment in Bridge - listed security, at market value
-- Investment in Bellamont - listed security, at market value
-- Exploration and evaluation assets - at estimated fair value
5. EXPLORATION AND EVALUATION ASSETS
June 8 to September 30, 2010
----------------------------------------------------------------------------
Cost:
Balance, beginning of period $ -
Acquisitions 19,041
Additions 4,422
Transfers to property and equipment -
----------------------------------------------------------------------------
Cost, end of period $ 23,463
Depreciation on furniture and fixtures (2)
Impairment losses -
----------------------------------------------------------------------------
Carrying value, end of period $ 23,461
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions include $1.0 million in respect of the Company's decommissioning
provision on its existing wells.
6. INVESTMENTS
September 30, 2010
----------------------------------------------------------------------------
Bellamont Exploration Ltd. $ 2,693
Bridge Energy ASA 2,575
Chinook Energy Inc. 10,890
----------------------------------------------------------------------------
$ 16,158
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The investments in Bellamont, Bridge and Chinook shares are classified as
available-for-sale financial instruments and are carried at fair value,
determined with reference to the published share prices. Holding gains for the
period from August 17, 2010, the date of closing of the Arrangement, to
September 30, 2010, in the amount of $919,000 are recognized in other
comprehensive income.
7. INVESTMENT IN ASSOCIATE
The Company'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 since August 17, 2010. 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.
SGR's summarized financial information as at and for the nine months ended
September 30, 2010, which represents SGR's book values, is as follows:
----------------------------------------------------------------------------
Total assets $ 52.3 million
Total liabilities $ 0.3 million
Revenues -
Net loss $ 0.8 million
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company also provides administrative services to SGR at a cost of $33,000
for the period ended September 30, 2010. The Company and SGR are also 40:60
joint venture participants in certain undeveloped lands.
8. DECOMMISSIONING LIABILITY
The Company provides for the future cost of decommissioning oil and gas
production facilities, including well sites and gathering systems. The total
decommissioning obligation is estimated 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 future costs. The total
estimated undiscounted amount required to settle the Company's decommissioning
obligation is approximately $1.3 million, which will be paid over the next 18
years, with the majority of costs paid between 2012 and 2028. A risk-free
discount rate of four percent was used to calculate the present value of the
decommissioning obligation, amounting to $1.0 million.
The following table provides a reconciliation of the carrying amount of the
obligation associated with the decommissioning of oil and gas properties:
June 8 to September 30, 2010
----------------------------------------------------------------------------
Balance, beginning of period $ -
Liability recognized 998
Decommissioning costs incurred -
Obligations disposed -
Accretion expense 5
----------------------------------------------------------------------------
Balance, end of period $ 1,003
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. DEFERRED INCOME TAXES
Deferred income tax assets and liabilities are based on the differences between
the accounting amounts and the related tax bases of the Company's property and
equipment, exploration and evaluation assets, decommissioning liability, share
capital and unrealized fair market gains and losses on investments.
The Company has tax pools associated with exploration and evaluation assets of
approximately $20.0 million as well as a non-capital loss of approximately $1.0
million. The tax loss expires in 2030. Deferred tax assets have not been
recognized due to the uncertainty as to future realization.
10. SHAREHOLDERS' EQUITY
Share Capital
Authorized
An unlimited number of voting common shares without nominal or par value
An unlimited number of first preferred shares without nominal or par value
Common shareholders are entitled to receive dividends if, as and when declared
by the Board of Directors. In the event of liquidation, dissolution or winding
up of the Company, common shareholders shall, subject to the priority of
preferred shareholders, participate in such distribution in equal amounts per
share.
Issued
Number of Common Shares Consideration
----------------------------------------------------------------------------
Balance as at June 8, 2010 - $ -
Shares issued under plan of
arrangement(1) 17,515 57,600
Management private placement (2) 2,300 7,544
Exercise of warrants(3) 6,562 21,522
Share issue costs (85)
----------------------------------------------------------------------------
Balance as at September 30, 2010 26,377 $ 86,581
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) On August 17, 2010 the Company completed the Arrangement with ARC and
SEO (Note 4) whereby the Company acquired from SEO undeveloped land,
equipment, cash and corporate investments in exchange for 16,631,241
common shares of the Company which were transferred to the former
shareholders of SEO. In addition, as per the terms of the Arrangement,
884,173 common shares were issued to ARC.
(2) Concurrent with the completion of the Arrangement, the Company
completed a private placement of 2.3 million voting common shares, at
a price of $3.28 per share, with directors, officers and employees of
the Company for total proceeds of $7.5 million.
(3) As part of the Arrangement, the Company issued warrants to acquire
common shares at a price of $3.28 prior to September 21, 2010. A total
of 6,562,000 warrants were exercised for total proceeds of $21.5
million.
11. SHARE-BASED PAYMENTS
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, employees
and consultants. Options are granted at the market price of the shares on the
date of grant, have a four-year term and vest over three years. Under the stock
option plan, a total of 2.6 million common shares have been reserved for
issuance.
Details of the options outstanding at September 30, 2010 are as follows:
Weighted
Average
Number of Exercise
Options Price
----------------------------------------------------------------------------
Outstanding at June 8, 2010 - $ -
Granted during the period 1,974 3.28
Exercised during the period - -
Expired during the period - -
Forfeited during the period - -
----------------------------------------------------------------------------
Outstanding at September 30, 2010 1,974 $ 3.28
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number exercisable at September 30, 2010 - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding Options
----------------------------------------------------------------------------
Weighted Weighted
Number of Average Average
Options Remaining Exercise
Range of Exercise Price Outstanding Life (years) Price
----------------------------------------------------------------------------
$0 to $3.28 1,974 3.9 $ 3.28
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The fair value of employee stock options is measured using the Black Scholes
option pricing model. Measurement inputs include the share price on measurement
date, exercise price of the instrument, expected volatility (based on weighted
average historical volatility adjusted for changes expected due to publicly
available information), weighted average expected life of the instruments (based
on historical experience and general option holder behavior), expected
dividends, and the risk-free interest rate (based on government bonds).
The weighted average inputs used in the Black-Scholes pricing model to determine
the fair value of the options at grant date of $1.06 include the following:
----------------------------------------------------------------------------
Share price 3.28
Exercise price 3.28
Volatility 40%
Forfeiture rate 10%
Option life 3.7
Dividends -
Risk-free interest rate 1.9%
----------------------------------------------------------------------------
The initial forfeiture rate was estimated to be 10%. This estimate will be
adjusted to the actual forfeiture rate. Share-based payment expense of $126,000
was charged to the statement of income during the period with an equivalent
offset to contributed surplus.
Contributed Surplus
June 8 to September 30, 2010
----------------------------------------------------------------------------
Balance, beginning of period $ -
Share-based payments 126
Transfer to share capital on exercise of
options -
----------------------------------------------------------------------------
Balance, end of period $ 126
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share were calculated as follows:
June 8 to
September 30, 2010
----------------------------------------------------------------------------
Net loss for the period $ 406
----------------------------------------------------------------------------
Weighted average number of common shares outstanding
- basic:
Common shares outstanding at June 8, 2010 -
Stock options exercised -
Effect of shares issued 8,109
----------------------------------------------------------------------------
Weighted average number of common shares outstanding
- basic 8,109
Effect of outstanding options -
----------------------------------------------------------------------------
Weighted average number of common shares outstanding
- diluted 8,109
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per share
- basic $ (0.05)
- diluted $ (0.05)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The average market value of the Company's shares for purposes of calculating the
dilutive effect of share options was based on quoted market prices for the
period that the options were outstanding. Excluded from diluted earnings per
share is the effect of the outstanding options as their effect is anti-dilutive.
13. FINANCIAL INSTRUMENTS
The following table sets out, for each class of financial asset and financial
liability, the carrying amount and fair value as at September 30, 2010. The
carrying value of cash and cash equivalents, accounts receivable and accounts
payable and accrued liabilities included on the statement of financial position
approximate their fair values due to the short-term nature of those instruments
and are not included in the table below.
Storm classifies the fair value of these financial instruments 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.
September 30, 2010
----------------------------------------------------------------------------
Carrying
Classification Amount Fair Value
----------------------------------------------------------------------------
Investments in publicly traded Available
companies(i) for sale $ 16,158 $ 16,158
----------------------------------------------------------------------------
(i) The fair value of the Company's investments in Bellamont, Chinook and
Bridge are determined with reference to published share prices and are
therefore classified as Level 1 financial instruments.
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's activities expose it to a variety of financial risks that arise as
a result of its exploration, development, production and financing activities
such as:
-- credit risk;
-- market risk; and
-- 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.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Company's receivables from joint
venture partners. The maximum exposure to credit risk at period end is as
follows:
Carrying Amount as at
September 30, 2010
----------------------------------------------------------------------------
Cash and cash equivalents $ 37,830
Trade receivables 195
----------------------------------------------------------------------------
$ 38,025
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash and cash equivalents
The Company limits its exposure to credit risk by only investing in liquid
securities and only with counterparties that have an acceptable credit rating.
Given these factors, management does not expect any counterparty to fail to meet
its obligations.
Trade receivables
In future periods a substantial portion of the Company's accounts receivable
will be trade receivables, concentrated with a limited number of joint venture
partners in the oil and gas industry and is subject to normal industry credit
risk. The Company attempts to mitigate the risk from such joint venture
receivables by obtaining pre-approval and cash call deposits from its partners
in advance of significant capital expenditures. The Company does not typically
obtain collateral from joint venture partners.
The Company's accounts receivable are all current at September 30, 2010. No
default on outstanding receivables is anticipated and, as such, no provision for
doubtful accounts has been recorded.
Market risk
Market risk is the risk that changes in market prices, such as commodity prices,
interest rates and foreign exchange rates, will affect the Company's income or
the value of the financial instruments. The objective of market risk management
is to manage and control market risk exposures within acceptable parameters,
while optimizing the return.
Market risks are as follows and are largely outside the control of the Company:
-- commodity prices;
-- interest rates;
-- foreign exchange rates.
Commodity prices
Commodity price risk is the risk that the fair value or future cash flows will
fluctuate as a result of changes in commodity prices. Commodity prices for oil
and natural gas are affected by many known and unknown factors such as demand
and supply imbalances, the relationship between the Canadian and United States
dollar as well as national and international economic and geopolitical events.
Although the Company currently does not have any production from its oil and gas
properties, it is exposed to the risk of declining prices for anticipated future
production resulting in a corresponding reduction in projected 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.
Once production is established, the Company may choose to enter into oil and
natural gas hedging contracts in order to reduce the fluctuation in production
revenue by fixing prices of future deliveries of oil and natural gas and thus
provide stability of future cash flow. The Company would not use these
instruments for trading or speculative purposes.
Interest rates
The Company does not currently have any debt and is not exposed to the risk of
reduced cash flow from increasing interest rates.
Foreign exchange rates
Prices for oil are determined in global markets and generally denominated in
United States dollars. Natural gas prices are influenced by both US and Canadian
supply and demand and by imports of liquefied natural gas. Changes in the
Canadian dollar relative to the US dollar have no impact on the Company's
results at this time.
Liquidity risk
Liquidity difficulties would emerge if the Company was unable to establish a
profitable production base and thus generate sufficient cash flow to cover both
operating and capital requirements. This may be the consequence of insufficient
cash flows resulting from low product prices, production interruptions,
operating or capital cost increases, or unsuccessful investment programs.
Accounts payable and accrued liabilities, with a contractual maturity of less
than one year, is the only financial liability outstanding and is more than
offset by current assets at September 30, 2010.
14. CAPITAL MANAGEMENT
The Company's capital structure is comprised of shareholders' equity. The
Company's objective when managing capital is to maintain financial flexibility
to preserve its investment program until internally generated cash flow emerges.
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, the budget will be amended; however, any changes are
again subject to approval by the Board of Directors. The Company is not
currently exposed to any externally imposed capital restrictions.
At present the Company has no revenue from oil and natural gas operations. Cash
and potential proceeds from sale of investments, will be invested in exploration
and development operations with the intent of generating short and medium term
cash flow, and thus financial sustainability. It may be that capital currently
available to the Company is insufficient to generate positive cash flow, thus
requiring additional capital which is likely to be available only on terms
dilutive to existing shareholders, if available at all. However, the
establishment of positive cash flow should enable the Company to access debt
financing which will provide a source of investment capital additional to
existing resources or future equity issues.
15. RELATED PARTY TRANSACTIONS
The remuneration of the key management personnel of the Company, which includes
directors and officers, is set out below in aggregate:
June 8 to September 30, 2010
----------------------------------------------------------------------------
Salaries and short-term benefits $ 61
Share-based payments $ 72
----------------------------------------------------------------------------
$ 133
----------------------------------------------------------------------------
----------------------------------------------------------------------------
16. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash working capital
Period ended September 30, 2010
----------------------------------------------------------------------------
Accounts receivable $ (195)
Prepaids and other (274)
Accounts payable and accrued liabilities 3,620
----------------------------------------------------------------------------
Change in non-cash working capital $ 3,151
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Relating to:
Operating activities $ 3
Financing activities -
Investing activities 3,148
----------------------------------------------------------------------------
$ 3,151
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Officers
Brian Lavergne Daniel J. Fitzgerald
President & CEO Vice President, Corporate Development
Robert S. Tiberio John Devlin
Chief Operating Officer Controller
Donald G. McLean Mark G. Eade
Vice President, Finance & CFO Corporate Secretary
----------------------------------------------------------------------------
Directors
Matthew J. Brister (1) (2) Brian Lavergne
CEO
John A. Brussa (3)
Gregory G. Turnbull (3)
Mark A. Butler (3)
P. Grant Wierzba (2)
Stuart G. Clark (1)
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
TSX Venture Exchange Alliance Trust Company
Trading Symbol "SRX" Calgary, Alberta
Solicitors Bankers
McCarthy Tetrault LLP ATB Financial
Burnet Duckworth & Palmer LLP Calgary, Alberta
Calgary, Alberta
Executive Offices
Auditors
Suite 800, 205 - 5th Avenue S.W.
PricewaterhouseCoopers LLP Calgary, Alberta, T2P 2V7 Canada
Calgary, Alberta Tel: (403) 817-6145
Fax: (403) 817-6146
www.stormresourcesltd.com
----------------------------------------------------------------------------
Abbreviations
3-D Three-dimensional Mcf Thousands of cubic feet
API American Petroleum Institute Mcf/d Thousands of cubic feet per
day
ARTC Alberta Royalty Tax Credit Mmbbls Millions of barrels
Bbls Barrels of oil or natural Mmbtu Millions of British Thermal
gas liquids Units
Bbls/d Barrels per day Mmbtu/d Millions of British Thermal
Units per day
Bcf Billions of cubic feet Mmcf Millions of cubic feet
Bcfe Billions of cubic feet Mmcf/d Millions of cubic feet per
equivalent day
Boe Barrels of oil equivalent Mstb Thousand stock tank barrels
Boe/d Barrels of oil equivalent NAV Net Asset Value
per day
Bopd Barrels of oil per day NGL Natural gas liquids
Cdn$ Canadian dollar NPV Net present value
DPIIP Discovered Petroleum OGIP Original Gas in Place
Initially in Place
ETAP Entreprise Tunisienne OPEC Organization of Petroleum
d'Activites Petrolieres Exporting Countries
FPSO Floating, Production, Scf/ton Standard cubic foot per ton
Storage, Offloading vessel
GJ Gigajoules STOOIP Stock Tank Original Oil in
Place
GJ/d Gigajoules per day Tcf Trillions of cubic feet
Mbbls Thousands of barrels TSX Toronto Stock Exchange
Mboe Thousands of barrels of oil US$ United States dollar
equivalent
WTI West Texas Intermediate
----------------------------------------------------------------------------
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