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CALGARY, ALBERTA, May 8, 2008 (Marketwire via COMTEX) -- Storm Exploration Inc. (TSX:SEO) is pleased to announce Its Financial and Operating Results for the Three Months Ended March 31, 2008
Unaudited
Consolidated Highlights -
Thousands of $CDN except
volumetric and per share Three Months to Three Months to
amounts March 31, 2008 March 31, 2007
-------------------------- ----------------- ------------------
Financial
Gas sales 26,241 23,440 (1)
NGL sales 2,389 1,105
Oil sales 5,145 3,227
Royalty income 199 237
----------------- ------------------
Production revenue 33,974 28,009
----------------- ------------------
Funds from operations 19,518 16,417
Per share - basic 0.44 0.38
Per share - diluted 0.43 0.38
Net income 6,426 5,066
Per share - basic 0.14 0.12
Per share - diluted 0.14 0.12
Capital expenditures, net
of dispositions 26,775 24,075
Debt, including working
capital deficiency 91,952 (2) 65,126
Weighted average common
shares outstanding
Basic 44,586 42,914
Diluted 45,685 43,652
Common shares outstanding
Basic 44,619 42,914
Fully Diluted 46,698 44,973
Operations
Oil Equivalent (6:1)
Barrels of oil equivalent (000s) 591 520
Barrels of oil equivalent per day 6,500 5,776
Average selling price ($CDN per BOE) $ 57.10 $ 53.42 (1)
Royalties 20.4% 20.1%
Gas production
Thousand cubic feet (000s) 3,051 2,704
Thousand cubic feet per day 33,525 30,048
Average selling price ($CDN per mcf) $ 8.60 $ 8.67 (1)
NGL Production
Barrels (000s) 30 19
Barrels per day 333 216
Average selling price ($CDN per barrel) $ 78.81 $ 56.93
Oil Production
Barrels (000s) 53 50
Barrels per day 579 553
Average selling price ($CDN per barrel) $ 97.63 $ 64.90
Wells drilled
Gross 11.0 10.0
Net 10.1 7.5
(1) Includes realized gain from hedging activities
(2) Excludes unrealized liability related to Q2 & Q3 2008 hedge positions
at March 31, 2008
First Quarter 2008 Highlights - Production in the first quarter increased to 6,500 Boe per day, a 12% increase from production of 5,776 Boe per day in the same period one year ago. This is a per share increase of 8% using basic shares outstanding. Production is currently approximately 7,300 to 7,500 Boe per day. - All 11 wells drilled in the quarter were successful including four oil sands test holes (4.0 net) at Surmont and seven gas wells (6.1 net) at Parkland. Two horizontal Montney gas wells were drilled and three horizontal Montney gas wells were completed and tied in during the first quarter including one horizontal well drilled in late 2007. - Cash flow for the quarter totaled $19.5 million or $0.43 per diluted share, an increase of 13% from cash flow of $0.38 per diluted share in the year earlier period. Excluding a hedging gain of $2.5 million in the prior year period, the year over year increase in cash flow per diluted share is 34%. - Achieved a cash flow netback of $33.00 per boe, an increase of 23% from the cash flow netback of $26.58 per Boe (excluding hedging gains) in the first quarter of 2007. With 86% of Storm's production being natural gas, this increase is notable in comparison to the increase of 10% in the average AECO natural gas price over the same period. - Net income for the quarter was $6.4 million or $0.14 per diluted share, up from net income of $0.12 per diluted share in the prior year period. The increase is primarily the result of growth in production as well as higher commodity prices which improved the corporate cash flow netback. - Invested $26.8 million during the quarter which resulted in the bank debt and working capital deficiency ending the period at $91.9 million (excluding an unrealized non-cash mark-to-market hedging loss of $2.8 million) or 1.2 times annualized quarterly cash flow. Subsequent to the end of the quarter, Storm's credit facility was increased to $110 million from $94 million. CORE AREA REVIEW Parkland/Ft St John Area, North East British Columbia This area includes our Montney discovery and is the largest of Storm's core areas, with net production averaging 3,511 Boe per day in the first quarter. As a result of three additional horizontal Montney gas wells that were completed and tied in during the quarter, current production has increased to approximately 4,600 Boe per day. This represents significant growth from average 2007 production of 2,240 Boe per day and very simply illustrates the high quality of our land position on the Montney fairway. First quarter activity included: - Drilling seven wells (6.1 net) with 100% success resulting in two horizontal Montney gas wells (2.0 net), three vertical Montney gas wells (2.1 net) and two Halfway/Doig gas wells (2.0 net). - Completing and tieing in three more horizontal Montney gas wells which are currently producing 9.2 mmcf per day. - Installing a third compressor at our Parkland facility which increased the capacity from 22 to 34 mmcf per day. The success of our first quarter program has resulted in current gross raw gas throughput increasing to 27 mmcf per day at Parkland. During the remainder of 2008, our activity will include drilling 13 wells (13.0 net) with five horizontal Montney development wells (5.0 net) and eight vertical wells (8.0 net) targeting the Montney formation. This drilling program is expected to fill up our expanded facility at Parkland by year end and, as a result, we are also finalizing plans to twin our existing facility in late 2008 or early 2009 in order to ensure that production growth from our horizontal development program can continue uninterrupted. Cost of this is estimated to be $10 to $15 million which is not currently included in our budget. Our 100% working interest Montney discovery has potential gas in place of 330 BCF assuming an areal extent of 5,825 acres (approximately 9 sections), average net pay of 35 metres, and average porosity of 8%. During the first quarter, we drilled two successful vertical step-outs; one has been completed, tied in and is currently producing 900 mcf per day while the second step-out will be completed later in the second quarter. Although both wells potentially expand the area of the pool, we will not change our estimate of gas in place until the current pool boundaries have been completely delineated. Approximately 70% of the potential gas in place has been delineated with our nine producing vertical wells and we plan to drill the remaining five vertical wells required to finish delineation in the second half of this year. Our development efforts using horizontal wells with five to seven fracs per wellbore have been very successful with current production of 13 mmcf per day from the five producing horizontal Montney gas wells that we have drilled to date. The presentation on our website (www.stormexploration.com) shows monthly average production for each of our producing vertical and horizontal wells up to the end of April. Vertical well production is important to track as the average horizontal well is expected to produce at a multiple (4 to 6 times) of the average vertical well. Storm's entire land position on the Montney fairway totals 85 net sections with approximately 35 net sections, including the nine sections encompassing our Montney discovery, identified as having the most prospectivity based on geological mapping and evaluation of our 3-D seismic. Numerous other Montney prospects and leads have been identified on these lands. Over the last year, three exploratory wells, including one gas well (0.5 net) drilled in the first quarter of 2008, have been drilled targeting the Montney formation on these lands with none of them encountering higher quality reservoir similar to what we have in our existing Montney discovery. All three wells did encounter a thick, gas saturated Montney interval and, as a result, we plan to drill three more wells in the second half of 2008 in areas we have identified as having the potential for improved reservoir quality. To date, five of the gas wells we have completed in the Montney formation also have potential in the uphole Halfway and Doig formations. As production declines from these vertical Montney gas wells, we will be completing them in the Halfway and Doig formations. Our Halfway and Doig opportunities also include eight step-out drilling locations that have been identified using our 3-D seismic and five infill locations in areas with lower expected recoveries. These wells will be drilled over the next two years. Grande Prairie Area, North West Alberta Production from this area averaged 2,042 Boe per day in the first quarter and is currently 1,900 Boe per day. Average production in 2007 was 2,400 Boe per day. In the first quarter, we were not active in this area since Alberta's New Royalty Framework ('NRF') does not provide us with a high enough return to justify putting capital at risk drilling wells in Alberta. During the remainder of 2008, our activity will be limited to drilling two wells (0.7 net) at Pouce Coupe, drilling two horizontal infills (1.5 net) in our Doe Creek light oil pool at Saddle Hills, and pipeline connecting one standing gas well (1.0 net) at Culp. Two wells planned at Clairmont testing separate Montney prospects will now be drilled in 2009 due to the time required to obtain drilling licences being lengthier than expected. These are all projects less impacted by Alberta's New Royalty Framework ('NRF') given that wells stabilize at lower rates (Pouce and Saddle Hills) or qualify for the deeper well reduction as horizontal wells (Montney at Clairmont). Although natural gas prices have increased to a current level of $8 to $9 per GJ at AECO, the typical well we have drilled in this area produces 800 mcf per day and would be subject to a 40% to 45% royalty rate which results in a field netback of approximately $22 to $25 per Boe which does not provide us with a high enough return on our capital investment. Cabin-Kotcho-Junior Area, North East British Columbia Net production from this area averaged 885 Boe per day in the first quarter. Production in the quarter was reduced by 150 Boe per day due to the corrosion failure of a salt water disposal pipeline late in 2007. The repair of the pipeline was completed in mid-February which has resulted in current production increasing to approximately 950 Boe per day. This past winter, we were not active in this area as most of our available capital was directed at evaluating and bringing on production from our Montney discovery at Parkland. Historically, our drilling activity in this winter access area has mainly targeted the Slave Point formation. In the future, our activity will also include prospects in the Bluesky/Debolt formations and horizontal wells in the Jean Marie formation, all in the Junior area. Our level of activity this coming winter will be contingent on the amount of discretionary, unallocated cash flow that is available which is dependent on natural gas prices. Storm also has exposure to the emerging Devonian shale gas play in the Horn River Basin through our land position in the Cabin area and through our ownership position in Storm Gas Resource Corp. ('SGR'), a company formed one year ago to pursue unconventional gas opportunities. Storm and Storm Ventures International Inc ('SVI') each have 45% ownership of SGR with the remaining 10% owned by SGR management. SGR has been reviewing available geological data which has resulted in the identification of areas with greater shale gas prospectivity where we have been acquiring land jointly with SGR. Over the next one to two years, we plan to continue acquiring land in these areas and we will evaluate public data from adjacent shale gas pilot projects as such data becomes available. Surmont Oil Sands Leases, Alberta This past winter, Storm successfully drilled and logged four test holes (4.0 net) which encountered thicker pay in the McMurray formation than had been the basis for earlier evaluation of our 3,840 acres (6 sections) of oil sands leases. McDaniel &Associates Consultants Ltd has updated their estimate of the bitumen contingent resource and this has resulted in a best case estimate of discovered bitumen in place exploitable using a Steam-Assisted-Gravity Drainage (SAGD) process to be 312 million barrels (+89%) with the best case estimate of contingent bitumen resources recoverable using a SAGD process being 113 million barrels (+102%). The before tax net present value associated with the best estimate contingent resources is $198 million at an 8% discount rate, $101 million at a 10% discount rate and $37 million at a 12% discount rate. Next winter, Storm will drill additional test holes to further prove up and expand the estimated bitumen in place. One section remains largely unevaluated and could materially increase our bitumen contingent resources. Storm has no plans at present to initiate development of this resource and no assurance can be provided that this resource will ever be exploited with a conventional SAGD project. STORM VENTURES INTERNATIONAL INC. Storm owns 4.3 million shares or 13% of the common shares of Storm Ventures International Inc. ('SVI'), a Calgary based, private energy company focused on unconventional and international exploration and exploitation opportunities. This share position has a value of $21.5 million or $0.46 per fully diluted Storm share using the price of $5 per share from SVI's last equity issue in December, 2006. SVI is active in the UK sector of the North Sea through its affiliate, Silverstone Energy Limited in which SVI has a 34% ownership position. Silverstone has drilled three new pool gas discoveries in the large, 200,000 acre Viking Fields area which have total potential gas in place of 320 BCF (100% working interest) and the tie-in of one of these, the Victoria field, is expected in the last quarter of 2008 at a cost of Pounds Sterling 88 million. Victoria field gas in place is estimated to be 163 BCF with gross proved plus probable recoverable reserves being 106 BCF (net 66 BCF). Silverstone has also recently acquired Granby Oil and Gas for Pounds Sterling 23 million plus the assumption of Pounds Sterling 31 million of non-recourse project debt. Granby's main asset is the 54% owned Tristan NW gas field which commenced production in mid-April at 15 mmcf per day. In addition to this, Granby has 110,000 net undeveloped acres with the top five prospects on those lands containing 42 MMBoe of net risked contingent resources. Silverstone has estimated that 4.8 MMboe of proved plus probable plus possible reserves were added with the Granby acquisition. Funding for the acquisition is being provided from a rights offering to existing Silverstone shareholders and the Victoria field tie-in will be partially funded with project financing which is contingent on a successful flow test. With current netbacks of Cdn $60 per Boe, significant cash flow will be provided by the Tristan NW and Victoria fields which will be used to fund the tie-in of the remaining Viking Fields discoveries in 2009 and 2010 and to fund additional exploratory drilling which, in 2008, will include two more Viking Fields wells and a well targeting a medium gravity oil prospect in the Quad 9/Gryphon area which has been farmed out (Silverstone pays 10% and carried for a 30% working interest). Silverstone is estimating 2010 average production of 45 mmcf per day from Tristan and two of the Viking Fields discoveries (Victoria and Vulcan East). In Tunisia, SVI has drilled and, in the next two months, will complete and evaluate an onshore well in the 71% interest Remada Sud permit that is testing one of two large Ordovician structures with potential gas in place of more than 200 BCF. In the 100% interest Jenein Centre block, a well will be drilled targeting light oil early in 2009. Significant discoveries in the Acacus formation have recently been announced in offsetting blocks. Offshore in the Gulf of Hammamet, nine prospects have been identified offsetting two existing discoveries using the 440 km2 of marine 3-D seismic recorded by SVI last year. An exploratory well is planned for mid-2009 to test one of these prospects. Also offshore, SVI recently acquired the remaining 33% working interest in the Cosmos permit and now has a 100% working interest in a 1983 discovery that tested at over 5,000 barrels of light oil per day and contains an estimated 25 million barrels of oil in place (estimated 3P recoverable is 9 million barrels). Development is planned later in 2009 using a vessel converted to an FPSO which is purpose-built for smaller field development. 2008 OUTLOOK Natural gas prices to the end of April have averaged $7.80 per GJ at AECO with current spot prices being over $9 per GJ. This is higher than our original budget assumption of $6.25 per GJ and will result in cash flow for the year being considerably higher than originally forecasted. This allows us to increase our level of capital investment in 2008 to $75 million from $65 million. Our drilling program will expand from 24 wells (23.3 net) to 30 wells (26.5 net) and $4 million will be added for land acquisition. A further increase to $90 to $100 million will be implemented in mid-August if natural gas prices remain above $7.50 per GJ. This second increase is likely to be directed towards twinning our facility at Parkland, drilling one or two additional horizontal Montney gas wells at Parkland in Q4, and drilling one or two vertical infills targeting the Halfway formation at Parkland. Production at the end of 2008 is still forecast to be 8,000 Boe per day which is unchanged from previous guidance. Guidance is not being increased given that most of the additional activity will happen at the end of the year and may not impact 2008 production. Production in April averaged 7,300 Boe per day while current production is at approximately 7,500 Boe per day. Second quarter production will be reduced by 1,100 Boe per day as a result of several minor facility outages and the 22 day shut-down in June of the McMahon gas plant for scheduled maintenance. These outages will result in second quarter production averaging approximately 6,300 to 6,500 Boe per day. Operating costs in the first quarter were $7.52 per Boe, higher than the $6.50 per Boe we had forecast as an average for 2008. Higher costs were mainly the result of normal, higher winter costs (methanol, fuel) as well increased salt water disposal and trucking costs at Junior associated with a pipeline failure late in 2007 which has now been repaired. As a result of higher first quarter costs, our forecast average operating cost in 2008 increases to $6.75 per Boe. We saw significant improvement in our field netback in the first quarter which averaged $35.87 per Boe, an increase of 23% from the 2007 first quarter field netback of $29.14 per Boe (excluding hedging gains). Over the same period, the average spot natural gas price at AECO increased by 10% to $7.44 per GJ from $6.75 per GJ in the first quarter of 2007. The significant improvement in our field netback is primarily due to increased volumes from the Parkland area where we realized a netback of $41.20 per Boe in the first quarter. The gas produced from our Montney discovery at Parkland is liquids rich resulting in liquids recoveries of 25 barrels per mmcf and the sales gas stream being higher heat content as evidenced by the wellhead natural gas price being $9.00 per mcf in the first quarter of 2008. With production from Parkland averaging 3,510 Boe per day in the first quarter and currently at approximately 4,600 Boe per day, we expect further improvement in our field netback throughout 2008 as production from our Montney discovery continues to increase. Continued, successful development of our Montney discovery at Parkland has resulted in significant production growth to date in 2008. This discovery will be the cornerstone of our growth for the next two years and possibly longer should our step-out and exploratory drilling efforts continue to be successful in expanding the size of the Montney resource on our lands. In addition to this, significant additional value may be added from our exposure to other larger scale opportunities including SVI's development opportunities and exploration prospects in the North Sea and Tunisia, the emerging Horn River Basin Devonian shale gas play and further delineation of our oil sands lease at Surmont. We look forward to updating our shareholders on our progress on these initiatives and others throughout the remainder of the year. Respectfully, Brian Lavergne, President and Chief Executive Officer May 8, 2008 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2008 Set out below is management's discussion and analysis of financial and operating results for Storm Exploration Inc. ("Storm" or the "Company") for the three months ended March 31, 2008. It should be read in conjunction with the unaudited consolidated financial statements for the three months ended March 31, 2008 and other operating and financial information included in this press release. This management's discussion and analysis is dated May 8, 2008. Introduction and Limitations: Basis of Presentation - Financial data presented below have largely been derived from the Company's unaudited consolidated financial statements for the three months ended March 31, 2008, prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). Specific accounting policies adopted by the Company as applicable to its business are set out in footnote 1 to the audited consolidated financial statements for the year ended December 31, 2007. The reporting and the measurement currency is the Canadian dollar. Unless otherwise indicated, tabular financial amounts, other than per share and per Boe amounts, are in thousands of dollars. Effective January 1, 2008 Storm adopted with prospective effect certain new accounting standards introduced as part of GAAP as follows: - Capital Disclosures: Section 1535 of the CICA Handbook, Capital Disclosures, requires companies to disclose in their financial statements objectives, policies and processes for managing capital, including compliance with any externally imposed capital requirements. - Financial Instrument Disclosure and Presentation: Section 3862 of the CICA Handbook, "Financial Instruments - Disclosures" and Section 3863, "Financial Instruments - Presentation". The new accounting standards require the Company to provide information about the significance of financial instruments to the Company's financial position and performance. In addition, information about the nature and extent of risks associated with financial instruments, and how the Company manages such risks, is to be provided. Forward-Looking Statements - Certain information set forth in this document, including management's assessment of Storm's future plans and operations, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, most of which are beyond the Company's control, including the effect of general economic conditions, industry conditions, volatility of commodity prices, changes in taxation and royalty regimes, currency fluctuations, imprecision of reserve estimates, relationships with parties involved with or affected by the Company's activities, 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. 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 update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Boe Presentation - For the purpose of calculating unit costs, natural gas is converted to a barrel of oil equivalent ("Boe") using six thousand cubic feet ("Mcf") of natural gas equal to one barrel of oil unless otherwise stated. Barrels of oil equivalent ("Boe") may be misleading, particularly if used in isolation. A Boe conversion ratio of six Mcf to one barrel ("bbl") is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All Boe conversions in this report are derived by converting natural gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil. Non-GAAP Measurements - Within management's discussion and analysis, references are made to terms having widespread use in the oil and gas industry in Canada. 'Funds from operations', 'funds from operations per share', and 'netbacks' and 'netbacks per Boe' are not defined by GAAP in Canada and are regarded as non-GAAP measures. Measurement of funds from operations is detailed on the Statement of Cash Flows. Funds from operations per share is calculated based on the weighted average number of common shares outstanding consistent with the calculation of net income per share. Netbacks equal total revenue less royalties, transportation and operating costs, calculated on a commodity and Boe basis. Total Boe is calculated by multiplying the daily production by the number of days in the year or quarter as the case may be.
PRODUCTION AND REVENUE
Average Daily Production
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Natural gas (Mcf/d) 33,525 30,048 31,133
----------------------------------------------------------------------------
Natural gas liquids (Bbls/d) 333 216 289
----------------------------------------------------------------------------
Crude oil (Bbls/d) 579 553 514
----------------------------------------------------------------------------
Total (Boe/d) 6,500 5,776 5,992
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Boe production for the first quarter of 2008 increased by 13% when compared to the first quarter of 2007 and by 8% compared to the fourth quarter of 2007. Increased production largely came from Storm's successful vertical and horizontal drilling program in the Parkland area of British Columbia. Production per million shares outstanding for the first quarter of 2008 averaged 146 Boe per day, compared to 135 Boe per day for the first quarter of 2007, and to the same amount in the final quarter of 2007, an increase of 8%. Production at the date of the report approximated 7,400 Boe per day. The increase over the average rate for the quarter is attributable to the tie in of two horizontal wells at Parkland close to the end of the first quarter, which had no appreciable effect on average quarterly production. Production for the second quarter of 2008 will be affected by the scheduled closure for maintenance for much of the month of June of the McMahon gas plant in north eastern British Columbia, where the Company's Parkland production is delivered. Average second quarter production is expected to be lowered by approximately 1,000 Boe per day.
Production Profile and Per Unit Prices
----------------------------------------------------------------------------
Quarter Ended March 31, 2008 Quarter Ended March 31, 2007
----------------------------------------------------------------------------
Average Selling Average Selling
Percentage Price Before Percentage Price Before
of Total Boe Transportation of Total Boe Transportation
Production Costs Production Costs
----------------------------------------------------------------------------
Natural gas
- Mcf 86% $ 8.60 87% $ 7.75
----------------------------------------------------------------------------
Natural gas
liquids -
Bbl 5% $ 78.81 4% $ 56.93
----------------------------------------------------------------------------
Crude oil -
Bbl 9% $ 97.63 9% $ 64.90
----------------------------------------------------------------------------
Per Boe $ 57.10 $ 48.65
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended December 31, 2007
----------------------------------------------------------------------------
Average Selling
Percentage Price Before
of Total Boe Transportation
Production Costs
----------------------------------------------------------------------------
Natural gas
- Mcf 87% $ 6.76
----------------------------------------------------------------------------
Natural gas
liquids -
Bbl 5% $ 72.94
----------------------------------------------------------------------------
Crude oil -
Bbl 8% $ 87.29
----------------------------------------------------------------------------
Per Boe $ 46.12
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per unit prices in the table above do not include any gains from hedging of natural gas prices in the first quarter of 2007. Storm's production base is largely natural gas and associated liquids. In addition, Storm's prospect inventory is largely focused on natural gas, and it is unlikely that in the short and medium term that crude oil will grow internally as a percentage of Boe production. The Company sells natural gas in both British Columbia and Alberta, with pricing being based on Station #2 in British Columbia and AECO in Alberta. In late 2007, as a result of the commissioning of the Peace River pipeline, natural gas from the Parkland area was sold with reference to Station #2 instead of AECO pricing. In 2008 growth in gas production has come largely from Parkland and was priced according to the Station #2 index. This is expected to continue for the balance of 2008. The Station #2 reference price for the first quarter of 2008 was $7.43 per GJ; for the first quarter of 2007 $6.75 per GJ; and for the fourth quarter of 2007 was $5.95 per GJ. The amount per GJ received by Storm for the first quarter of 2008 was approximately 16% higher than the Station #2 reference price, a price premium attributable to the high heat content natural gas delivered from the Montney formation at Parkland. In addition to the high heat content, Montney gas is liquids rich, which has resulted in natural gas liquids growing as a percentage of total Boe production.
Production by Area - Boe per Day
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Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
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Parkland/Ft. St. John Area
- NE BC 3,511 1,756 2,913
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Grande Prairie Area - NWAB 2,042 2,746 2,181
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Cabin-Kotcho-Junior Area
- NE BC 885 1,084 829
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Other 62 190 69
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Total 6,500 5,776 5,992
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The above sets out the average production from each of Storm's core areas. The Company's focus on the Parkland area has resulted in 100% year-over-year production growth at that property. Correspondingly, reduced investment in Alberta is evidenced by a 26% reduction in year-over-year production.
Production Revenue
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Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Natural gas $26,241 $20,959 $19,365
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Natural gas liquids 2,389 1,105 1,937
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Crude oil 5,145 3,227 4,128
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Hedging gains - 2,481 -
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Revenue from product sales 33,775 27,772 25,430
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Royalty income 199 237 123
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Total Production Revenue $33,974 $28,009 $25,553
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Royalty income for each quarter is derived from ownership of overriding royalties, largely in the Peace River Arch. A reconciliation of revenue from product sales between 2008 and 2007 is as follows:
----------------------------------------------------------------------------
Natural
Natural Gas Crude Hedging
Gas Liquids Oil Gains Total
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Revenue from product
sales - Q1 2007 $20,959 1,105 3,227 2,481 $27,772
----------------------------------------------------------------------------
Effect of increased
production year -
over - year 2,767 626 195 - 3,588
----------------------------------------------------------------------------
Effect of increased
product prices
year-over-year 2,515 658 1,723 - 4,896
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Decrease in natural
gas hedging gains - - - (2,481) (2,481)
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Revenue from product
sales - Q1 2008 $26,241 2,389 5,145 - $33,775
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Hedging: Storm had hedges in place at March 31, 2008 for the period April 1 - September 30, 2008. However, in the first quarter of 2007, the Company realized hedging gains on natural gas contracts of $2.5 million, or $4.77 per Boe, or $0.92 per Mcf. Storm follows hedge accounting rules with respect to prior hedges and hedges currently in place. However any future hedges entered into by Storm may not satisfy hedge accounting criteria; correspondingly the Company may be obliged to follow mark-to-market rules, which would require that gains and losses on hedges would be included in the determination of net income at the end of each reporting period, rather than over the period covered by the hedge.
ROYALTIES
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
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Charge for period $6,902 $5,592 $5,338
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Royalties as a percentage
of revenue from product
sales before royalties
and hedging gains
- Crown 19.5% 20.3% 19.5%
- Other 0.9% 1.8% 1.5%
----------------------------------------------------------------------------
Total 20.4% 22.1% 21.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per Boe $11.67 $10.76 $ 9.68
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In late 2007 the provincial government of Alberta announced broadly based changes to the provincial Crown royalty structure. The new royalty structure reflects both well productivity and product pricing. Higher productivity wells face the greatest increases; however lower productivity wells, including some of Storm's production, may benefit from lower royalty rates. Approximately 32% of Storm's production came from Alberta in the first quarter of 2008, with the remaining 68% from British Columbia. For the remainder of 2008 Storm's capital programs will continue to be focused on the exploitation of its largely natural gas properties in the Peace River Arch area of north eastern British Columbia, which, assuming operational success, will result in Alberta revenues continuing to fall as a percentage of total revenue. In addition, natural declines will further reduce Storm's Alberta based production. In the final quarter of 2008, immediately prior to implementation of the new royalty framework, successful execution of the Company's business plan could result in production from British Columbia increasing to 80% of total Boe production. Nevertheless, the allocation of capital by the Company to projects outside of Alberta is not exclusively in response to the changed Crown royalty regime. The Company's British Columbia projects offer the highest economic return of any from Storm's project inventory.
PRODUCTION COSTS
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Charge for period $4,448 $3,660 $3,778
----------------------------------------------------------------------------
Percentage of revenue
from product sales
before hedging gains 13.2% 14.5% 14.9%
----------------------------------------------------------------------------
Per Boe $ 7.52 $ 7.04 $ 6.85
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total production costs for the first quarter of 2008 increased over production costs for the first and fourth quarters of 2007 in response to growing product sales. Higher per Boe costs in the first quarter of 2008 resulted from weather related cost increases, additional trucking costs and certain cost allocations from prior periods. Storm's cash costs per Boe, which comprise production, general and administrative costs and interest, amounted to $10.39 for the first quarter of 2008, compared to $9.37 for the first quarter of 2007 and to $10.29 for the fourth quarter of 2007. Higher production and interest costs in the first quarter of 2008, resulted in increased cash costs per Boe when compared to the same period in 2007.
TRANSPORTATION COSTS
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Charge for period $1,408 $1,128 $1,306
----------------------------------------------------------------------------
Percentage of revenue
from product sales
before hedging gains 4.2% 4.5% 5.1%
----------------------------------------------------------------------------
Per Boe $ 2.38 $ 2.17 $ 2.37
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increased charges for transportation reflect increased production levels as well as increased trucking costs associated with higher levels of natural gas liquids production. The Company's primary focus on natural gas, with exposure primarily to pipeline transportation charges, results in largely consistent per Boe charges between periods.
FIELD NETBACKS
Details of field netbacks per commodity unit are as follows:
----------------------------------------------------------------------------
Quarter ended March 31, 2008
----------------------------------------------------------------------------
Crude Oil Natural Gas Natural Total
($/Bbl) Liquids ($/Bbl) Gas ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $97.63 $78.81 $8.60 $57.10
----------------------------------------------------------------------------
Royalty income 1.67 0.48 0.03 0.34
----------------------------------------------------------------------------
Royalties (14.82) (17.34) (1.83) (11.67)
----------------------------------------------------------------------------
Production costs (8.44) - (1.31) (7.52)
----------------------------------------------------------------------------
Transportation (5.28) (3.45) (0.34) (2.38)
----------------------------------------------------------------------------
Field netback $70.76 $58.50 $5.15 $35.87
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter ended March 31, 2007
----------------------------------------------------------------------------
Crude Oil Natural Gas Natural Total
($/Bbl) Liquids ($/Bbl) Gas ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $64.90 $56.93 $7.75 $48.65
----------------------------------------------------------------------------
Hedging gains - - 0.92 4.77
----------------------------------------------------------------------------
Royalty income 0.47 0.79 0.07 0.46
----------------------------------------------------------------------------
Royalties (10.63) (17.21) (1.75) (10.76)
----------------------------------------------------------------------------
Production costs (6.88) - (1.23) (7.04)
----------------------------------------------------------------------------
Transportation (1.69) (3.26) (0.36) (2.17)
----------------------------------------------------------------------------
Field netback $46.17 $37.25 $5.40 $33.91
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter ended December 31, 2008
----------------------------------------------------------------------------
Crude Oil Natural Gas Natural Total
($/Bbl) Liquids ($/Bbl) Gas ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $87.29 $72.94 $6.76 $46.12
----------------------------------------------------------------------------
Royalty income 0.59 0.42 0.03 0.22
----------------------------------------------------------------------------
Royalties (13.92) (17.96) (1.47) (9.68)
----------------------------------------------------------------------------
Production costs (7.99) - (1.19) (6.85)
----------------------------------------------------------------------------
Transportation (4.71) (3.63) (0.34) (2.37)
----------------------------------------------------------------------------
Field netback $61.26 $51.77 $3.79 $27.44
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Production costs for natural gas liquids are included with natural gas costs. Field netbacks for the first quarter of 2008 increased by 6% when compared to the first quarter of 2007. Excluding a hedging gain realized in the first quarter of 2007, the year-over-year gain would have been 23%. Compared to the final quarter of 2007, netback for the first quarter of 2008 increased by 31%. Improved pricing for the Company's products, along with reasonable cost stability resulted in improvement.
INTEREST
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Charge for period $1,061 $ 669 $1,123
----------------------------------------------------------------------------
Per Boe $ 1.79 $1.29 $ 2.04
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest is paid on Storm's revolving bank facility. Increased interest costs year-over-year correspond to increased borrowings required to fund a property acquisition completed in June 2007. Late in 2007 interest rates began to fall, resulting in a lower per unit interest cost in the first quarter of 2008, when compared to the immediately prior quarter.
GENERAL AND ADMINISTRATIVE COSTS
Total costs:
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Gross general and
administrative costs $1,364 $1,408 $1,944
----------------------------------------------------------------------------
Capital and operating
recoveries (727) (865) (1,170)
----------------------------------------------------------------------------
Net general and
administrative costs $ 637 $ 543 $ 774
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Costs per Boe:
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Gross general and
administrative costs $2.31 $2.71 $3.51
----------------------------------------------------------------------------
Capital and operating
recoveries (1.23) (1.67) (2.11)
----------------------------------------------------------------------------
Net general and
administrative costs $1.08 $1.04 $1.40
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year-over-year gross general and administrative costs were largely unchanged, although recoveries fell in the first quarter of 2008 when compared to the prior year. Compared to the final quarter of 2007, gross general and administrative costs fell considerably in the first quarter of 2008, as costs for the final quarter of 2007 contain various costs related to the Company's year end. Storm does not capitalize general and administrative costs.
STOCK BASED COMPENSATION COSTS
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Charge for period $ 336 $ 337 $ 240
----------------------------------------------------------------------------
Per Boe $0.57 $0.65 $0.44
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock based compensation costs are non cash charges which reflect the value of stock options and performance warrants issued to directors and employees. The value is amortized over the life of the award. Storm's performance warrant plan was terminated mid 2007, upon the exercise of the remaining warrants. The increase in the charge in the first quarter of 2008, when compared to the immediately prior quarter, corresponds to the issue of additional stock options late in 2007.
DEPLETION DEPRECIATION AND ACCRETION
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Depreciation and depletion
charge for period $10,057 $8,360 $9,275
----------------------------------------------------------------------------
Accretion charge for period 121 112 117
----------------------------------------------------------------------------
Total $10,178 $8,472 $9,392
----------------------------------------------------------------------------
Total per Boe $ 17.21 $16.30 $17.04
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The increase in the charge for depreciation, depletion and accretion for the first quarter of 2008 is a consequence of higher production volumes, as the depletion component of the charge is based on a cost per Boe. The increase in the charge for depletion and depreciation per Boe for the first quarter of 2008 when compared to the equivalent quarter of 2007, is largely attributable to property acquisitions in mid 2007, when reserves were purchased at a higher cost per Boe than Storm's historical finding costs. Accretion is the increase for the reporting period in the present value of the Company's asset retirement obligation, which is discounted using an interest rate of 8%. INCOME AND OTHER TAXES For quarter ended March 31, 2008, Storm recorded a future income tax charge of $2.6 million compared to $2.5 million for the first quarter of 2007. The deferral of taxes to future periods largely results from resource pool deductions exceeding the accounting charge for depletion, depreciation and accretion. The statutory combined federal and provincial rate used to measure the future income tax obligation for the first quarter of 2008 is 30%, compared to 32% for the first quarter of 2007. At March 31, 2008, Storm had tax pools carried forward estimated to be $210 million. In September 2007 the Company issued flow through shares for gross proceeds of $15.1 million. The Company is obligated to incur a like amount of Canadian Exploration Expense by December 31, 2008. At March 31, 2008, the Company considers that qualifying expenditures totaling $7.2 million have been incurred. In addition, Storm has a capital loss in the amount of $10 million available for application against future taxable capital gains. NET INCOME AND NET INCOME PER SHARE Net income for the first quarter of 2008 amounted to $6.4 million, compared to $5.1 million in the first quarter of 2007 and $2.9 million in the final quarter of 2007. Net income per diluted share for the first quarter of 2008 increased largely pro rata when compared to the prior quarters.
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Per Per Per
diluted diluted diluted
$ share - $ share - $ share -
----------------------------------------------------------------------------
Net income $6,424 $0.14 $5,066 $0.12 $2,852 $0.06
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FUNDS FROM OPERATIONS Funds from operations for the first quarter of 2008 amounted to $19.5 million, or $0.43 per diluted share, compared to $16.4 million, or $0.38 per diluted share for 2007.
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Per Per Per
diluted diluted diluted
$ share - $ share - $ share -
----------------------------------------------------------------------------
Funds from
operations $19,518 $0.43 $16,417 $0.38 $13,233 $0.30
----------------------------------------------------------------------------
----------------------------------------------------------------------------
INVESTING AND FINANCING Working Capital Receivables comprise production revenue receivables and accruals, and receivables in respect of operating and capital costs. Prepaid costs include unamortized insurance premiums, deposits and certain inventory items. Accounts payable 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. Storm had a working capital deficiency of $14.7 million at March 31, 2008, compared to $11.3 million at March 31, 2007 and $10.2 million at December 31, 2007. The working capital deficiency at each period end corresponds to the Company's preference to act as operator and the seasonality of its field operations. The Company's working capital deficiency is cyclical and is highest at the end of the first quarter of each year and lowest at the end of second quarter.
Property and Equipment
Capital costs incurred were as follows:
----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007 December 31, 2007
----------------------------------------------------------------------------
Land and lease, net $ 1,793 $ 1,144 $ 1,663
----------------------------------------------------------------------------
Seismic - 773 24
----------------------------------------------------------------------------
Drilling and completions 20,807 11,976 14,657
----------------------------------------------------------------------------
Facilities and equipment 5,237 7,716 4,853
----------------------------------------------------------------------------
Other 16 16 24
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Field Expenditures 27,853 21,625 21,221
----------------------------------------------------------------------------
Property acquisitions 514 2,450 -
----------------------------------------------------------------------------
Property dispositions (1,592) - (4,127)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total $26,775 $24,075 $17,094
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Bank Debt, Liquidity and Capital Resources Storm has received bank approval for a revolving borrowing base bank credit facility of $110 million, increased from $94 million at December 31, 2007. The amount drawn on this facility at March 31, 2008 amounted to $80.1 million. Debt, including working capital deficiency, amounted to $92 million at March 31, 2008, resulting in a ratio of debt to annualized funds from operations for the first quarter of 2008 of 1.2 times. Storm funds its field capital programs through cash flow and bank borrowings. Acquisitions are funded by a combination of debt and, if required, equity. Field capital programs tend to be concentrated in the winter months, with the result that capital expenditures in the first and fourth quarters of the year will exceed cash flow, compensated by lower capital expenditures in the second and third quarters. In quarters of high field activity, Storm operates with a substantial working capital deficit, which is paid down in quarters of lower field activity. Investment At March 31, 2008, the Company's investment in Storm Ventures International Inc. ("SVI") represented a 13% ownership position, comprising 4.3 million common shares. The carrying amount of the investment on the Company's consolidated balance sheet comprises the Company's investment cost, plus a dilution gain recognized during the year ended December 31, 2005. This carrying amount should not be regarded as representative of the value of Storm's investment. Storm's cash investment in SVI since commencement of oil and gas operations in 2004 totals $3,000,000. Storm has no financial or management commitments to SVI: however, Storm does provide accommodation and administrative services. Amounts, at cost, billed to SVI amounted to $59,000 in the first quarter of 2008 and $22,000 in 2007. Future Income Taxes Estimated future income taxes at March 31, 2008 represents the excess of the accounting amounts over the related tax bases of property and equipment and share capital. Details of the Company's tax assets are as follows:
----------------------------------------------------------------------------
As at Maximum Annual
March 31, 2008 deduction
----------------------------------------------------------------------------
Canadian oil and gas property expense $ 99,300 10%
----------------------------------------------------------------------------
Canadian development expens
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