HIGHLIGHTS & OUTLOOK

 

HIGHLIGHTS – FIRST QUARTER 2014

 

  • Production in the first quarter was 5,068 Boe per day (22% oil plus NGL), an increase of 104% from the same period last year and 6% from the prior quarter.  On a per-share outstanding at quarter end basis, the year-over-year increase was 15%.  The increase resulted from growth at Umbach where first quarter production was 3,559 Boe per day which represents growth of 565% from the first quarter of 2013.                                                                                            
  • NGL production was 725 barrels per day in the first quarter, a year-over-year increase of 178%.  NGL production increased as a result of production growth from the liquids-rich Montney formation at Umbach.  The first quarter NGL price of $84.49 per barrel was 84% of the average Edmonton Par light oil price.   
  • Activity in the first quarter of 2014 was focused on Storm’s 100% working interest lands at Umbach South where four Montney horizontal wells (4.0 net) plus one Montney vertical delineation well (1.0 net) were drilled and two horizontal wells (2.0 net) were completed and pipeline connected.  As the existing facility is at capacity, only one of the completed Montney horizontal wells started producing in late February with the average rate in March and April being restricted to 4.3 Mmcf per day gross raw gas.  The remaining Montney horizontal wells will start producing in September when Storm’s new facility at Umbach is operational.   
  • Funds from operations for the quarter totaled $8.7 million or $0.09 per basic share, a year-over-year increase of 80% on a per-share basis.  The increase in funds from operations was the result of growth at Umbach where the field operating netback was $27.03 per Boe which is higher than the corporate average. 
  • The funds from operations netback was $18.99 per Boe in the quarter, an increase of $4.58 per Boe or 32% from the prior year.  The year-over-year improvement was primarily the result of lower operating costs and the first quarter natural gas price increasing to $5.63 per Mcf from $3.46 per Mcf in the prior year period. These gains were partially offset by a hedging loss of $3.10 per Boe.     
  • The field operating netback, excluding hedging gains or losses, was $25.47 per Boe for the quarter, an increase of 26% from $20.14 per Boe in the previous year.  The first quarter operating cost was $10.88 per Boe, a decrease of 20% from the prior year.  Operating costs are improving due to growth at Umbach where the first quarter operating cost was $7.78 per Boe.      
  • Controllable cash costs (operating, transportation, cash G&A, interest expense) were $15.97 per Boe in the quarter which is a decrease of $4.84 per Boe, or 23%, from $20.81 per Boe in the prior year.  
  • Capital investment was $110.4 million in the first quarter which included $88.0 million for an asset acquisition at Umbach.  Operations capital expenditures totaled $22.3 million and included $3.4 million for facilities and pipelines plus $17.8 million for drilling and completions. 

     

Debt plus working capital deficiency, net of investments, at the quarter end totaled $22.2 million which is 0.6 times annualized first quarter cash flow.  In May 2014, Storm’s banker, ATB Financial, increased the revolving bank facility to $90.0 million. 

  • On January 31, Storm closed the acquisition of a 100% working interest in 29 sections of land in the Umbach-Nig area, prospective for liquids-rich natural gas from the Montney formation.  The acquisition included two horizontal wells producing 359 Boe net per day (19% NGL) from the Montney formation.  The total cost of approximately $88.0 million consisted of $30.0 million in cash and 13.6 million common shares of Storm with a deemed value of $4.25 per common share (closing price on the TSX Venture Exchange January 30, 2014). 
  • On February 14, a bought deal financing and non-brokered private placement of common shares were completed with 8.5 million common shares being issued at a price of $4.10 per common share.  Aggregate gross proceeds of $34.9 million were used to fund the cash portion of the acquisition of land and production in the Umbach-Nig area that closed January 31, 2014. 

 

OUTLOOK

Production in April averaged 5,350 Boe per day based on field estimates, and second quarter production is forecast to be 5,200 to 5,500 Boe per day.  Corporate production will increase when the new field compression facility is operational at Umbach in September 2014. 

As a result of a higher forecast natural gas price and the recent changes to British Columbia’s Deep Well Royalty Credit Program, Storm is increasing 2014 capital investment from $78.0 million to $97.0 million.  The incremental capital will be invested at Umbach to drill an additional four Montney horizontal wells (4.0 net) and complete four Montney horizontal wells (3.6 net).  Forecast production for the fourth quarter of 2014 increases to 8,900 to 9,200 Boe per day which represents 90% growth on a year-over-year basis (55% growth on a per-share basis).  Revised guidance is set forth below. 

 

January 23, 2014

 Original Guidance

May 14, 2014

Revised Guidance

AECO natural gas price

$3.35 per GJ

$4.25 per GJ

Edmonton Par light oil price

Cdn $89 per bbl

Cdn $94 per bbl

Estimated year-end debt plus working capital deficiency(1)                      

$50.0 million

$57.0 million

Estimated average operating costs

$8.00 - $9.00 per Boe

$8.00 - $9.00 per Boe

Estimated average royalty rate (on production revenue before hedging)

14% - 15%

15% - 16%

Estimated operations capital, excluding acquisitions & dispositions

$78.0 million

$97.0 million

Estimated acquisitions

$88.0 million

$88.0 million

Estimated cash G&A net of recoveries

$4.0 million

$4.0 million

Forecast fourth quarter average production

7,500 – 7,900 Boe/d

8,900 – 9,200 Boe/d

 

(20% oil + NGL)

(20% oil + NGL)

Forecast average annual production

5,500 – 6,500 Boe/d

6,000 – 6,700 Boe/d

 

(21% oil + NGL)

(21% oil + NGL)

Umbach horizontal wells drilled

10 gross (10.0 net)

14 gross (14.0 net)

Umbach horizontal wells completed & tied in

9 gross (9.0 net)

13 gross (12.6 net)

  (1)  Includes value of publicly listed securities. 

Adjusted net debt at the end of 2014 is forecast to be $57.0 million (including public company investments), which would be approximately 0.9 times annualized funds from operations in the fourth quarter of 2014 (assumes fourth quarter AECO $3.75 per GJ and Edmonton Par Cdn$87.00 per barrel).

The recently announced changes to British Columbia’s Deep Well Royalty Credit Program provides a royalty credit of approximately $0.6 million for a Montney horizontal well with a 1,200 metre lateral drilled at Umbach after April 1, 2014.  The royalty credit reduces the royalty rate to 6% until the credit is used up which is forecast to be approximately 14 months at an AECO natural gas price of $3.75 per GJ.  Eight of Storm’s Montney horizontal wells being drilled at Umbach in 2014 will benefit from the royalty credit which will be re-invested to drill and complete additional horizontal wells at Umbach.

At Umbach, one drilling rig has been working since early December 2013 and has drilled eight Montney horizontal wells (8.0 net) with seven horizontal wells drilled as part of the 2014 program.  Drilling operations have continued through spring break-up and the remaining seven Montney horizontal wells (7.0 net) in the 2014 program are expected to be drilled by the end of August.  Four Montney horizontal wells (4.0 net) have been completed so far in 2014 with one well commencing production in late February.  Horizontal well performance is exceeding management’s forecast which has moderated declines.  As a result, the existing facility is full and most of the newly drilled Montney horizontal wells will commence production once construction of the new 24 Mmcf per day field compression facility is completed in September 2014.   The decision to expand the new facility to 48 Mmcf per day will likely be made in the fourth quarter of 2014 with approximately six to eight months being required to order equipment and for construction of the expansion.  With a growing inventory of horizontal wells to be turned on when the second field compression facility is completed, significant growth is expected at Umbach in the second half of 2014.  

Storm’s land position in the HRB continues to be a core, long-term asset with significant leverage to improving natural gas prices.