HIGHLIGHTS & OUTLOOK

Highlights – YEAR END & Q4 2012

• Fourth quarter production averaged 2,815 Boe per day which is a year-over-year increase of 260% or 55% on a per-share basis.  Oil plus NGL production grew to represent 36% of fourth quarter production versus 19% a year ago.  Average 2012 production grew 95% on a per-share basis to 2,254 Boe per day with 38% being oil plus NGL.  Increased production was the result of two corporate transactions that closed in the first quarter of 2012, Bellamont Exploration Ltd. (“Bellamont”) and Storm Gas Resource Corp. (“SGR”), and also from new horizontal wells in the Montney formation at Umbach.  The Bellamont transaction added 1,253 Boe per day to average 2012 production and the acquisition of SGR added 276 Boe per day. Increased oil plus NGL production in 2012 was primarily the result of the Bellamont transaction which added 668 barrels per day of oil plus NGL and from growth at Umbach where NGL production grew by 75 barrels per day. 
• Capital investment totaled $8.8 million in the fourth quarter and $166.0 million for the year.  The majority of 2012 capital investment related to acquisitions net of dispositions, which totaled $139.2 million.  Acquisitions were $154.9 million which included the Bellamont transaction for $96.6 million and the SGR acquisition for $55.2 million.  Dispositions totaled $15.7 million from the sale of two non-core properties in the second half of 2012.  Capital investment in operations was $26.9 million for the year.  
• During 2012, activity was primarily focused on delineating the resource in the Montney formation at Umbach.  Drilling included six wells (4.4 net) with four horizontal wells (2.4 net) in the Montney at Umbach.  Three horizontal wells (1.8 net) were completed and pipeline connected at Umbach.  In the fourth quarter, two horizontal wells (1.2 net) were drilled at Umbach with completion and tie-in of both planned for 2013. 
• Funds from operations in the fourth quarter was $5.0 million, or $0.08 per basic share, an increase of 165% from cash flow of $0.03 per basic share in the prior year.  For the year, funds from operations increased by 610% to $13.4 million.  The increase in quarterly and yearly funds from operations resulted primarily from the Bellamont transaction which increased higher priced oil plus NGL as a proportion of total production and added $13.2 million of operating income in 2012.  
• Funds from operations increased throughout 2012 and averaged $19.37 per Boe in the fourth quarter.  The 2012 average funds from operations per Boe was $16.19, an increase of 70% from the prior year amount of $9.48 per Boe.  Total cash costs including operating expense, interest expense, transportation costs, and cash general and administrative costs were $19.83 per Boe in 2012 and decreased to $19.34 per Boe in the fourth quarter. 
• Hedging gains from fixed price financial hedges put in place to protect capital investment were $1.7 million in 2012.  For 2013, commodity price hedges currently include 400 barrels of oil per day in the first quarter at an average floor price of Cdn $91.08 per barrel, 300 barrels of oil per day in the second quarter at an average floor price of Cdn $91.48 per barrel, and 8,000 GJ per day of natural gas in the first quarter at an average AECO floor price of $3.16 per GJ. 
• Net loss in the fourth quarter was $2.3 million or $0.04 per basic share, a decrease from the net loss of $0.07 per basic share a year earlier.  Net loss for the year was $6.6 million or $0.12 per basic share, a decrease from the prior year’s net loss of $0.14 per basic share.  The net loss was primarily due to a $1.3 million loss on the sale of investments, a write-down of investments of $2.6 million, and a $1.0 million loss on the disposition of oil and gas properties. 
• Debt and working capital deficiency was $44.7 million at year end.  Including the $4.3 million market value for Storm’s investment in publicly listed companies at year end, adjusted net debt was $40.4 million or 2.0 times annualized fourth quarter funds from operations. Including previously announced asset dispositions for proceeds totaling $20.1 million which closed in the first quarter of 2013, pro-forma adjusted net debt decreases to $20.3 million which is 1.0 times annualized fourth quarter funds from operations.  Storm’s bank credit facility is $52.0 million after giving effect to asset sales in the first quarter of 2013. 
• Total proved (“1P”) reserves increased 270% to 13.8 Mmboe with additions being 10.9 Mmboe.  On a per-share basis using basic shares outstanding at year end, the increase was 59%.  Delineation drilling in the Montney at Umbach added 4.1 Mmboe (38% of additions), the Bellamont transaction added 4.8 Mmboe, and the acquisition of SGR added 2.6 Mmboe. 
• Total proved plus probable (”2P”) reserves grew 230% to 27.3 Mmboe with additions totaling 19.8 Mmboe.  Growth on a per-share basis was 40% using basic shares outstanding at year end.  Delineation drilling in the Montney at Umbach added 5.5 Mmboe (28% of additions), the Bellamont transaction added 8.0 Mmboe, and the acquisition of SGR added 6.7 Mmboe. 
• The all-in cost to add 1P reserves was $21.85 per Boe and for 2P reserves was $16.26 per Boe.  The all-in cost includes all capital expenditures, the change in future development costs, acquisitions, dispositions and revisions. 
• The cost to add reserves per National Instrument 51-101 (“NI 51-101”), which excludes the effect of acquisitions, divestitures and revisions, was $14.20 per Boe for 1P reserves and $12.19 per Boe for 2P reserves.  All reserves additions per NI 51-101 were at Umbach. 
• Storm’s asset value is $2.35 per share using the net present value of 2P reserves, discounted at 10% before tax, and after deducting adjusted net debt of $40.4 million at the end of 2012.  This excludes any value for Storm’s landholdings which totaled 310,000 net acres at year end.

Outlook

Results in 2012 were generally in line with guidance (year-end debt, operating costs, royalty rate, operations capital).  Production in the fourth quarter of 2012 was below previous guidance (2,815 Boe per day versus previous guidance of 3,000 Boe per day) due to outages and capacity constraints with third party field compression at Umbach.  Production in the first quarter of 2013 is expected to be 2,500 Boe per day and will increase to 3,000 Boe per day in the second quarter.  This reflects the impact of the asset dispositions, continuing downtime with third party field compression at Umbach, and maintenance turnarounds at the Fort Nelson gas plant (HRB shut in for 28 days) and the Teepee gas plant (half of Grande Prairie area shut in for 15 days).  Production growth is expected to resume in the second half of 2013 with additions at Umbach coming from expansion of the gathering system and as horizontal wells are drilled, completed and tied in on 100% working interest lands.

 Preliminary 2013 guidance provided November 13, 2012 is being revised to reflect the recent asset dispositions that closed in the first quarter of 2013 (total proceeds $20.1 million) and an increase in activity levels at Umbach.  Net of acquisitions and dispositions, total capital investment is expected to be $25 million.  Updated guidance is provided below:      

(1)  Includes value of publicly listed securities.

(2)  Dispositions closed in February 2013.

The 2013 capital investment program will be focused on developing the resource in the Montney formation at Umbach.  Major expenditures will include: 

• $20.0 million of proceeds from property dispositions;
• $4.5 million to acquire a working interest in an existing facility at Umbach;
• $10.0 million to drill five horizontal wells (4.6 net) at Umbach;
• $15.0 million to complete and tie in seven horizontal wells (5.8 net) at Umbach;
• $6.0 million for the purchase of undeveloped land;
• $5.0 million to expand the gathering pipeline system at Umbach.

With a 2013 natural gas price at AECO of $3 per GJ and an Edmonton Par oil price of $87 per barrel, this program will be funded with cash flow, the sale of non-core assets, and with bank debt.  Adjusted net debt is forecast to be unchanged at $45 million at the end of 2013 (including public company investments) which is within Storm’s current bank line of $52 million and approximately two times forecast 2013 funds from operations.

 Over the last year, Storm has gained critical mass and cash flow through two corporate transactions.  Activity in 2012 was focused on drilling horizontal wells at Umbach to continue delineating the large, liquids-rich natural gas resource in the Montney formation.  To date, Storm has delineated approximately 40% of its land position at Umbach with reserves assigned to only the Upper Montney formation on 11% of the land base.  Well control confirms that there is a significant inventory of undrilled horizontal wells in the Upper and Middle Montney intervals. As a result, in 2013, the focus will transition to developing the resource and growing production and cash flow.  NGL recovery of 67 barrels per Mmcf sales through a shallow-cut gas plant greatly improves the netback and economics at current natural gas prices.  Modifications to the completion technique are expected to improve first year average rates and result in a rate of return meeting or exceeding 20% to 25% at current commodity prices.  If results at Umbach are supportive of doing so, development may be accelerated with funding being provided by additional asset sales.        

 Regarding the HRB property, the optionality of Storm’s land position is confirmed by recent transactions involving major land positions either in the HRB or other large scale, gas-prone resource plays in British Columbia and Alberta.  The HRB continues to offer significant leverage to improving natural gas prices and remains a long term, core asset for Storm.