HIGHLIGHTS & OUTLOOK

HIGHLIGHTS – 2017 THIRD QUARTER

  • Production increased 14% from the prior year (13% on a per-share basis) to average 15,193 Boe per day. The increase was achieved with approximately 2,500 Boe per day being shut in as a result of the maintenance turnaround at the McMahon Gas Plant (loss of 14,000 Boe per day for 14 days in July) and 1,100 Boe per day was shut in during September due to the very low natural gas price at Station 2 ($0.66 per GJ). 
  • Condensate and NGL production increased 22% from the prior year to 2,806 barrels per day which represented 18% of per-Boe production and 43% of total revenue.
  • In response to the low Western Canadian natural gas prices during the quarter, sales were maximized into the higher priced Chicago market which resulted in 71% of third quarter natural gas sales being at Chicago, 5% at Alliance Transfer Point (“ATP”) and the remainder at Station 2.
  • At the end of the quarter, there was an inventory of ten Montney horizontal wells (10.0 net) at Umbach that had not started producing which includes four completed wells. Two horizontal wells (2.0 net) started production in the quarter while eight horizontal wells (8.0 net) have started production during the first nine months of the year.
  • Montney horizontal well performance at Umbach continues to improve as length is increased and as drilling targets areas where field condensate rates are higher. The three wells (3.0 net) completed in 2017 with enough history averaged 4.1 Mmcf per day gross raw gas plus 128 barrels per day of field condensate over the first 180 calendar days (approximately 800 Boe per day sales with 24% liquids including gas plant NGL).  After adjusting for the 39 days of downtime with the McMahon Gas Plant turnaround, the gas rate would be 23% higher than the average well completed in 2014 to 2016 while the field condensate rate would be 130% higher.
  • Controllable cash costs (production, general and administrative, interest and finance) were $7.67 per Boe which is a year-over-year decrease of 9%. The decrease was mainly due to production costs declining 10% as a result of production growth and the long-term processing arrangement at the McMahon Gas Plant which commenced in January 2017. 
  • Funds flow was $13.2 million ($9.41 per Boe), an increase of 50% from a year ago. The improvement was primarily from a higher netback combined with a 14% increase in production volumes.  The netback increased by $2.24 per Boe with most of this from hedging (+$1.37 per Boe) and lower production costs (+$0.66 per Boe). 
  • Net income was $0.7 million or $0.01 per share. Hedging continues to have a recurring impact on quarterly net income with the realized and unrealized gains and losses on hedging adding $1.7 million to net income.
  • Capital investment was $23.9 million with 81% being invested in drilling and completions at Umbach. This was less than the original forecast of $28.0 million as a result of lower than budgeted drilling and completion costs.
  • Total debt including working capital deficiency was $101.3 million which is 1.9 times annualized third quarter funds flow. The bank credit facility is $165.0 million.
  • Natural gas sales will be further diversified through recently added marketing arrangements that now result in approximately 54% to 68% of firm transportation capacity for 2018 being sold at the Chicago price, 11% at the Sumas price less a marketing adjustment (US$0.69/Mmbtu), 5% at the ATP price, 3% to 17% at the Station 2 price and 13% at the AECO price.
  • Commodity price hedges continue to be added and currently protect approximately 30% of forecast production for 2018.

 

OUTLOOK

Third quarter production was 15,193 Boe per day which was less than guidance of 15,500 to 17,000 Boe per day provided on August 15, 2017.  This was primarily due to natural gas prices being lower than forecast which resulted in approximately 1,100 Boe per day that was shut in during September while the start-up of recently completed horizontal wells has been delayed until the fourth quarter.

For the fourth quarter of 2017, production is forecast to be 18,000 to 19,000 Boe per day which represents year-over- year growth of 39% at the mid-point.  This is a reduction from guidance provided on August 15, 2017 due to continued weak natural gas prices at Station 2 in October (averaged $0.33/GJ) which further delayed the start-up of new horizontal wells until November.  Production to date in the fourth quarter has averaged 17,200 Boe per day based on field estimates.  Capital investment is expected to be $26.0 million which includes drilling seven horizontal wells plus completing three horizontal wells at Umbach.

Updated guidance for 2017 is summarized in the tables below.  Forecast commodity prices reflect actual year-to-date pricing plus the approximate forward strip for the remainder of 2017.  With continuing low natural gas prices at Station 2 delaying the start-up of recently completed horizontal wells, completions originally planned for the fourth quarter have been delayed until 2018.  As a result, capital investment will be reduced to $82.0 million (lower end of the range previously indicated) and year-end debt is expected to be at or below 1.5 times fourth quarter funds flow.

2017 Guidance

 

 

 

 

August 15, 2017

 

Updated

November 14, 2017

$Cdn/$US exchange rate

0.775

0.77

Chicago daily natural gas - US$/Mmbtu

$2.90

$2.90

AECO daily natural gas - Cdn$/GJ

$2.45

$2.10

Station 2 daily natural gas - Cdn$/GJ

$2.00

$1.70

Edmonton light oil - Cdn$/Bbl

$60.00

$61.00

Estimated average operating costs - $/Boe

$5.75 - $6.00

$6.00

Estimated average royalty rate

(% production revenue before hedging)

6% - 8%

 

6%

 

Estimated capital investment - $ million

(excluding acquisitions & dispositions)

$75.0 - $95.0

 

$82.0

 

Estimated cash G&A  - $ million      

$6.0 - $6.5

$6.0 - $6.5

                                   - $/Boe

$0.95 - $1.05

$1.00 - $1.10

Forecast fourth quarter production - Boe/d

 % condensate and NGL

19,000 - 21,000

17%

18,000 – 19,000

18%

Forecast annual production - Boe/d

% condensate and NGL

16,500 - 18,000

17%

16,200

18%

Umbach horizontal wells drilled

Umbach horizontal wells completed

Umbach horizontal wells connected

12 - 15 gross (12.0 - 15.0 net)

10 - 16 gross (10.0 - 16.0 net)

13 - 16 gross (13.0 - 16.0 net)

16 gross (16.0 net)

12 gross (12.0 net)

15 gross (15.0 net)

       

2017 Guidance History

 

 

Chicago

Daily

(US$/Mmbtu)

 

Station 2

Daily

(Cdn$/GJ)

 

AECO

Daily

(Cdn$/GJ)

Estimated

 Operations

 Capital

($ million)

Forecast

Fourth Quarter

Production

(Boe/d)

 

Forecast Annual

Production

(Boe/d)

September 7, 2016

$3.00

$2.25

$2.65

$75.0 - $80.0

18,000 - 20,000

16,500 - 18,000

November 15, 2016

$3.00

$2.20

$2.65

$75.0 - $80.0

18,000 - 20,000

16,500 - 18,000

March 2, 2017

$3.00

$2.00

$2.50

$75.0 - $80.0

18,000 - 20,000

16,500 - 18,000

 

May 15, 2017

$3.00

$2.10

$2.50

$75.0 - $80.0

19,000 - 21,000

17,000 - 18,000

August 15, 2017

$2.90              19,000 - 21,000             17,000 - 18,000

$2.00

$2.45

$75.0 - $95.0

19,000 - 21,000

16,500 - 18,000

November 14, 2017

$2.90

$1.70

$2.10

$82.0

18,000 - 19,000 19,000

16,200

Guidance for 2018 is provided in the table below.  Based on the assumptions provided in the table, capital investment is expected to be $55.0 to $90.0 million depending on commodity prices with average annual production forecast to increase by 22% to 32%.  The production forecast uses a 6.3 Bcf type curve for future horizontal wells at Umbach with the type curve based on the performance of horizontal wells completed in 2014 to 2016.  Recently drilled wells are approximately 60% longer and are expected to outperform this type curve.  The cost to drill and complete a horizontal well is estimated to be $4.4 million while the equipping and pipeline tie-in cost is expected to average $0.9 million per well.  The timing to install additional compression at Umbach will largely depend on the outlook for the natural gas price at Station 2.  For the first half of the year, capital investment is expected to be $25.0 to $44.0 million depending on commodity prices and funds flow.

2018 Guidance

 

 

November 14, 2017

$Cdn/$US exchange rate

0.79

Chicago daily natural gas - US$/Mmbtu

$2.80

Sumas monthly natural gas - US$/Mmbtu

$2.40

AECO daily natural gas - Cdn$/GJ

$1.80 - $2.10

Station 2 daily natural gas - Cdn$/GJ

$1.30 - $1.70

WTI - US$/bbl

$52.00

Edmonton light oil - Cdn$/Bbl

$62.00

Estimated revenue net of transportation - $/Boe

(excluding hedging)

$18.00 - $19.25

Estimated average operating costs - $/Boe

$5.75

Estimated average royalty rate

(% production revenue before hedging)

6% - 9%

 

Estimated capital investment - $ million

(excluding acquisitions & dispositions)

$55.0 - $90.0

 

Estimated cash G&A  - $ million      

$6.0 - $7.0

                                   - $/Boe

$0.70 - $0.95

Estimated interest expense - $ million

$4.5 - $5.5

Forecast fourth quarter production - Boe/d

 % condensate and NGL

20,000 - 27,000

17%

Forecast annual production - Boe/d

% condensate and NGL

20,000 - 23,000

17%

Umbach horizontal wells drilled

Umbach horizontal wells completed

Umbach horizontal wells connected

6 -12 gross (6.0 - 12.0 net)

11 - 17 gross (11.0 - 17.0 net)

11 - 16 gross (11.0 - 16.0 net)

 The low case for 2018 guidance offers the least exposure to Station 2 natural gas prices and would result in capital investment of $55.0 million with annual average production of 20,000 to 21,000 Boe per day, a year-over-year increase of 22%.  This would fill firm transportation capacity which is 102 Mmcf per day sales in 2018.  Capital investment would be approximately 75% of funds flow using the low end of the range for forecast commodity prices (year-over-year growth would be achieved while reducing debt).

The high case for 2018 guidance would result in capital investment of $90.0 million with annual average production of 22,000 to 23,000 Boe per day, a year-over-year increase of 32%.  Production in the fourth quarter of 2018 would increase to 25,000 to 27,000 Boe per day.  Capital investment would largely equal funds flow using the high end of the range for forecast commodity prices.  An infrastructure investment of $7.0 million to add compression at Umbach is required to achieve this growth.

Horizontal well performance and capital efficiencies are expected to continue improving with longer wells being drilled at Umbach.  The five wells completed in 2017 that have started production are 28% longer and the improvement in initial rates is encouraging although more history is required to determine the magnitude of the improvement.  Capital efficiencies have also improved with the drilling and completion cost per meter of length in 2017 decreasing by 12% when compared to wells completed in 2016.  Further improvements are expected given that wells drilled in the second half of 2017 are 60% longer than the average well completed in 2014 to 2016 and will target areas where higher field condensate rates are expected.  

The effect of continuing volatility in Western Canadian natural gas prices is largely mitigated for Storm by liquids production, commodity price hedges and firm transportation capacity which has diversified natural gas sales.  Liquids production represented 37% of year-to-date revenue, commodity price hedges are currently in place for approximately 30% of forecast 2018 production, and natural gas sales are now more diversified with only 16% to 30% of firm transportation for 2018 being sold at Western Canadian prices.  However, incremental production growth above Storm’s firm transportation capacity (102 Mmcf per day sales or 20,000 to 21,000 Boe per day) is largely directed to Station 2 where recent prices have provided for the lowest netback within Storm’s marketing portfolio.  As a result, capital investment has been designed to be flexible where activity and production growth can be quickly adjusted in direct response to the Station 2 natural gas price (currently there are four newly completed horizontal wells that are pipeline connected and can be turned on).  Generating a return on invested capital as well as maintaining a strong balance sheet are important to the long-term sustainability of the Company and the amount of production growth that is achieved will largely be dependent on commodity prices.   

With a large liquids-rich resource in the Montney at Umbach offering multiple years of drilling inventory, the longer-term focus continues to be growing net asset value for shareholders by converting resource into production and funds flow growth on a per-share basis.