HIGHLIGHTS & OUTLOOK

 

HIGHLIGHTS – 2015 THIRD QUARTER

  •  Production averaged 9,654 Boe per day (18% oil plus NGL), a per-share increase of 27% from the previous year. Production was reduced by approximately 2,900 Boe per day as a result of shutting in up to half of Storm’s production at Umbach several times during the quarter when the natural gas price at BC Station 2 was too low and would have resulted in an unacceptably low field netback (caused by constraints and outages on the Spectra and TransCanada sales pipeline systems).
  • NGL production was 1,697 barrels per day, an increase of 47% from the previous year. The price was $33.32 per barrel which was 59% of the average Edmonton light oil price (59% of the NGL volume was higher value condensate and plant pentanes).  The NGL price was reduced by the negative price for propane (-$8.18 per barrel) which affected 17% of the NGL volume.
  •  Activity was focused at Umbach where four horizontal wells were completed and a fifth compressor was installed at the second field compression facility to increase capacity by 10 Mmcf per day (total field compression capacity at Umbach is now 82 Mmcf per day).     
  •  Controllable cash costs (operating, G&A, and interest) were $9.35 per Boe which is a year-over-year decline of $1.72 per Boe, or 16%, and a decline of 15% from the previous quarter. Transportation cost is not included as recent natural gas marketing arrangements deduct the pipeline tariff from revenue which artificially reduces the transportation cost.
  •  Funds from operations was $8.98 per Boe, a year-over-year decrease of $8.90 per Boe, or 50%. Revenue declined by $19.47 per Boe which was partially offset by a cash hedging gain of $2.22 per Boe.
  •  Funds from operations was $8.0 million, or $0.07 per basic share, a decrease of 32% from the prior year. Higher production and the improvement in controllable cash costs was more than offset by the realized commodity price decreasing by 52% from the previous year. 
  •  Operations capital investment was $19.6 million with $10.0 million for completions and $8.5 million for facilities plus pipelines.
  •   Debt plus working capital deficiency was $40.0 million which is 1.2 times annualized third quarter cash flow. Storm’s bank credit facility is currently $140.0 million.
  •  The previously announced disposition of certain non-core properties in the Grande Prairie area of Alberta closed on July 15 (second quarter production from these properties was 600 Boe per day) with net proceeds of $23.7 million being used to reduce bank indebtedness.

 

 HEDGING & MARKETING

Realized cash gains in 2015 on Storm’s commodity price hedges totaled $9.1 million up to the end of the second quarter.  A summary of current hedges is provided below:

 

Q4 2015

2016

Crude Oil

 

 

WTI Cdn $75.00/Bbl floor

WTI Cdn $90.75/Bbl ceiling

500 Bopd

Natural Gas

AECO Cdn $3.36/GJ

($4.20/Mcf)

35,670 GJ/d

(28,500 Mcf/d)

AECO Cdn $2.98/GJ

($3.72/Mcf)

21,250 GJ/d

(17,000 Mcf/d)

 

Although Storm has no oil production, the WTI hedge protects condensate and plant pentanes revenue which are priced in reference to WTI.

 The purpose of Storm’s commodity price hedges is to provide greater certainty regarding future cash flows and capital investment in order to support longer term growth plans.  A maximum of 50% of current production (most recent monthly or quarterly average), before royalties, will be hedged; anticipated production growth is not hedged.

 Storm’s marketing commitments are summarized below.  These do not fix the price but show the price differentials and transportation cost.

 

Q4 2015

2016

 

 

Physical sale at McMahon Gas Plant

4,300 GJ/d Chicago monthly or daily price

minus Alliance pipeline toll Cdn$1.40/GJ

Physical sale at McMahon Gas Plant

18,200 GJ/d Chicago monthly or daily price

minus Alliance pipeline toll Cdn$1.40/GJ

 

 

Natural Gas

Physical sale at McMahon Gas Plant

13,400 GJ/d AECO +US$0.79/Mmbtu

minus Alliance pipeline toll Cdn$1.40/GJ

Physical sale at McMahon Gas Plant

34,800 GJ/d AECO +US$0.67/Mmbtu

minus Alliance pipeline toll Cdn$1.40/GJ

 

Physical sale at BC Stn 2

12,800 GJ/d AECO -$0.78/GJ

minus Spectra T-north pipeline toll Cdn$0.17/GJ

Physical sale at BC Stn 2

11,000 GJ/d AECO -$0.34/GJ

minus Spectra T-north pipeline toll Cdn $0.17/GJ

 

Physical sale at McMahon Gas Plant

11,400 GJ/d AECO -$0.22/GJ

Physical sale at McMahon Gas Plant

10,300 GJ/d AECO -$0.68/GJ

 

OUTLOOK

In the third quarter, production averaged 9,654 Boe per day which was lower than the forecast of 10,000 to 11,000 Boe per day provided with the release of second quarter results on August 13, 2015.  Production was reduced by approximately 2,900 Boe per day as a result of shutting in production for several periods where the BC Stn 2 natural gas price was very low (the daily spot price averaged $1.22 per GJ from August 7 to 12, $0.75 per GJ from August 24 to September 4, and $0.72 per GJ from September 22 to 30).  This was caused by constraints on the TransCanada and Spectra sales pipeline systems which reduced takeaway capacity from British Columbia and increased volumes being sold at BC Station 2.  During periods where the natural gas price at BC Station 2 results in an unacceptably low field netback, Storm has reduced production to equal the volume of natural gas that is hedged (incremental volumes above what is hedged receive the BC Station 2 daily spot price).     

Production in the fourth quarter of 2015 is forecast to be 10,000 to 12,000 Boe per day and will depend largely on constraints on the TransCanada pipeline system in Alberta and their impact on the daily spot natural gas price at BC Station 2.  Production to date in the fourth quarter has averaged 8,900 Boe per day based on field estimates with approximately 3,900 Boe per day shut in during October due to the BC Station 2 natural gas price averaging $0.97 per GJ as a result of continued constraints on the TransCanada sales pipeline system. 

Revised guidance for 2015 is provided below with the major revisions being reductions to forecast commodity prices and forecast production plus a reduction in capital investment due to lower service costs and the drilling of two horizontal wells being deferred to 2016. 

2015 Guidance

August 13, 2015

Guidance

November 11, 2015

Revised Guidance

AECO natural gas price

$2.68 per GJ

$2.60 per GJ

BC STN 2 natural gas price

$2.01 per GJ

$1.87 per GJ

Edmonton light oil price

Cdn$59 per Bbl

Cdn$58 per Bbl

Estimated average operating costs

$7.75 - $8.00 per Boe

$7.75 - $8.00 per Boe

Estimated average royalty rate

(on production revenue before hedging)

7% - 8%

6% - 7%

Estimated operations capital

(excluding acquisitions & dispositions)

$106.0 million

$92.0 million

Estimated land & property acquisitions/(dispositions)

($23.7 million) ($19.3 million)

Estimated cash G&A net of recoveries

$5.3 million

$5.3 million

Forecast fourth quarter production

14,000 – 15,000 Boe/d

(18% NGL)

10,000 – 12,000 Boe/d

(18% NGL)

Forecast annual production

11,000 – 12,000 Boe/d

(19% oil + NGL)

10,000 – 11,000 Boe/d

(19% oil + NGL)

Umbach horizontal wells drilled

Umbach horizontal wells completed

Umbach horizontal wells starting production

12 gross (12.0 net)

14 gross (14.0 net)

14 gross (14.0 net)

10 gross (10.0 net)

13 gross (13.0 net)

13 gross (13.0 net)

 

Capital investment in 2015 is focused entirely on the Umbach area with $50.0 million for drilling and completions plus $34.0 million to expand infrastructure (including $4.1 million to order long-lead-time equipment for the third compression facility).

 Guidance for 2016 has been finalized and is shown below.  

2016 Guidance

 

 

 November 11, 2015

AECO natural gas price

 

 

$2.50 per GJ

BC STN 2 natural gas price

 

 

$1.90 per GJ

Edmonton light oil price

 

 

Cdn$57.00 per Bbl

Estimated average operating costs

 

 

$7.00 - $7.50 per Boe

Estimated average royalty rate

(on production revenue before hedging)

 

 

7% - 8%

Estimated operations capital

(excluding acquisitions & dispositions)

 

 

$105.0 million

Estimated cash G&A net of recoveries

 

 

$5.0 million

 

 

 

 

Forecast fourth quarter production

 

 

20,000 – 21,000 Boe/d

(17% NGL)

Forecast annual production

 

 

16,000 – 18,000 Boe/d

(17% oil + NGL)

Umbach horizontal wells drilled

Umbach horizontal wells completed

Umbach horizontal wells starting production

 

 

14 gross (14.0 net)

14 gross (14.0 net)

16 gross (16.0 net)

 

Capital investment in 2016 will be directed entirely to Umbach and will include $63.0 million for drilling and completions plus $34.0 million for infrastructure (remaining $21.0 million for the third field compression facility).  With this level of investment, total debt at the end of 2016 is forecast to be $105.0 million which would be approximately 1.5 times annualized funds from operations in the fourth quarter of 2016.

 Note that capital investment in 2016 of $105.0 million per the above table is based on a daily spot natural gas price of $1.90 per GJ at BC Station 2.  Storm’s incremental growth volumes receive the BC Station 2 daily spot price and, should the price be materially below this level, capital investment in 2016 for infrastructure plus drilling and completions may be delayed which would reduce forecast production.  This is consistent with what has been done since the BC Station 2 price began weakening in July 2015 which resulted in production being shut in plus drilling and completions being deferred as capital investment is contingent on achieving a minimum netback or rate of return.  If necessary, Storm can reduce capital investment to $50.0 to $55.0 million which would result in forecast production being maintained at 14,000 to 15,000 Boe per day throughout 2016 (using the current forward strip, debt at the end of 2016 would be unchanged from the end of 2015).  Approximately 95% of this level of production would be covered by Storm’s pipeline commitments and marketing arrangements and would not be exposed to the BC Station 2 daily spot price. 

 Although constraints on the TransCanada sales pipeline system have continued into the fourth quarter, which has continued to depress the BC Station 2 natural gas price, the impact on Storm will be diminished going forward as a result of firm pipeline commitments and marketing agreements which cover 59 Mmcf per day sales in 2016 (67 Mmcf per day including interruptible service on the Alliance Pipeline) and increases to 88 Mmcf per day sales in 2018 (98 Mmcf per day including interruptible service on the Alliance Pipeline).  For comparison, in 2015, transportation commitments totaled 22 Mmcf per day sales.  Natural gas sales will also be more diversified as, using forecast natural gas production for 2016,  approximately 18% will be sold in Chicago at the daily spot or monthly index price (through the Alliance Pipeline), 33% sold in Chicago at the AECO monthly index price plus $0.67 USD per Mmbtu (through the Alliance Pipeline), 11% sold at BC Station 2 at the AECO monthly index less $0.34 per GJ, 10% sold at the McMahon Gas Plant at the AECO monthly index less $0.68 per GJ, and the remaining 28% will be sold at BC Station 2 at the daily spot price.  To ensure that the firm pipeline commitments and marketing arrangements can be met, there are also firm processing commitments which total 65 Mmcf per day raw gas in 2016. 

 Controllable cash costs (operating, G&A, and interest) have averaged $10.62 per Boe to date in 2015 which is a 7% improvement when compared to $11.43 per Boe in 2014.  Previously, Storm included transportation costs in controllable cash costs; however, this is being removed because recent marketing arrangements result in pipeline tariffs being deducted from the sales price which artificially reduces transportation costs.  Further improvement in controllable cash costs on a per-Boe basis is expected given that operating costs will decrease as a result of continued production growth, recent longer term processing commitments with lower associated fees, and recent investments in infrastructure at Umbach (conversion of a second well to salt water disposal and adding a fuel gas conditioning unit).

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