HIGHLIGHTS & OUTLOOK

 

HIGHLIGHTS – THIRD QUARTER 2014

  

  • Production was 7,160 Boe per day (22% oil plus NGL), an increase of 88% from the same period last year and 31% from the previous quarter. On a per-share basis, the year-over-year increase was 31% using common shares outstanding at the end of each period.  The increase was the result of growth at the Umbach property where third quarter production was 5,823 Boe per day which is 168% higher than a year ago and 46% higher than the previous quarter. 

 

  • NGL production was 1,154 barrels per day, a year-over-year increase of 554 Boe per day, or 92%. Increased NGL production was the result of production growth from the liquids-rich Montney formation at Umbach where recovery was 39 barrels per Mmcf sales in the third quarter.  With 62% of the NGL mix being condensate plus pentanes, the NGL price of $73.09 per barrel was 75% of the average Edmonton Par light oil price.

 

  • Activity was focused on Storm’s 100% working interest lands at Umbach South where three Montney horizontal wells (3.0 net) were drilled, three horizontal wells (2.6 net) were completed, and the new field compression facility was started up ahead of schedule on August 19th.

 

  • To date in 2014, seven horizontal wells (6.6 net) have started producing at Umbach which has resulted in corporate production increasing from 5,068 Boe per day in the first quarter to more than 10,500 Boe per day in October. The new facility at Umbach is full with throughput averaging 25 Mmcf per day since mid-September and there is an inventory of four completed horizontal wells (4.0 net) that will commence production as facility capacity becomes available plus five standing horizontal wells (5.0 net) that are awaiting completion.  

 

  • At Umbach, the five Montney horizontal wells that started production in 2014 with enough history have averaged 5.2 Mmcf per day gross raw gas (950 Boe per day sales) over the first 90 calendar days, a 50% improvement from the average 2013 horizontal well. Notably, over the first 180 calendar days, the first of the 2014 horizontal wells with enough history has averaged 4.9 Mmcf per day (900 Boe per day sales), a 70% improvement from the average 2013 horizontal well.  

 

  • The corporate field operating netback, excluding hedging gains or losses, was $20.59 per Boe, an increase of $0.20 per Boe from the previous year. The year-over-year improvement is mainly due to an 8% decrease in operating costs which were $9.53 per Boe.           

 

  • Funds from operations totaled $11.8 million or $0.11 per basic share, a year-over-year increase of 38% on a per-share basis. The funds from operations netback was $17.88 per Boe and was reduced by a hedging loss of $1.17 per Boe.  Controllable cash costs (operating, transportation, cash G&A, interest expense) were $12.76 per Boe, a year-over-year decrease of 11%, or $1.51 per Boe.      

 

  • Net income was $5.5 million or $0.05 per share, a significant improvement when compared to the loss of $0.02 per share in the previous year.

 

  • Capital investment was $30.4 million with major expenditures being $17.5 million for facilities and pipelines plus $11.5 million for drilling and completions.

 

  • Debt plus working capital deficiency, net of investments, totaled $56.1 million at the end of the quarter which is 1.2 times annualized third quarter cash flow. In November 2014, Storm’s banking syndicate increased the revolving bank facility to $130.0 million.

 

  HEDGING UPDATE

 Current commodity price hedges for the fourth quarter of 2014 include:

  • 12,100 Mcf per day (14,500 GJ per day) of natural gas with an average floor price of approximately $4.07 per Mcf and an average ceiling price of $4.28 per Mcf (AECO monthly index $3.39 per GJ for the floor and $3.57 per GJ for the ceiling);
  • 450 barrels per day of oil with an average floor price of WTI Cdn$102.43 per barrel and an average ceiling price of WTI Cdn$104.83 per barrel.

 

For January to September of 2015, commodity price hedges include:

  • 18,000 Mcf per day (21,700 GJ per day) of natural gas with an average floor price of approximately $4.18 per Mcf and an average ceiling price of $4.61 per Mcf (AECO monthly index $3.48 per GJ for floor and $3.84 per GJ for ceiling);
  • 533 barrels per day of oil with a price of WTI Cdn$98.43 per barrel.

 

The purpose of Storm’s commodity price hedges is to reduce the effect of commodity price fluctuations on capital investment and growth over the next 12 months.  A maximum of 50% of current production (most recent monthly or quarterly average), before royalties, will be hedged; production growth is not hedged.

OUTLOOK

Production in October was more than 10,500 Boe per day based on field estimates, and fourth quarter production is forecast to be approximately 10,500 Boe per day.  Corporate production is expected to increase to approximately 13,500 Boe per day in April 2015 after the new field compression facility at Umbach is expanded to 48 Mmcf per day.

 

Updated guidance for 2014 is provided below.  Forecast fourth quarter production is expected to be 10,500 Boe per day which is higher than previous guidance and represents year-over-year growth of 70% on a per-share basis.  Operations capital expenditures will increase by $8.0 million with $3.5 million to purchase equipment to expand the second field compression facility at Umbach and $4.5 million to drill an additional two horizontal wells in December 2014.  Total debt at the end of 2014 is forecast to be approximately $59.0 million which would be approximately 0.9 times annualized funds from operations in the fourth quarter of 2014 (assuming commodity prices in the fourth quarter of 2014 are AECO $3.50 per GJ and Edmonton Par Cdn$88.00 per barrel).

 

2014 Guidance

January 23, 2014

 Original Guidance

May 14, 2014

Revised Guidance

November 13, 2014 Revised Guidance

AECO natural gas price

$3.35 per GJ

$4.25 per GJ

$4.30 per GJ

Edmonton Par light oil price

Cdn$89 per Bbl

Cdn$94 per Bbl

Cdn$97 per Bbl

Estimated average operating costs

$8.00 - $9.00 per Boe

$8.00 - $9.00 per Boe

$9.00 - $9.50 per Boe

Estimated average royalty rate

(on production revenue before hedging)

14% - 15%

15% - 16%

15%

Estimated operations capital

(excluding acquisitions & dispositions)

$78.0 million

$97.0 million

$105.0 million

Estimated acquisitions

$88.0 million

$88.0 million

$88.0 million

Estimated cash G&A net of recoveries

$4.0 million

$4.0 million

$3.8 million

Forecast fourth quarter production

7,500 – 7,900 Boe/d

8,900 – 9,200 Boe/d

10,500 Boe/d

 

(20% oil + NGL)

(20% oil + NGL)

(20% oil + NGL)

Forecast annual production

5,500 – 6,500 Boe/d

6,000 – 6,700 Boe/d

 7,000 Boe/d

 

(21% oil + NGL)

(21% oil + NGL)

(21% oil + NGL)

Umbach horizontal wells drilled

10 gross (10.0 net)

14 gross (14.0 net)

16 gross (16.0 net)

Umbach horizontal wells completed & tied in

9 gross (9.0 net)

13 gross (12.6 net)

13 gross (12.6 net)

 

Guidance for 2015 includes operations capital expenditures of $110.0 million with forecast fourth quarter production averaging 14,000 to 14,500 Boe per day (year-over-year growth of 35% on a per-share basis).  Forecast annual production of 11,500 to 12,700 Boe per day assumes Umbach South is shut in for approximately 3 weeks during June 2015 for a scheduled maintenance turnaround at the McMahon Gas Plant (reduces production in the second quarter of 2015 to approximately 10,400 Boe per day).  At Umbach South, $41.0 million will be invested to further expand infrastructure including $2.5 million for pipelines, $9.5 million to expand the second field compression facility, $4.9 million for a condensate stabilizer plus other equipment at the second field compression facility, and $24.0 million to construct a third field compression facility.  Total debt is forecast to be $95.0 to $100.0 million at the end of 2015 which would be approximately 1.2 times annualized funds from operations in the fourth quarter of 2015 (assuming commodity prices in 2015 average AECO $3.25 per GJ and Edmonton Par Cdn$83.00 per barrel).

2015 Guidance

 

AECO natural gas price

$3.25 per GJ

Edmonton Par light oil price

Cdn$83 per Bbl

Estimated average operating costs

$7.50 - $8.00 per Boe

Estimated average royalty rate

(on production revenue before hedging)

12% - 14%

Estimated operations capital

(excluding acquisitions & dispositions)

$110.0 million

Estimated acquisitions

$0.0 million

Estimated cash G&A net of recoveries

$5.3 million

Forecast fourth quarter production

14,000 – 14,500 Boe/d

 

(18% oil + NGL)

Forecast annual production

11,500 – 12,700 Boe/d

 

(19% oil + NGL)

Umbach horizontal wells drilled

9 gross (9.0 net)

Umbach horizontal wells completed & tied in

14 gross (14.0 net)

 

At Umbach Storm has now drilled 29 horizontal wells (25.4 net) and 16.4 net horizontal wells are on production.  The existing field compression facilities are full and there are six completed Montney horizontal wells (6.0 net) which will begin producing as facility capacity becomes available.  In addition, three standing Montney horizontal wells (3.0 net) are awaiting completion.  With the productivity of horizontal wells continuing to improve, and with the existing facilities forecast to remain full throughout 2015 even after expanding the second facility, the decision was made to add a third, larger field compression facility with initial capacity of 35 Mmcf per day.  This results in field compression capacity increasing to 101 Mmcf per day at the end of 2015 and ensures that there will be enough capacity if horizontal well productivity continues to exceed the 5.0 Bcf raw gas type curve used for internal budgeting purposes.  The large increase in field compression capacity will also allow for additional Montney horizontal wells to be drilled and completed in 2015 if commodity prices and results are supportive of doing so.

Storm has accumulated a large, higher quality land position at Umbach and approximately one third (47.6 net sections) has been delineated by the 25.4 net horizontal wells that have been drilled to date in the Montney formation.  Assuming four horizontal wells per section, there is an inventory of 165.0 net horizontal wells that remain to be drilled.  The remaining two thirds of Storm’s lands (94.0 net sections) have not yet been tested with horizontal wells, but appear to be highly prospective given results from horizontal wells drilled by other operators on offsetting acreage.             

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