HIGHLIGHTS & OUTLOOK

 

HIGHLIGHTS – 2015 SECOND QUARTER

  • During the second quarter, horizontal well performance at Umbach continued to meet or exceed expectations and there remained an inventory of nine horizontal wells (9.0 net) that had not yet started producing at the end of the quarter.
  • Production averaged 9,657 Boe per day (20% oil plus NGL), a per-share increase of 69% from the previous year. Production was reduced by approximately 2,250 Boe per day by the planned maintenance turnaround of the McMahon Gas Plant which was shut in for 28 days in June.  Prior to the turnaround, production in April and May averaged 11,900 Boe per day.
  •  NGL production was 1,602 barrels per day, an increase of 110% from the previous year which was the result of production growth from the liquids-rich Montney formation at Umbach where NGL recovery was 37 barrels per Mmcf sales in the quarter. The NGL price was $41.23 per barrel which was 67% of the average Edmonton light oil price (approximately 61% of the NGL mix is higher value condensate and pentanes).
  • Activity in the quarter was focused at Umbach where two new horizontal wells came on production and a condensate stabilizer plus fuel gas conditioning skid was installed at the second field compression facility.
  • Funds from operations was $8.2 million, or $0.07 per basic share, a decrease of 26% from the prior year. The decline was entirely due to declining commodity prices. 
  • Funds from operations was $9.31 per Boe, a year-over-year decrease of 58% with revenue per Boe declining by 52%, or $22.59 per Boe, being partially offset by a cash hedging gain of $2.02 per Boe.
  • Controllable cash costs (operating, transportation, cash G&A and interest) were $12.10 per Boe which is a year-over-year decline of 12% or $1.63 per Boe and a decline of 9% from the previous quarter. 
  • Net loss was $4.2 million, or $0.04 per share, compared to net income of $6.6 million in the previous year. Loss on the sale of the non-core Grande Prairie properties was $1.6 million.  
  • Capital investment totaled $8.9 million with $8.3 million for facilities and pipelines at Umbach.
  • Debt plus working capital deficiency was reduced to $28.1 million which was 0.9 times annualized second quarter cash flow. Storm’s bank credit facility is currently $140.0 million.
  • During the quarter, longer term processing commitments were increased to 54 Mmcf per day raw gas and longer term transportation commitments were increased to 51 Mmcf per day sales which represents approximately 65% of forecast production in the fourth quarter of 2015. In the second quarter, processing and transportation commitments covered approximately 40% of production. 
  • A bought deal financing of common shares was completed on June 10 with 8.0 million common shares being issued at a price of $4.55 per common share. Aggregrate net proceeds of $34.2 million will ultimately be used to accelerate growth into 2016.
  • Subsequent to quarter end, the previously announced disposition of certain non-core properties in the Grande Prairie area of Alberta closed on July 15 with an effective date of July 1. Net proceeds of $23.7 million were used to reduce bank indebtedness.  Second quarter production from these properties was 600 Boe per day (58% oil plus NGL).

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 HEDGING UPDATE

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:

  

 

H2 2015

2016

Crude Oil

 

 

WTI Cdn $77.25/Bbl

500 Bopd

Natural Gas

AECO Cdn $3.36/GJ

($4.20/Mcf)

32,000 GJ/d

(25,600 Mcf/d)

AECO Cdn $3.00/GJ

($3.75/Mcf)

16,000 GJ/d

(13,000 Mcf/d)

 

Fixed AECO - Stn 2 differential at

-$0.3375/GJ on 11,000 GJ/d

 

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.

 OUTLOOK

In the second quarter, production averaged 9,657 Boe per day which was lower than the forecast of 10,000 to 10,500 Boe per day provided with the release of first quarter results on May 13, 2015.  Although production in April and May averaged 11,900 Boe per day, production in June was reduced by approximately 6,800 Boe per day due to the McMahon Gas Plant being shut in for 28 days in June for a planned maintenance turnaround.  This was longer than the original expectation of 21 days and resulted in second quarter production being lower than forecast.  

 Production in the third quarter of 2015 is forecast to be 10,000 to 11,000 Boe per day and will depend largely on the duration and magnitude of constraints on the TransCanada NGTL pipeline system in Alberta.  Production to date in the third quarter has averaged 9,000 Boe per day based on field estimates and has been impacted by unplanned restrictions on the Spectra Energy T-North Pipeline caused by restrictions on the TransCanada NGTL Pipeline system, unplanned outages and restrictions on the Alliance Pipeline and 5 days of unplanned downtime at the McMahon Gas Plant.  Capital investment in the third quarter is expected to total $30.0 million with the majority directed to completing seven horizontal wells (7.0 net). 

 With the proceeds of the equity issue that closed in June, capital investment for 2015 is being increased to $106.0 million which will result in six more horizontal wells (6.0 net) being drilled and three more horizontal wells (3.0 net) being completed.  None of these are scheduled to begin production until 2016.  As a result of horizontal well performance continuing to exceed expectations, forecast production for the fourth quarter is being increased to 14,000 to 15,000 Boe per day which is a 6% increase from previous guidance after deducting 600 Boe per day for non-core property dispositions.  This assumes that the restrictions on the TransCanada NGTL Pipeline system are largely eliminated by mid to late October.

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2015 Guidance

February 26, 2015

 Revised Guidance

August 13, 2015

Revised Guidance

AECO natural gas price

$2.35 - $2.90 per GJ

$2.68 per GJ

BC STN 2 natural gas price

$2.05 - $2.60 per GJ

$2.01 per GJ

Edmonton light oil price

Cdn$53 - $62 per Bbl

Cdn$59 per Bbl

Estimated average operating costs

$8.00 - $8.50 per Boe

$7.75 - $8.00 per Boe

Estimated average royalty rate

(on production revenue before hedging)

6% - 10%

7% - 8%

Estimated operations capital

(excluding acquisitions & dispositions)

$80.0 million

$106.0 million

Estimated land & property acquisitions/(dispositions)

 $0.0 million ($23.7 million)

Estimated cash G&A net of recoveries

$5.3 million

$5.3 million

Forecast fourth quarter production

14,000 – 14,500 Boe/d

(19% oil + NGL)

14,000 – 15,000 Boe/d

(18% NGL)

Forecast annual production

11,000 – 12,000 Boe/d

(20% oil + NGL)

11,000 – 12,000 Boe/d

(19% oil + NGL)

Umbach horizontal wells drilled

Umbach horizontal wells completed

Umbach horizontal wells starting production

6 gross (6.0 net)

11 gross (11.0 net)

14 gross (14.0 net)

12 gross (12.0 net)

14 gross (14.0 net)

14 gross (14.0 net)

 

Capital investment is focused entirely at Umbach in 2015 and will include:

  •  $67.0 million for drilling and completions;
  • $4.2 million for larger diameter gathering pipelines and the pipeline connection to the Stoddart Gas Plant;
  • $18.5 million to expand the second field compression facility from 27 to 64 Mmcf per day and install a condensate stabilizer and fuel gas conditioning unit;
  • $4.0 million to order the long-lead-time equipment for the third field compression facility. 

 

Total debt at the end of 2015 is forecast to be $67.0 million assuming average 2015 pricing of AECO $2.68 per GJ, BC Station 2 $2.01 per GJ and Edmonton light oil Cdn$59.00 per barrel which represents actual prices to date plus current forward strip pricing for the remainder of 2015.  This would be approximately 1.3 times annualized funds from operations in the fourth quarter of 2015.

 Preliminary guidance for 2016 is also being provided:  

 

2016 Guidance

 

 

August 13, 2015

Preliminary Guidance

AECO natural gas price

 

 

$2.80 per GJ

BC STN 2 natural gas price

 

 

$2.40 per GJ

Edmonton light oil price

 

 

Cdn$61.00 per Bbl

Estimated average operating costs

 

 

$7.00 - $7.50 per Boe

Estimated average royalty rate

(on production revenue before hedging)

 

 

8% - 10%

Estimated operations capital

(excluding acquisitions & dispositions)

 

 

$106.0 million

Estimated cash G&A net of recoveries

 

 

$5.6 million

 

 

 

 

Forecast fourth quarter production

 

 

20,000 – 21,000 Boe/d

(17% NGL)

Forecast annual production

 

 

16,000 – 19,000 Boe/d

(17% oil + NGL)

Umbach horizontal wells drilled

Umbach horizontal wells completed

Umbach horizontal wells starting production

 

 

12 gross (12.0 net)

15 gross (15.0 net)

17 gross (17.0 net)

 

Capital investment in 2016 will also be directed entirely to Umbach and will include:

  •  $64.0 million for drilling and completions;
  • $24.0 million to construct a third facility which will include a condensate stabilizer for planned start-up in early May 2016.

 

The corporate operating cost in 2015 is expected to decline below $7.25 per Boe in the fourth quarter from $8.56 per Boe in the second quarter.  This is the result of selling higher cost properties in the Grande Prairie area as well as a reduction in operating costs at Umbach which are expected to decline to $6.75 per Boe in the fourth quarter due to continued production growth, recent longer term processing commitments which have a lower associated fee, and infrastructure projects including conversion of wells to salt water disposal and adding a fuel gas conditioning unit.

 Proceeds from the equity issue that closed in June are being used to increase capital investment in 2015 which will accelerate production growth in 2016.  This decision is supported by forward strip pricing for 2016 (approximately AECO $2.80 per GJ) which results in a half cycle rate of return of 27% for horizontal wells drilled at Umbach.  Accelerating growth is also supported by the multi-year inventory of 170 horizontals that remain to be drilled in the upper Montney on the one-third of Storm’s lands which have been delineated to date.  In addition, in the current business environment, the cost to drill and complete horizontal wells is expected to be lower while further expanding the infrastructure at Umbach in 2016 will increase Storm’s ‘head start’ on competitors in the area.

 With a strong balance sheet, an evolving longer term infrastructure plan at Umbach, and with the Montney at Umbach providing Storm with a competitive advantage (increased revenue from NGL recovery plus a lower drilling and completion cost from the shallower depth), Storm remains well positioned for continued rapid growth into 2016 and beyond. 

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