HIGHLIGHTS & OUTLOOK
2018 Second Quarter Highlights
- Production increased by 40% on a per-share basis from the prior year to 19,529 Boe per day which was consistent with guidance (19,500 to 20,500 Boe per day). Production in the quarter was reduced by approximately 800 Boe per day as a result of a gas plant maintenance turnaround in June. Note that production in the prior year quarter was reduced by approximately 4,000 Boe per day for a maintenance turnaround at the McMahon Gas Plant.
- Liquids production (condensate plus NGL) grew by 33% year over year with liquids representing 18% of total production and 43% of production revenue.
- Over the last 12 months, Storm has increased production by 40% on a per-share basis with total capital expenditures being less than funds flow (debt has been reduced by $5.5 million).
- At the end of the quarter, there was an inventory of seven Montney horizontal wells (7.0 net) at Umbach that had not started producing. Three horizontal wells (3.0 net) started production in the quarter, all on the same pad at the Nig land block.
- Horizontal well performance at Umbach continues to improve as length is increased. Wells completed in 2017 are expected to have first year average rates 30% higher than wells completed in 2014 to 2016. The first well completed in 2018 (at the Nig land block) has averaged 7.1 Mmcf per day raw plus 230 barrels per day of field condensate over the first 90 calendar days which is approximately 1,400 Boe per day sales with 26% liquids (field condensate plus plant NGL).
- Revenue net of transportation costs was $20.82 per Boe which is an increase of 2% from last year as higher liquids pricing more than offset a 16% decrease in the natural gas price.
- The field operating netback was $14.25 per Boe, an improvement of 17% compared to last year. The improvement was mainly from production costs declining by 19% to $5.46 per Boe as a result of continuing production growth in addition to the prior year quarter being impacted by the maintenance turnaround at the McMahon Gas Plant.
- Funds flow increased to $23.4 million ($13.16 per Boe) or $0.19 per share, a year-over-year increase of 90% on a per-share basis. The improvement was largely from higher production volumes (prior year was reduced by the McMahon Gas Plant maintenance turnaround) and lower production costs on a per-Boe basis. Compared to the previous quarter, funds flow per share was unchanged with an 18% decrease in the natural gas price being offset by higher liquids pricing, lower G&A costs and a small hedging gain.
- Capital investment was $2.9 million which was significantly less than funds flow of $23.4 million and was less than guidance of $6.0 million as horizontal well completions were deferred due to stronger than forecast well performance.
- The balance sheet remains strong with debt including the working capital deficiency being $85.1 million which is a quarter-over–quarter reduction of approximately $21 million and represents 0.9 times annualized quarterly funds flow.
- Commodity price hedges continue to be added and currently protect approximately 48% of forecast production for the remainder of 2018.
For the third quarter of 2018, production is forecast to be 19,500 to 20,500 Boe per day with production to date in the third quarter averaging 20,200 Boe per day based on field estimates. Capital investment is expected to be $25 million which includes $10 million for the sour gas plant at Nig (further details provided below).
Storm has finalized a growth plan which will result in the construction of a 50 Mmcf per day sour gas plant to develop the Nig land block and the construction of a 50 Mmcf per day field compression facility to develop the Fireweed land block. This is expected to result in corporate production growing to more than 30,000 Boe per day in the second half of 2020 while increasing liquids production and lowering operating costs. In addition, installation of additional compression at Umbach in the third quarter of 2018 provides the option to further accelerate growth by completing additional standing wells if supported by commodity prices. Further details are provided below:
- On the Nig land block, a 50 Mmcf per day sour gas plant will be built with start-up expected to be between October 2019 and March 2020 depending on the timing for regulatory approvals and for field construction. The gas plant will be filled with the three existing producing wells (3.0 net) at Nig plus an additional six horizontal wells (6.0 net) will be drilled at Nig this winter and completed in 2019. The gas plant is expected to reduce corporate operating costs by approximately $1.50 per Boe (plant operating cost $2.00 per Boe) and increase liquids production by approximately 1,100 barrels per day (90% NGL, 10% plant condensate). Total cost is estimated to be approximately $81 million which includes the facility, a horizontal acid gas disposal well and a sales gas pipeline. Corporate production is forecast to increase from current levels to approximately 25,000 to 26,000 Boe per day with 20% liquids when the gas plant is completed and with the additional wells being drilled and completed at Nig.
- In the Fireweed area, Storm has agreed to pool and jointly develop existing undeveloped lands with offsetting lands owned by a private company (no change to Storm’s net land position). Storm is contributing 26 net sections to the pooling and will be the operator with a 50% working interest. Preliminary planning is underway to construct a 50 Mmcf per day field compression facility with start-up expected in mid-2020 depending on timing for regulatory approvals and for field construction. Preliminary planning also includes drilling and completing twelve horizontal wells in 2019 and 2020. Based on offsetting well results, condensate production at Fireweed is expected to be higher than Umbach by approximately 25 barrels per Mmcf. When the facility is completed, net forecast production additions are expected to be 4,000 to 5,000 Boe per day with 25% liquids.
- At Umbach, additional compression (35 Mmcf per day) will be installed in the third quarter of 2018 at a cost of approximately $2 million which will allow for the completion of standing horizontal wells to accelerate production growth if supported by the Station 2 price (greater than $1.50 to $1.75 per GJ). The additional compression will increase sales capacity by approximately 7,000 Boe per day.
The reduction in operating costs associated with the sour gas plant at Nig is expected to mitigate the impact of commodity price volatility and low Western Canadian natural gas prices.
Incremental natural gas produced from Nig and Fireweed will be sold at Station 2. Full cycle rates of return from both projects are expected to be very attractive at Station 2 $1.25 per GJ, WTI US$60 per barrel, and Edmonton light oil Cdn$68 per barrel (Cdn$1 = US$0.78, differential –US$7 per barrel).
Updated guidance for 2018 is provided below with capital investment increased to $80 million (from $55 to $65 million) with approximately $14 million of the increase being directed to the sour gas plant at Nig (primarily deposits for equipment) and the remainder to accelerate drilling. Forecast commodity prices have been updated to reflect pricing to date and the approximate forward strip for the remainder of the year. Estimated funds flow has increased by approximately $10 million as a result of commodity prices to date being higher than initially forecast.
May 15, 2018
August 14, 2018
|Cdn$/US$ exchange rate||0.79||0.78|
|Chicago daily natural gas – US$/Mmbtu||$2.60||$2.70|
|Sumas monthly natural gas – US$/Mmbtu||$1.95||$2.05|
|AECO daily natural gas – Cdn$/GJ||$1.35||$1.45|
|Station 2 daily natural gas – Cdn$/GJ||$1.20||$1.35|
|WTI – US$/Bbl||$64.00||$66.00|
|Edmonton light oil – Cdn$/Bbl||$73.00||$76.00|
|Est revenue net of transport (excl hedges) – $/Boe||$19.00 – $19.50||$20.50 – $21.50|
|Est operating costs – $/Boe||$5.75||$5.75|
|Est royalty rate (% revenue before hedging)||6% – 8%||5% – 7%|
|Est capital investment (excl A&D) – $ million||$55.0 – $65.0||$80.0|
|Est cash G&A – $ million||$6.0 – $7.0||$6.0 – $7.0|
|– $/Boe||$0.78 – $0.95||$0.78 – $0.95|
|Est interest expense – $ million||$4.0||$4.0|
|Forecast fourth quarter production – Boe/d
|20,000 – 21,000
|20,000 – 21,000
|Forecast annual production – Boe/d
|20,000 – 21,000
|20,000 – 20,500
|Est annual funds flow at 20,000 Boe/d – $ million||$76.0 – $80.0||$85.0 – $90.0|
|Umbach horizontal wells drilled – gross
Umbach horizontal wells completed – gross
Umbach horizontal wells connected – gross
|3 – 6 (3.0 – 6.0 net)
8 – 11 (8.0 – 11.0 net)
10 (10.0 net)
|5 (5.0 net)
10 (10.0 net)
8 (8.0 net)
|Nov 14, 2017||$2.80||$1.30 – $1.70||$1.80 – $2.10||$55.0 – $90.0||20,000 – 27,000||20,000 – 23,000|
|Mar 1, 2018||$2.60||$1.05||$1.40||$55.0 – $90.0||20,000 – 27,000||20,000 – 23,000|
|May 15, 2018||$2.60||$1.20||$1.35||$55.0 – $65.0||20,000 – 21,000||20,000 – 21,000|
|Aug 14, 2018||$2.70||$1.35||$1.45||$80.0||20,000 – 21,000||20,000 – 20,500|
Preliminary guidance for 2019 includes capital investment of $125 million which includes approximately $67 million for the sour gas plant at Nig and $15 million at Fireweed. It is anticipated that a total of 10 horizontal wells will be drilled (8.5 net), 11 horizontal wells will be completed (9.0 net) and 10 horizontal wells (10.0 net) would start production. This is expected to result in production averaging 21,000 to 23,000 Boe per day.
Capital investment required to maintain production at approximately 20,000 Boe per day is estimated to be $60 million in 2018 (versus forecast funds flow of $85 – $90 million) and $20 million in 2019. This is likely to decrease given improved performance from the horizontal wells at the Nig land block.
Growth will be funded with debt plus free funds flow. The significant improvement in performance of the 2017 and 2018 horizontal wells has resulted in forecast funds flow exceeding capital investment required to maintain production and the resulting free funds flow is expected to provide most of the funding for the sour gas plant at Nig. Using current forward strip pricing results in forecast total debt peaking at approximately 80% of the current bank credit facility in the quarter before the start-up of the sour gas plant at Nig. If necessary, capital investment and production growth will be reduced to ensure debt does not exceed this level.
Storm’s ongoing hedging program, diversified natural gas sales and liquids production mitigate commodity price volatility. Although natural gas prices declined from the first quarter to the second quarter of 2018, funds flow was unchanged as the price decrease was offset by gains on natural gas hedging and higher liquids prices. In addition, Storm’s diversified natural gas sales resulted in only 13% being sold in the second quarter at Western Canadian pricing which showed the most weakness quarter over quarter with AECO declining 43% to average $1.12 per GJ and Station 2 declining 42% to average $1.05 per GJ. Since last fall, AECO and Station 2 prices have been weak relative to US prices as supply growth in Alberta and British Columbia has exceeded contracted takeaway capacity on the TCPL/NGTL system. The majority of Storm natural gas sales (69%) were at Chicago where the price declined by 8% quarter over quarter to average US$2.66 per Mmbtu.
With a large, multi-year drilling inventory in the Montney in an area that is liquids-rich and higher quality, Storm’s business plan continues to be focused on adding value by converting resource into debt adjusted funds flow growth on a per-share basis.