HIGHLIGHTS & OUTLOOK
2019 Third Quarter Highlights
Production and funds flow were reduced by a 14-day outage at the McMahon Gas Plant and from shutting in wells during several periods of very low natural gas prices at AECO and BC Station 2. Construction of the 50 Mmcf per day Nig Gas Plant is ongoing with major equipment deliveries to the site beginning in September while start-up is planned for January 2020. A four-well pad in the Nig area was completed in June and July; however, the pipeline tie-in was not finished until mid-November as a result of delays due to rain and wet field conditions.
- Production was 9% lower year over year and was within the guidance range for the quarter of 18,000 to 20,000 Boe per day. Production was reduced by approximately 2,400 Boe per day due to an unplanned third-party outage at the McMahon Gas Plant (loss of 16,000 Boe per day for 14 days) and by approximately 800 Boe per day due to low natural gas prices at AECO and Station 2 (shut in 5,000 Boe per day for a total of 15 days).
- Liquids production (field condensate plus gas plant NGL) represented 18% of total production and 36% of production revenue.
- Three new horizontal wells have started producing in 2019 which has offset corporate declines. A four-well pad at Nig (includes one well in the lower Montney) will start production in mid-November which is expected to increase fourth quarter production to 22,000 to 24,000 Boe per day (the first three wells at Nig had average first year calendar day rates of 1,400 Boe per day sales).
- Revenue per Boe declined by 33% year over year. The NGL price declined 94% primarily as a result of lower contracted butane and propane prices during the current marketing period which runs from April 2019 to March 2020. The realized natural gas price declined by 25%, however, was still approximately 270% higher than the Station 2 price as a result of diversified sales.
- Controllable cash costs including transportation, production, general and administrative, and interest were $13.19 per Boe which is an increase from $12.67 per Boe in the prior year. Higher production cost was due to the effect of lower production levels on fixed costs while higher interest and finance costs were the result of debt increasing during the construction of the Nig Gas Plant.
- Funds flow was $12.0 million, or $0.10 per share, a decrease of 46% on a per-share basis year over year with the decrease largely the result of lower commodity prices and production being reduced by the McMahon Gas Plant outage.
- Net income was nil compared to $7.2 million in the prior year and is primarily attributable to lower commodity prices reducing the funds flow netback to $7.00 per Boe from $11.81 per Boe last year.
- Capital investment was $32.8 million which included $26.7 million for the Nig Gas Plant project (includes $4.3 million to drill and complete a horizontal well for acid gas disposal) plus $6.1 million to finish completing and pipeline connect a four-well pad at Nig.
- Year-to-date capital investment is $72.9 million with 60% invested in future growth opportunities (Nig Gas Plant project $42.1 million plus Fireweed $1.4 million).
- Total debt which includes the working capital deficiency was $123 million, represents approximately 60% utilization of the $205 million bank line, and is an increase from $91.0 million at the start of the year due to the large proportion of 2019 capital investment being directed to the Nig Gas Plant project. Total debt was 2.6 times annualized quarterly funds flow and is expected to decline below 2.0 times following completion of the Nig Gas Plant which increases funds flow by reducing per-Boe operating costs and improving liquids recovery.
Production in the fourth quarter of 2019 is forecast to average 22,000 to 24,000 Boe per day with capital investment estimated to be $32 to $37 million (approximately 73% allocated to the Nig Gas Plant project). Production is below previous guidance mainly because of shut-ins during October due to the low natural gas price at Station 2 ($0.36 per GJ).
Updated guidance for 2019 is provided below. Changes include reducing forecast fourth quarter production due to low natural gas prices at Station 2 and updating forecast pricing to reflect actual prices to date plus the approximate forward strip for the remainder of the year. Approximately 70% of estimated capital investment is funding future growth (Nig Gas Plant project $70 million plus Fireweed $5 million).
August 13, 2019
November 12, 2019
|Cdn$/US$ exchange rate||0.755||0.755|
|Chicago daily natural gas – US$/Mmbtu||$2.45||$2.45|
|Sumas monthly natural gas – US$/Mmbtu||$3.40||$3.50|
|AECO daily natural gas – Cdn$/GJ||$1.55||$1.65|
|Station 2 daily natural gas – Cdn$/GJ||$1.00||$0.90|
|WTI – US$/Bbl||$55.00||$56.00|
|Edmonton condensate diff – US$/Bbl||-$5.10||-$4.20|
|Est revenue net of transport (excl hedges) – $/Boe||$16.50 – $17.00||$17.25 – $17.75|
|Est operating costs – $/Boe||$5.75 – $6.00||$5.75 – $6.00|
|Est royalty rate (% revenue net transportation)||5% – 7%||5% – 6%|
|Est mid-point field operating netback – $/Boe||$9.87||$10.65|
|Est hedging loss – $ million||$4.0 – $5.0||$6.5 – $7.5|
|Est cash G&A – $ million||$6.0 – $6.5||$6.5 – $7.0|
|Est interest expense – $ million||$5.5 – $6.5||$5.0 – $5.5|
|Est capital investment (excl A&D) – $ million||$110.0||$105.0 – $110.0|
|Forecast fourth quarter production – Boe/d
|23,000 – 25,000
|22,000 – 24,000
|Forecast annual production – Boe/d
|20,000 – 22,000
|20,000 – 22,000
|Est annual funds flow – $ million||$55.0 – $61.0(1)||$58.7 – $64.5(1)|
|Horizontal wells drilled – gross
Horizontal wells completed – gross
Horizontal wells starting production – gross
|9 (7.5 net)
8 (6.5 net)
7 (7.0 net)
|6 (6.0 net)
5 (5.0 net)
7 (7.0 net)
- Based on the range for forecast annual production and using the mid-point for each of the estimated field operating netback, estimated cash G&A, estimated hedging gain or loss and estimated interest expense.
|Nov 13, 2018||$2.50||$1.25||$60.00||$128.0||$72.0 – $88.0||21,000 – 24,000|
|Feb 28, 2019||$2.60||$1.25||$55.00||$128.0||$67.0 – $79.0||21,000 – 24,000|
|May 14, 2019||$2.65||$1.20||$55.00||$128.0||$65.0 – $77.0||21,000 – 24,000|
|Aug 13, 2019||$2.45||$1.00||$55.00||$110.0||$55.0 – $61.0||20,000 – 22,000|
|Nov 12, 2019||$2.45||$0.90||$56.00||$105.0 – $110.0||$58.7 – $64.5||20,000 – 22,000|
Natural gas prices have steadily declined since last winter primarily because of supply growth exceeding demand growth in both the US and Western Canada with price volatility amplified at AECO and Station 2 as a result of recurring pipeline restrictions and outages (several days of negative pricing). There are indications that supply growth in the US is slowing while Western Canadian production has been declining since mid-summer which has recently improved the AECO price and narrowed the NYMEX-AECO price differential. Future pricing for 2020 is approximately $1.85 per GJ at AECO and $1.60 per GJ at Station 2 which is materially higher than pricing to date in 2019 ($1.44 per GJ at AECO and $0.81 per GJ at Station 2). Station 2 pricing could continue to improve now that repairs on the T-south pipeline to Sumas have been completed (the failure in October 2018 reduced throughput by 15% to as much as 45%) and with expected start-up of the NGTL North Montney extension into northeast British Columbia in early 2020 (delayed from initial start-up date in mid-September 2019). Although only 18% of year-to-date natural gas sales has been at Station 2, most of Storm’s incremental production growth will be directed to Station 2.
Capital investment in 2020 is expected to be $75 to $90 million (previous estimate was $80 million) which will be approximately equal to estimated funds flow at current strip pricing (WTI US$54/Bbl, Chicago US$2.45/Mmbtu, AECO $1.85/GJ, Station 2 $1.60/GJ, Edmonton condensate WTI –US$5/Bbl, Cdn$0.76 per US$1). Investment in 2020 includes:
- $35 to $50 million at Fireweed which includes constructing a 50 Mmcf per day field compression facility that is expandable to 100 Mmcf per day (50% working interest), drilling four to eight horizontal wells (2.0 to 4.0 net), and completing three to seven wells (1.5 to 3.5 net);
- $28 to $40 million at Nig and Umbach which includes drilling four horizontal wells (4.0 net) and completing three to seven horizontal wells (3.0 to 7.0 net).
Capital investment in both 2019 and 2020 has been reduced from earlier estimates as a result of 2019 funds flow being lower than initial expectations due to the unplanned outages at the McMahon Gas Plant and lower commodity prices. This delays growth from Fireweed with first production now expected in late 2020 or early 2021 (previously expected to be in the second half of 2020). Adjusting capital investment is the main way to maintain a strong balance sheet (an important part of Storm’s business strategy) given that commodity prices and funds flow are less controllable.
Total debt exiting 2019 is forecast to be below 2.0 times annualized fourth quarter funds flow and is expected to decline further after start-up of the Nig Gas Plant which adds $15 to $20 million to 2020 funds flow depending on liquids pricing.
Corporate production is forecast to average 22,000 to 24,000 Boe per day in the fourth quarter of 2019 (4,000 to 4,300 barrels per day of liquids) and is forecast to increase to 27,000 to 30,000 Boe per day in the fourth quarter of 2020 (5,700 to 6,300 barrels per day of liquids). Average annual production in 2020 is forecast to be 24,000 to 26,000 Boe per day which represents an increase of approximately 25% from 2019 with liquids production increasing by approximately 45%. This includes the impact of a planned 25-day maintenance outage at the McMahon Gas Plant in September 2020 (financial effect will be largely mitigated by the Nig Gas Plant) and assumes first production from Fireweed in late 2020 or early 2021 depending on the timing to construct infrastructure.
The near-term plan remains focused on growing funds flow which will come from start-up of the Nig Gas Plant in early 2020 (reduces per-Boe operating costs and increases liquids production) and from first production at Fireweed in late 2020 or early 2021 (increases condensate production). Although planned growth has been delayed as a result of reducing 2019 and 2020 capital investment, this was necessary to maintain a strong balance sheet in response to 2019 funds flow being reduced by unplanned outages at the McMahon Gas Plant and by lower commodity prices. The start-up of Storm’s Nig Gas Plant (100% working interest) diversifies processing and will reduce the effect of any future outages at third-party gas processing plants.