HIGHLIGHTS & OUTLOOK
2020 First Quarter Highlights
Funds flow was largely unchanged from the first quarter of last year with higher production and lower production costs offset by lower NGL and natural gas prices.
- Production was 23,946 Boe per day, an increase of 7% from the previous quarter and an increase of 21% year over year. This was consistent with guidance (24,000 to 25,000 Boe per day) with the increase resulting from the start-up of the Nig Gas Plant plus a full quarter of production from a four-well pad at Nig.
- Liquids production (field condensate plus gas plant NGL) totaled 4,621 barrels per day, an increase of 8% from the previous quarter and an increase of 24% year over year.
- Production from the most recent four wells in the Nig area continue to meet expectations since start-up in November 2019 with the IP150 averaging approximately 1,500 Boe per day sales (8% field condensate) for the three upper/mid Montney wells and approximately 1,000 Boe per day sales (30% field condensate) for the lower Montney well.
- Revenue net of transportation was $14.27 per Boe, a decline of $11.27 per Boe, or 44% from last year, mainly due to lower NGL and natural gas prices. The NGL price declined 90% as a result of lower propane prices and from larger pricing deductions during the current marketing year ending March 2020. The natural gas price declined 43% as a result of lower pricing in the Chicago and Sumas markets (60% of sales).
- Liquids represented 19% of sales volumes and 36% of production revenue (versus 19% and 30% respectively in the prior year period).
- Production, general and administrative, and interest and finance costs were $6.77 per Boe, a year-over-year decline of $1.53 per Boe. Production cost decreased $0.92 per Boe with start-up of the Nig Gas Plant and the previous year was higher due to an unplanned outage at the McMahon Gas Plant.
- Hedging provided a realized gain of $2.7 million versus a realized loss of $9.6 million in the prior year. The gain was from contracts for Chicago natural gas and WTI oil while the prior year loss was mainly from contracts for Sumas natural gas that were entered into before a failure on the Enbridge T-south pipeline in October 2018.
- Funds flow was $16.9 million or $0.14 per share which was largely unchanged from last year with higher production and lower costs offsetting lower commodity prices.
- Net income was $10.5 million compared to $0.6 million in the prior year with the improvement primarily from a non-cash hedging gain of $10.5 million on the mark-to-market value of future hedging contracts which was partially offset by the deferred income tax expense of $3.9 million.
- Capital investment was $26.5 million (below guidance of $30 million) and included $11 million for the Nig Gas Plant project plus $9 million to complete and tie in a three-well pad at Umbach.
- Total debt including working capital deficiency was $139 million or 2.1 times annualized quarterly funds flow and, including letters of credit, represents 73% utilization of the $205 million bank line.
- Commodity price hedges have increased and during the remainder of 2020 protect approximately 42% of forecast production using the mid-point of guidance. Hedges provide floor prices of approximately Cdn$2.90 per Mcf (15% higher than the first quarter average price) and WTI Cdn$64.00 per barrel in 2020 with approximately half of the hedges being collars which provide exposure to higher prices.
Production in the second quarter of 2020 is forecast to average 23,000 to 25,000 Boe per day with capital investment expected to be less than $3 million. Production in April was approximately 24,500 Boe per day based on field estimates and is expected to be lower in May and June as liquids production is being reduced as much as possible to avoid sales at very low prices after deducting transportation costs and price differentials (WTI has averaged approximately US$23.00 per barrel to date in May with the Edmonton condensate differential at -US$16.55 per barrel). Liquids production is being reduced by shutting in the lower Montney well at Nig (850 Boe per day sales, 37% liquids) and restricting wells with the highest condensate-gas ratios.
Updated guidance for 2020 is provided below. Forecast production includes the effect of a planned 25-day maintenance outage at the McMahon Gas Plant in September 2020 and from NGL recovery being reduced after ‘warming up’ the Nig Gas Plant. The ceiling for forecast fourth quarter production was reduced to 28,000 Boe per day from 30,000 Boe per day as a result of the deferral of activity at Fireweed. Capital investment is intended to be approximately equal to or less than forecast funds flow and is being reduced approximately $25 million by deferring activity at Fireweed for up to one year (first production in the second half of 2021 or in early 2022). Forecast pricing provided below reflects actual prices to date plus the approximate forward strip for the remainder of the year.
|February 27, 2020||Current
May 12, 2020
|Cdn$/US$ exchange rate||0.76||0.72|
|Chicago daily natural gas – US$/Mmbtu||$1.90||$2.05|
|Sumas monthly natural gas – US$/Mmbtu||$1.90||$2.20|
|AECO daily natural gas – Cdn$/GJ||$1.75||$2.20|
|Station 2 daily natural gas – Cdn$/GJ||$1.65||$2.15|
|WTI – US$/Bbl||$50.50||$30.50|
|Edmonton condensate diff – US$/Bbl||($4.00)||($4.50)|
|Est revenue net of transport (excl hedges) – $/Boe||$13.50 – $13.75||$12.00 – $13.00|
|Est production costs – $/Boe||$4.50 – $4.75||$4.50 – $4.75|
|Est royalty rate (% revenue net transportation)||5% – 7%||5% – 6%|
|Est mid-point field operating netback – $/Boe||$8.20||$7.20|
|Est realized hedging gains or (losses) – $ million||$5.0 – $6.0||$11.0 – $12.0|
|Est cash G&A – $ million||$6.0 – $7.0||$6.0 – $7.0|
|Est interest expense – $ million||$7.0 – $8.0||$7.0 – $8.0|
|Est capital investment (excluding A&D) – $ million||$75.0 – $85.0
(Nig GP $14.0 million)
|$52.0 – $60.0
(Nig GP $12.0 million)
|Forecast fourth quarter Boe/d
Forecast fourth quarter liquids Bbls/d
|25,000 – 30,000
5,300 – 6,300
|25,000 – 28,000
5,100 – 5,600
|Forecast annual Boe/d
Forecast annual liquids Bbls/d
|23,500 – 26,000
4,900 – 5,500
|23,500 – 26,000
4,500 – 5,000
|Est annual funds flow – $ million||$62.0 – $69.0 (1)||$59.0 – $66.0 (1)|
|Horizontal wells drilled – gross
Horizontal wells completed – gross
Horizontal wells starting production – gross
|6 – 10 (4.0 – 8.5 net)
8 – 10 (6.5 – 8.5 net)
5 – 10 (5.0 – 8.5 net)
|6 – 9 (5.0 – 8.0 net)
8 (7.5 net)
7 (7.0 net)
(1) 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 12, 2019||$2.45||$1.60||$54.00||$75.0 – $90.0||not provided||24,000 – 26,000|
|Feb 27, 2020||$1.90||$1.65||$50.50||$75.0 – $85.0||$62.0 – $69.0||23,500 – 26,000|
|May 12, 2020||$2.05||$2.15||$30.50||$52.0 – $60.0||$59.0 – $66.0||23,500 – 26,000|
Capital investment in 2020 will be allocated as follows:
- $6 million at Fireweed in the first quarter to drill two horizontal wells (1.0 net) and complete one well (0.5 net);
- $36 million at Nig includes $12 million to complete the gas plant (100% working interest), drill four horizontal wells (4.0 net) and complete and pipeline connect four wells (4.0 net); and
- $10 – $18 million at Umbach to complete and pipeline connect three horizontal wells (3.0 net) plus drill three horizontal wells (3.0) which are contingent on commodity prices and forecast funds flow.
Firm pipeline capacity and marketing arrangements will result in approximately 60% of forecast natural gas production in 2020 being sold into US markets and the remaining 40% in Western Canadian markets (52% directed to Chicago, 18% to BC Station 2, 17% to AECO, 8% to Sumas and 5% to Alliance ATP).
The recent, rapid decline in oil prices has materially reduced NGL and condensate prices. Based on the current forward strip, Storm’s revenue from condensate plus NGL is forecast to decline to approximately 15% of total revenue during the remainder of 2020 versus 36% in the first quarter. In response, liquids production has been reduced as much as possible while maximizing natural gas sales which includes reducing NGL recovery, storing condensate and reducing production from wells with higher condensate-gas ratios. Hedges will also mitigate the effect of low liquids prices during the remainder of 2020 with a floor of approximately WTI Cdn$64.00 per barrel on 1,450 barrels per day while the Edmonton condensate differential to WTI was fixed at -Cdn$7.24 per barrel on 730 barrels per day.
Partially offsetting the effect of lower oil prices is stronger natural gas prices which have strengthened significantly over the last two months in anticipation of declining associated gas production from US oil producers and from liquids-rich natural gas producers in Canada where growth has been largely subsidized by revenue from liquids production. With the improvement in natural gas prices the hedge position was expanded and currently protects pricing during the remainder of 2020 on approximately 42% of forecast annual production versus 16% at the last update on February 27.
Previously, the emphasis was on growing liquids production to increase revenue and that was largely going to come from growth at Fireweed where condensate makes up a larger proportion of the sales volume than at Nig and Umbach. With the decline in the WTI oil price reducing expected rates of return and forecast funds flow for 2020, activity at Fireweed will be deferred by up to one year with an option to accelerate depending on commodity prices. Partially offsetting this, the improvement in the Station 2 natural gas price has improved rates of return at Umbach and three horizontal wells are being planned for drilling in the second half of 2020 depending on commodity prices and forecast funds flow (completions in early 2021).
Regarding the COVID-19 pandemic, the impacts to date for Storm have been relatively minor. The health and safety of everyone working at Storm has always been and will continue to be a priority and since March 13, the majority of office employees transitioned to working remotely while field employees have adjusted procedures and travel arrangements to minimize contact with others. The efforts of everyone at Storm in managing the challenges caused by the pandemic are greatly appreciated.
The objective remains to increase asset value per share by converting resource into per-share growth of funds flow and reserves value. Commodity price volatility continues to be one of the biggest risks to manage with the recent reversal of oil and natural gas prices requiring that the near-term growth plan be changed to adapt to the ‘new normal’. Shifting the operational focus away from growing liquids revenue will take some time to execute and will be challenging given that liquids revenue was a big contributor to funding Storm’s growth over the last several years (and other producers to an even greater extent). However, Storm’s main competitive advantage has not changed and remains a large, high quality land position in the Montney fairway where significant longer-term upside remains given PDP reserves are recognized only in the upper Montney on approximately 8% of the total land position.