Storm Exploration Inc. (TSX:SEO)
Highlights -
Thousands of $CDN Three Three Six Six
except volumetric Months to Months to Months to Months to
and per share June 30, June 30, June 30, June 30,
amounts 2008 2007 2008 2007
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Financial
Gas sales 29,547 (1) 20,381 55,788 (1) 43,821 (1)
NGL sales 3,239 1,236 5,628 2,341
Oil sales 5,906 3,365 11,051 6,592
Royalty Income 196 174 395 411
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Production Revenue 38,888 25,156 72,862 53,165
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Funds from
operations 23,250 12,921 42,768 29,338
Per share - basic 0.52 0.30 0.96 0.68
Per share - diluted 0.50 0.29 0.93 0.67
Net income 9,465 2,832 15,889 7,898
Per share - basic 0.21 0.06 0.36 0.18
Per share - diluted 0.20 0.06 0.34 0.18
Capital
expenditures, net of
dispositions 5,780 32,768 32,555 56,843
Debt, including
working capital
deficiency 75,144 (2) 84,806 75,144 (2) 84,806
Weighted average
common shares
outstanding
Basic 44,634 42,915 44,610 42,915
Diluted 46,179 43,708 46,101 43,702
Common shares
outstanding
Basic 44,657 43,047 44,657 43,047
Fully Diluted 47,026 44,998 47,026 44,998
Operations
Oil Equivalent (6:1)
Barrels of oil
equivalent (000s) 558 520 1,149 1,040
Barrels of oil
equivalent per day 6,130 5,713 6,315 5,744
Average selling
price ($CDN per
BOE) $ 69.36 (1) $ 48.05 (1) $ 63.05 (1) $ 50.74 (1)
Gas production
Thousand cubic feet
(000s) 2,893 2,720 5,943 5,424
Thousand cubic feet
per day 31,786 29,891 32,656 29,969
Average selling
price ($CDN per
mcf) $ 10.22 (1) $ 7.49 (1) $ 9.39 (1) $ 8.08 (1)
NGL Production
Barrels (000s) 28 20 59 39
Barrels per day 313 217 323 216
Average selling
price ($CDN per
barrel) $ 113.64 $ 62.66 $ 95.69 $ 59.82
Oil Production
Barrels (000s) 47 47 100 97
Barrels per day 519 514 549 533
Average selling
price ($CDN per
barrel) $ 124.97 $ 71.87 $ 110.56 $ 68.28
Wells drilled
Gross - 1.0 11.0 11.0
Net - 1.0 10.1 8.5
(1) Includes results of hedging activities
(2) Excluding unrealized mark to market hedging provision
Second Quarter 2008 Highlights
- Production in the second quarter increased to 6,130 Boe per day, a 7% increase
from production of 5,713 Boe per day in the same period one year ago. This is a
per share increase of 3% using basic shares outstanding. Quarterly production
was reduced by 1,050 Boe per day as a result of the planned 22 day maintenance
shut-down at the McMahon Gas Plant in June. Production in April and May prior to
the shut-down averaged 7,200 Boe per day while production in June averaged 4,000
Boe per day.
- Cash flow for the quarter totaled $23.3 million or $0.50 per diluted share, an
increase of 72% from cash flow of $0.29 per diluted share in the year earlier
period. Growth in production as well as higher commodity prices both contributed
to the increase.
- The cash flow netback of $41.69 per Boe is an increase of 68% from the cash
flow netback of $24.85 per Boe in the second quarter of 2007. This increase is
significantly greater than the increase of 44% in the average AECO natural gas
reference price over the same period as a result of production growth from our
Montney discovery at Parkland which contains higher heat content, liquids rich
natural gas.
- Net income for the quarter was $9.5 million or $0.20 per diluted share, up
from net income of $0.06 per diluted share in the prior year period. The
increase is the result of both growth in production and the increase in the
corporate cash flow netback.
- Capital investment during the quarter totaled $5.8 million which resulted in
the bank debt and working capital deficiency declining significantly to end the
period at $75.1 million (excluding non-cash mark to market hedging loss of $5.3
million) or 0.8 times annualized quarterly cash flow. This is a $16.8 million
decline from the bank debt plus working capital deficiency of $91.9 million at
the end of the prior quarter. Capital spending was relatively modest as road use
restrictions in the Fort St. John area that are imposed every spring (road bans)
prevented mobilization of rigs until late June.
CORE AREA REVIEW
Parkland/Ft St John Area, North East British Columbia
This area includes our Montney discovery and is the largest of Storm's core
areas, with net production averaging 3,335 Boe per day in the second quarter, an
increase of 64% from production of 2,029 Boe per day in the second quarter of
2007. Production from our Montney discovery at Parkland averaged approximately
2,150 Boe per day during the quarter. Quarterly production from this area was
reduced by 1,050 Boe per day as a result of the planned maintenance shut-down of
the McMahon gas plant for 22 days in June.
During the second half of 2008, all of our activity in this area will be at our
Parkland property and will include:
- Drilling eight vertical Montney step-outs (7.6 net).
- Drilling seven more horizontal Montney development wells (7.0 net). By the end
of 2008, Storm expects to have 12 producing horizontal Montney wells at
Parkland.
- Drilling two horizontal Montney wells (1.4 net) as part of a farm-in we have
entered into on a six section block just south-west of our Parkland discovery.
Storm has committed to paying 67% of the cost to drill and complete two
horizontal wells and has an option to drill a third with each horizontal well
earning a 33% working interest in two sections of land. Facility and pipeline
cost will be shared based on the earned working interest (33% Storm). Successful
horizontal wells will not be pipelined and producing until late in the first
quarter of 2009.
- Constructing a second facility with 12.5 Mmcf per day of initial capacity at
an estimated cost of $15 million which will be expanded to 25 Mmcf per day of
capacity through the addition of a second compressor early in 2009 at a cost of
$2.5 million. This facility is expected to be operational by the end of
November, 2008.
This activity represents 90% of Storm's total capital investment planned in the
second half of 2008.
Development of our Montney discovery using four horizontal wells per section
with six to eight fracs per wellbore continues to progress as expected. We are
currently producing 14 Mmcf per day of raw gas from six horizontal Montney gas
wells plus 3 Mmcf per day of raw gas from nine Montney vertical wells. The
seventh horizontal well has been drilled and is currently being completed. First
year rates from each horizontal well are still expected to average 2.3 Mmcf per
day of raw gas which is approximately four to six times that of the average
vertical well. Cost inflation and increasing the number of fracs (six to eight
fracs instead of five) has increased the cost of drilling, completing and
pipelining each horizontal to $5.3 million. The presentation on our website
(www.stormexploration.com) is periodically updated and shows monthly average
production for each of our producing vertical and horizontal wells.
Our most recent internal estimate of potential gas in place for our 100% working
interest Montney discovery was 330 BCF which was determined based on an internal
evaluation by Storm's technical staff using an areal extent of 5,825 acres
(approximately 9 sections) and data from nine successful vertical gas wells
which show average net pay of 35 metres (average gross pay of 89 metres) and
average porosity of 8%. Net pay has been determined using gas effect on logs
which is evidenced by cross-over on limestone scale neutron-density logs; this
is approximately equivalent to a 6% sandstone scale cut-off. To date in the
third quarter, we have drilled four more vertical step-outs (4.0 net) with three
of them being successful while the fourth was abandoned after encountering a
thick, gas saturated Montney interval which is not believed to be economic for
vertical well development. The 12 successful vertical gas wells we have now
drilled provide vertical well control covering approximately 8.5 sections which
is equivalent to 94% of our most recent internal estimate of potential gas in
place. As a result of our drilling success to date in the third quarter, our
internal estimate of potential gas in place now ranges from our most recent
estimate of 330 BCF (330 BCF net) to as much as 430 BCF (410 BCF net) which is
based on an expanded area of 8,420 acres (approximately 13 sections) with
average net pay of 32 metres (average gross pay of 86 metres) and average
porosity of 7.9%. Although Storm has a 100% working interest in the original
nine sections of land encompassing our discovery, the area of expanded potential
gas in place includes two adjacent sections where Storm earned a 60% working
interest through a farm-in. Based on production from our vertical wells,
reservoir quality may be lower in some areas, which could result in lower
recovery factors being realized in these areas, or could result in the cost to
develop those areas being higher due to the need for increased horizontal well
density.
Peace River Arch, North West Alberta
Production from this area averaged 1,761 Boe per day in the second quarter and
is currently 1,750 Boe per day. Production in the second quarter of 2007 was
2,467 Boe per day.
In the first half of 2008, we were not active in this area since Alberta's New
Royalty Framework ('NRF') does not provide us with a high enough return at lower
natural gas price levels to justify putting capital at risk drilling wells in
Alberta. However, as a result of the recent increase in natural gas prices, we
have more discretionary cash flow available for reinvestment and will drill four
wells (2.2 net) in the second half of 2008, with two wells (0.7 net) planned at
Pouce Coupe and two horizontal infills (1.5 net) planned for our Doe Creek light
oil pool at Saddle Hills. These drilling locations are all lower risk and are
less affected by Alberta's New Royalty Framework ('NRF') given that successful
wells are expected to have a longer reserve life, with production stabilizing at
lower rates which means that they will be subject to lower royalties.
Cabin-Kotcho-Junior Area, North East British Columbia
Net production from this area averaged 962 Boe per day in the second quarter.
This represents a decline of 9% from average production of 1,053 Boe per day in
the year earlier period. Current production is approximately 875 Boe per day.
This area is accessible only in the winter and, this past winter, we were not
active as most of our available capital was directed at evaluating and bringing
on production from our Montney discovery at Parkland. Historically, our drilling
activity in this winter access area has mainly targeted the Slave Point
formation. In the future, our drilling activity can be expected to include
prospects in the Bluesky/Debolt formations and horizontal wells in the Jean
Marie formation, all in the Junior area. Our level of activity this coming
winter will be contingent on the amount of discretionary, unallocated cash flow
that is available which is dependent on natural gas prices.
Storm also has exposure to the emerging Devonian shale gas play in the Horn
River Basin which is adjacent to the Cabin area. Most of our existing lands in
the Cabin area are on the Slave Point reef edge, where the Devonian shales are
much thinner and less likely to be economically exploitable. Although very
little of our existing land position is prospective for the Devonian shales, we
have been increasing our exposure to more prospective areas as a result of our
partnership with and ownership position in Storm Gas Resource Corp. ('SGR').
Storm and SGR have agreed to jointly acquire lands prospective for the Devonian
shales in the Horn River Basin with Storm having a 40% working interest and SGR
having a 60% working interest. Combined with Storm's 23% ownership position in
SGR, our exposure to this unconventional gas project is approximately 54% which
enables us to use internally generated cash flow in 2008 and 2009 to fund land
capture and the possible drilling of test wells in this area. With this area
being accessible mainly in the winter and with our focus on land capture over
the next one to two years, we don't expect to have an indication regarding
potential upside for at least two to three years.
Surmont Oil Sands Lease, Alberta
As reported in our first quarter update on May 8th, McDaniel &Associates
Consultants Ltd updated their evaluation of the bitumen contingent resource
contained in the McMurray formation on Storm's 3,840 acres (6 sections) of oil
sands leases. Their best case estimate of discovered bitumen resource (defined
as bitumen in place exploitable using a Steam-Assisted-Gravity Drainage or SAGD
process) is 312 million barrels with the best estimate of contingent bitumen
resources recoverable using a SAGD process being 113 million barrels.
Next winter, possibly as early as December 2008, Storm plans to drill and core
an additional five test holes to further prove up and expand the estimated
bitumen in place. One section remains largely unevaluated and could materially
increase our bitumen contingent resources. Storm has no plans at present to
initiate development of this resource and no assurance can be provided that this
resource will ever be exploited with a conventional SAGD project.
STORM GAS RESOURCE CORP.
Storm Gas Resource Corp ('SGR') was formed more than one year ago to pursue
unconventional gas opportunities in the Horn River Basin and elsewhere.
Subsequent to the end of the second quarter, SGR completed an equity issue and
raised $40 million at a price of $6.50 per share. Storm invested $4.9 million to
acquire 0.8 million shares as part of this offering. We have now invested a
total of $6.1 million in SGR and own 2.05 million shares representing a 23%
ownership position. SGR's primary focus in the next two years will be to expand
its land position prospective for the Devonian shales in the Horn River Basin,
test the productivity of those acquired lands, and add additional lands in new
areas with unconventional gas potential. This is a longer term investment and we
don't expect to have an indication regarding the upside potential for at least
three years.
STORM VENTURES INTERNATIONAL INC.
Storm owns 4.5 million shares of Storm Ventures International Inc. ('SVI'), a
Calgary based, private energy company focused on unconventional and
international exploration and exploitation opportunities. This share position
has a value of $28 million or $0.60 per fully diluted Storm share using the
price of $6.25 per share from a rights offering to existing shareholders, which
raised $31 million and closed mid August 2008. Storm invested $1.25 million and
acquired an additional 200,000 shares.
SVI is active in the UK sector of the North Sea through its affiliate,
Silverstone Energy Limited in which SVI has a 33% ownership position.
Silverstone recently completed the Granby Oil and Gas corporate acquisition,
which included a 54% working interest in the producing Tristan NW gas field and
also added 110,000 net undeveloped acres, with the top five prospects on those
lands containing 42 MM Boe of net risked contingent resources focused on oil
which significantly diversifies Silverstone's project inventory. In the Viking
Fields area, one of three gas discoveries drilled by SVI, the Victoria field, is
expected to commence production beginning the last quarter of 2008 at a cost of
Pounds Sterling 44 million. Victoria field gas in place is estimated to be 163
BCF with gross proved plus probable recoverable reserves being 106 BCF (net 66
BCF). Silverstone has identified multiple greater than 50 BCF prospects in the
Viking Fields area which potentially represent greater than 2 TCF of gas in
place, and plans to drill one or two of these each year for the next several
years. With current netbacks of Cdn $60 per Boe, significant cash flow will be
provided by production from the Tristan NW and Victoria gas fields which will be
used to fund the tie-in of the remaining Viking Fields discoveries in 2009 and
2010. Cash flow will also be used to fund additional exploratory drilling which,
in 2008, will include one to two more Viking Fields exploratory wells and a well
targeting a medium gravity oil prospect in the Quad 9/Gryphon area which has
been farmed out (Silverstone pays 10% and is carried for a 30% working
interest).
In Tunisia, SVI recently drilled and is currently completing and evaluating an
onshore well in the 71% interest Remada Sud permit that is testing one of two
large Ordovician structures. The well is believed to be capable of production at
200-250 Bbl of 43 degree API light oil per day. This is a significant early
stage encouragement on SVI's huge, 1.2 million acre land block. In the 65%
interest Jenein Centre block, a well will be drilled targeting light oil early
in 2009. Offshore in the Gulf of Hammamet, ten prospects have been identified
offsetting existing discoveries using the 440 km2 of marine 3-D seismic recorded
by SVI last year. An exploratory well is planned for mid-2009 to test one of
these prospects. This block also holds three existing fallow discoveries with as
much as 150 million barrels of oil in place. One of these, the Cosmos Main pool
(67% interest) with 25 million barrels of oil in place, will be developed with
two production wells, one injection well and with a vessel converted to an FPSO
which is purpose-built for smaller field development. First oil is expected in
2010 with initial production possibly as high as 20,000 barrels of light oil per
day. Immediately adjacent to this development, the Cosmos Terraces potentially
hold another 12 million barrels of oil in place.
2008 OUTLOOK
So far in 2008, natural gas prices have averaged $8.67 per GJ at AECO (January
to July average spot price) with current spot prices being approximately $7.25
per GJ. This is higher than our original budget assumption of $6.25 per GJ and
will result in cash flow for the year being considerably higher than originally
forecasted. As a result, we are increasing our level of capital investment in
2008 to $105 million from our original estimate of $65 million, and we will fund
this higher level of investment primarily with cash flow assuming natural gas
prices at AECO average $7.75 per GJ in the second half of 2008. This does not
include our additional equity investments in SVI or SGR. About $10 million of
the increase is required to offset cost inflation resulting from rising steel
prices, trucking costs, drilling rig rates and frac costs which have increased
the cost of drilling and completing a well by approximately 10% to 15%. An
additional $20 million will be invested in expanding our drilling program from
24 wells (23.3 net) to 32 wells (28.3 net) which includes an additional four
horizontal Montney development wells (3.4 net). We will also invest $15 million
to expand our infrastructure at Parkland by constructing a second facility in
the fourth quarter which will further enhance our competitive advantage in the
area. Minor dispositions are expected to total $5 million. Although most of the
increased drilling will be towards the end of 2008, we expect that production
exiting 2008 will now be 8,200 Boe per day which represents an estimate for
fourth quarter production assuming that there are no major facility outages.
Production in July averaged approximately 7,100 Boe per day and current
production is approximately 7,000 Boe per day. We expect third quarter
production to average approximately 7,100 to 7,300 Boe per day.
Second quarter operating costs were higher than guidance at $7.13 per Boe as a
result of our Parkland property being shut-in for the 22 day planned maintenance
turnaround at the McMahon gas plant in June. Operating costs at Parkland in the
first half of 2008 were exceptionally low at $4.33 per Boe so the shut-in of
this property for most of June had a significant impact on second quarter
operating costs. We expect considerable improvement in operating costs in the
second half of 2008 and are still forecasting an average 2008 operating cost of
$6.75 per Boe.
Field netbacks in the second quarter increased significantly to average $45.08
per Boe with the improvement resulting from increased volumes at Parkland where
the second quarter field netback was $51.00 per Boe. The gas produced from our
Montney discovery at Parkland is liquids rich resulting in liquids recoveries of
25 barrels per Mmcf and a higher heat content sales gas stream with a price per
Mcf approximately 24% higher than the price in $ per GJ or 23% higher than the
price in $ per Mmbtu.
We expect that our Montney discovery at Parkland will be the cornerstone of our
growth for several years. Longer term, we have exposure to SVI's growing
inventory of large-scale international opportunities, we are working at
expanding our exposure to the Horn River Basin Devonian shale gas play and will
work to further expand the resource contained in our oil sands lease at Surmont
through additional drilling. Although the spot natural gas price has undergone a
significant correction in the last month, this is an exciting time be a natural
gas focused producer with exposure to several large-scale resource oriented
opportunities given that consumption is likely to continue rising since natural
gas is relatively inexpensive and has a lower carbon emission profile than
alternative fuels. With the cost to find and develop new and existing reserves
of natural gas steadily increasing each year, offsetting production declines and
increasing production will require natural gas prices to continue trending
higher as they have over the past seven years.
Respectfully,
Brian Lavergne,
President and Chief Executive Officer
August 14, 2008
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND OPERATING RESULTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2008
Set out below is management's discussion and analysis of financial and operating
results for Storm Exploration Inc ("Storm" or the "Company") for the three and
six months ended June 30, 2008. It should be read in conjunction with the
consolidated financial statements for the three and six months ended June 30,
2008 and for the year ended December 31, 2007 and other operating and financial
information included in this press release. This management's discussion and
analysis is dated August 14, 2008.
Introduction and Limitations:
Basis of Presentation - Financial data presented below have largely been derived
from the Company's unaudited financial statements for the three and six months
ended June 30, 2008, prepared in accordance with Canadian Generally Accepted
Accounting Principles ("GAAP"). Specific accounting policies adopted by the
Company are set out in footnote 1 to the unaudited consolidated financial
statements for the three and six months ended June 30, 2008 and in footnote 2 to
the Company's audited consolidated financial statements for the year ended
December 31, 2007. The reporting and the measurement currency is the Canadian
dollar. Unless otherwise indicated, tabular financial amounts, other than per
share and per Boe amounts, are in thousands of dollars.
Effective January 1, 2008 Storm adopted with prospective effect certain new
accounting standards introduced as part of GAAP as follows:
- Capital Disclosures:
Section 1535 of the CICA Handbook, Capital Disclosures, requires companies to
disclose in their financial statements, objectives, policies and processes for
managing capital, including compliance with any externally imposed capital
requirements.
- Financial Instrument Disclosure and Presentation:
Section 3862 of the CICA Handbook, "Financial Instruments - Disclosures" and
Section 3863, "Financial Instruments - Disclosure and Presentation". The new
accounting standards require the Company to provide information about the
significance of financial instruments to the Company's financial position and
performance. In addition information about the nature and extent of risks
associated with financial instruments, and how the Company manages such risks,
is to be provided.
Additional details about such accounting changes and their effect on the Company
are described in the footnotes to the unaudited consolidated financial
statements for the three and six months ended June 30, 2008.
Forward-Looking Statements - Certain information set forth in this document,
including management's assessment of Storm's future plans and operations,
contains forward-looking statements. By their nature, forward-looking statements
are subject to numerous risks and uncertainties, some of which are beyond the
Company's control, including the effect of general economic conditions, industry
conditions, volatility of commodity prices, currency fluctuations, imprecision
of reserve estimates, environmental risks, competition from other industry
participants, the lack of availability of qualified personnel or management,
stock market volatility and ability to access sufficient capital from internal
and external sources. Readers are advised that the assumptions used in the
preparation of such information, although considered reasonable at the time of
preparation, may prove to be imprecise and, as such, undue reliance should not
be placed on forward-looking statements. Storm's actual results, performance or
achievement, could differ materially from those expressed in, or implied by,
these forward-looking statements. Storm disclaims any intention or obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required under securities
law.
Boe Presentation - For the purpose of calculating unit costs, natural gas is
converted to a barrel of oil equivalent ("Boe") using six thousand cubic feet
("Mcf") of natural gas equal to one barrel of oil unless otherwise stated.
Barrels of oil equivalent ("Boe") may be misleading, particularly if used in
isolation. A Boe conversion ratio of six Mcf to one barrel ("bbl") is based on
an energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead. All Boe conversions
in this report are derived by converting natural gas to oil in the ratio of six
thousand cubic feet of gas to one barrel of oil.
Non-GAAP Measurements - Within management's discussion and analysis, references
are made to terms having widespread use in the oil and gas industry in Canada.
'Funds from operations', 'funds from operations per share', 'cash flow from
operations' and 'netbacks' are not defined by GAAP in Canada and are regarded as
non-GAAP measures. Measurement of funds from operations is detailed on the
Statement of Cash Flows. Funds from operations per share is calculated based on
the weighted average number of common shares outstanding consistent with the
calculation of net income per share. Netbacks equal total revenue less
royalties, transportation and operating costs, calculated on a Boe basis. Total
Boe is calculated by multiplying the daily production by the number of days in
the year or quarter as the case may be.
PRODUCTION AND REVENUE
Average Daily Production
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Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
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Natural gas
(Mcf/d) 31,786 29,891 32,656 29,969
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Natural gas
liquids
(Bbls/d) 313 217 323 216
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Crude oil
(Bbls/d) 519 514 549 533
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Total (Boe/d) 6,130 5,713 6,315 5,744
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Production for the second quarter of 2008 was affected by scheduled maintenance
at the McMahon gas plant operated by Spectra Energy in Fort St John, British
Columbia, which receives approximately 58% of Storm's gas production, including
all of the Company's Parkland production. The plant was closed to gas shipments
for 22 days in June which resulted in the loss of approximately 3,190 Boe per
day of production during the month. Pro forma average production for the quarter
would have approximated 7,200 Boe per day, absent the McMahon plant turnaround,
representing growth of 26% over the prior year and 11% over the first quarter of
2008. The Company expects that the McMahon plant will be subject to a similar
turnaround in 2010.
Total Boe production in the second quarter of 2008 increased by 7% when compared
to the same quarter in 2007. The year-over-year production increase is largely
attributable to production growth from the Company's Montney discovery at
Parkland. Production approximated 2,150 Boe in the second quarter of 2008 from
Storm's Montney gas discovery; the Company had 196 Boe per day of Montney gas
production in the same quarter of 2007.
Production per million basic shares outstanding in the second quarter of 2008
averaged 137 Boe per day, compared to 133 Boe per day for the second quarter of
2007, an increase of 3%.
For the six months ended June 30, 2008 production increased by 10% when compared
to the same period in 2007, or an increase of 6% per million shares outstanding
for each period.
Production Profile and Per Unit Prices
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Three Months to Three Months to
June 30, 2008 June 30, 2007
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Average Average
Selling Selling
Percentage Price Before Percentage Price Before
of Total Boe Transportation of Total Boe Transportation
Production Costs Production Costs
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Natural gas
- Mcf 86% $10.49 87% $7.47
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Natural
gas liquids
- Bbl 5% $113.64 4% $62.66
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Crude oil
- Bbl 8% $124.97 9% $71.87
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Per Boe $70.80 $47.91
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Six Months to June 30, 2008 Six Months to June 30, 2007
----------------------------------------------------------------------------
Percentage Average Selling Average Selling
of Total Price Before Percentage of Price Before
Boe Transportation Total Boe Transportation
Production Costs Production Costs
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Natural gas
- Mcf 87% $9.53 87% $7.61
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Natural gas
liquids -Bbl 5% $95.69 4% $59.82
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Crude oil
- Bbl 9% $110.56 9% $68.28
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Per Boe $63.05 $48.29
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Per unit prices in the table above do not include any gains or losses from hedging.
Storm's production base is largely natural gas and associated liquids. In
addition, Storm's prospect inventory is largely focused on natural gas, and,
based on exploitation of the Company's existing asset base, it is unlikely in
the short and medium term, that crude oil will increase as a percentage of Boe
production. Growth in gas production for the balance of 2008 is expected to come
largely from Parkland in British Columbia.
The average AECO reference price for the second quarter of 2008 was $9.67 per
GJ; for the first quarter of 2008 the AECO price was $7.45 per GJ; and for the
six months to June 30, 2008 was $8.50 per GJ.
The corporate average realized price per GJ received by Storm for the second
quarter of 2008 was approximately 9% higher than the AECO reference price. This
pricing premium is attributable to high heat content natural gas delivered from
Storm's Montney discovery at Parkland, which receives a price approximately 25%
higher than the AECO reference price. Montney natural gas accounted for
approximately 35% of natural gas production in the quarter. Correspondingly, the
McMahon gas plant turnaround in June 2008 had the effect of reducing the
contribution of premium priced Montney production to the corporate average
realized price for the second quarter. For the six months to June 30, 2008, the
corporate average price was 11% higher than the AECO reference price. In
addition to superior heat content, Montney natural gas also has associated
liquids content of approximately 25 barrels per Mmcf, which has resulted in
year-over-year growth in liquids production. Increased Montney gas production in
future months should result in an increase to Storm's average natural gas price,
plus continued growth in natural gas liquids production.
Production by Area - Boe per Day
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Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Parkland, Fort
St. John - BC 3,335 2,029 3,424 1,893
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Peace River
Arch - Alberta 1,761 2,467 1,896 2,613
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Cabin-Kotcho
- Junior - BC 962 1,053 924 1,068
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Other 72 164 71 170
----------------------------------------------------------------------------
Total 6,130 5,713 6,315 5,744
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The above sets out the average production from each of Storm's core areas.
Montney production averaged 2,150 Boe per day for the quarter ended June 30,
2008. There was 196 Boe per day of Montney production in the same quarter of
2007.
The Company's focus on the Parkland area has resulted in quarterly
year-over-year production from the area growing by 64%. Correspondingly, reduced
investment in Alberta is evidenced by a 29% reduction in year-over-year
production in to Peace River Arch.
Production Revenue
----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Natural gas $ 30,349 $ 20,310 $ 56,590 $ 41,270
----------------------------------------------------------------------------
Natural gas liquids 3,239 1,236 5,628 2,341
----------------------------------------------------------------------------
Crude oil 5,906 3,365 11,051 6,592
----------------------------------------------------------------------------
Hedging (losses) gains (802) 71 (802) 2,551
----------------------------------------------------------------------------
------------------------------------------------------
Revenue from
product sales 38,692 24,982 72,467 52,754
----------------------------------------------------------------------------
Royalty income 196 174 395 411
----------------------------------------------------------------------------
Total Production
Revenue $ 38,888 $ 25,156 $ 72,862 $ 53,165
----------------------------------------------------------------------------
----------------------------------------------------------------------------
A reconciliation of revenue from product sales between the quarters ended June
30, 2008 and 2007 is as follows:
----------------------------------------------------------------------------
Natural
Natural Gas Crude
Gas Liquids Oil Total
----------------------------------------------------------------------------
Revenue from product
sales - second
quarter 2007 $ 20,381 1,236 3,365 $ 24,982
----------------------------------------------------------------------------
Contribution from
increased production
quarter-over-quarter 1,809 997 58 2,864
----------------------------------------------------------------------------
Contribution from
increased product prices
quarter-over-quarter 8,230 1,006 2,483 11,719
----------------------------------------------------------------------------
Loss from hedging activities (873) - - (873)
----------------------------------------------------------------------------
Revenue from product sales
- second quarter 2008 $ 29,547 3,239 5,906 $ 38,692
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Hedging:
Storm realized a hedging loss of $0.8 million, equivalent to $1.44 per Boe or
$0.28 per Mcf during the quarter ended June 30, 2008. No hedging gains or losses
were realized in the first quarter of 2008; however, averaged over the six month
period to June 30, 2008, the hedging loss realized in the second quarter was
equivalent to $0.70 per Boe or $0.13 per Mcf.
Although Storm followed hedge accounting rules with respect to prior hedges and
hedges in place at June 30, 2008, any future hedges entered into by the Company
may not satisfy hedge accounting criteria; correspondingly the Company may be
obliged to follow mark-to-market rules.
Hedges in place at June 30, 2008 are as follows:
----------------------------------------------------------------------------
Product Volume Period Contract Price
----------------------------------------------------------------------------
Natural gas 12,000 GJ July 1, 2008 - Fixed price Cdn $8.04 per GJ
per day September 30,
2008
----------------------------------------------------------------------------
Natural gas 11,000 GJ July 1, 2008 - Collar Ceiling $8.70 per GJ
per day September 30, Floor $7.50 per GJ
2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ROYALTIES
----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Charge for period $ 8,504 $ 5,398 $ 15,406 $ 10,990
----------------------------------------------------------------------------
Royalties as a
percentage of
revenue from
product sales
before hedging
- Crown 20.3% 20.2% 20.1% 20.3%
- Other 1.2% 1.4% 1.1% 1.7%
----------------------------------------------------------------------------
Total 21.5% 21.6% 21.2% 22.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per Boe $ 15.24 $ 10.38 $ 13.40 $ 10.57
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The introduction of the New Royalty Framework by the Provincial Government of
Alberta in October 2007, to be effective from January 1, 2009, will have the
broad result of increasing Alberta provincial royalties, particularly on wells
with high initial production rates, which tend to be wells with higher capital
at risk. This results in a reduction in returns accruing to oil and gas
investment in the province. Approximately 30% of Storm's production came from
Alberta in the second quarter of 2008, compared to 45% in the second quarter of
2007. All other production comes from British Columbia. For the balance of 2008,
Storm's capital programs will continue to be focused on the exploitation of its
natural gas properties in the Peace River Arch area of north eastern British
Columbia, which, assuming operational success, will result in revenue from
Alberta continuing to fall as a percentage of total revenue. In addition to
lower investment, natural declines will further reduce Storm's Alberta based
production and revenues. In the final quarter of 2008, immediately prior to
implementation of the new royalty framework, successful execution of the
Company's business plan could result in production from British Columbia
increasing to 80% of total production. Nevertheless, the allocation of capital
by the Company to projects outside of Alberta is not exclusively in response to
the changed provincial royalty regime in Alberta. The Company's British Columbia
projects offer the highest economic returns.
PRODUCTION COSTS
----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Charge for period $ 3,978 $ 3,959 $ 8,426 $ 7,619
----------------------------------------------------------------------------
Percentage of revenue
from product sales
before hedging 10.1% 15.9% 11.5% 15.2%
----------------------------------------------------------------------------
Per Boe $ 7.13 $ 7.62 $ 7.33 $ 7.33
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total production costs for the quarter ended June 30, 2008 were largely
unchanged year-over-year but fell as a percentage of revenue largely in response
to improved pricing. Per Boe, production costs for the quarter to June 30, 2008
fell by 6% when compared to the same period in 2007, in part due to a more
concentrated asset base and higher productivity Montney horizontal natural gas
wells. Production costs per Boe for the six month periods to June 30, 2008 and
2007 were unchanged. A return to full production at Parkland in July 2008, and
the focus on drilling high productivity horizontal wells in the second half of
2008, should result in future reductions in per unit costs. A focus on cost
control in all pricing environments has enabled Storm to maintain a consistent
and low cost structure.
Storm's cash costs, which comprise production, general and administrative costs
and interest, amounted to $10.53 for the quarter ended June 30, 2008, compared
to $10.77 for the quarter ended June 30, 2007. For the six month periods to June
30, cash costs for 2008 amounted to $10.46 and to $10.07 for 2007. Second
quarter cash costs tend to be higher than other quarters, as limited field
activity results in lower overhead recoveries.
TRANSPORTATION COSTS
----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Charge for period $ 1,258 $ 1,238 $ 2,666 $ 2,366
----------------------------------------------------------------------------
Percentage of revenue
from product sales
before hedging 3.2% 5.0% 3.6% 4.7%
----------------------------------------------------------------------------
Per Boe $ 2.25 $ 2.38 $ 2.32 $ 2.28
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company's predominately natural gas production base results in reasonable
stability of transportation costs. Transportation costs from Storm's Parkland
property are lower than the corporate average and increased future production
from the area should result in lower transportation costs in future quarters.
Details of field netbacks per commodity unit are as follows:
----------------------------------------------------------------------------
Three Months to June 30, 2008
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
----------------------------------------------------------------------------
Product sales $ 124.97 $ 113.64 $ 10.49 $ 70.80
----------------------------------------------------------------------------
Hedging loss - - (0.28) (1.44)
----------------------------------------------------------------------------
Royalty income 0.79 0.43 0.05 0.35
----------------------------------------------------------------------------
Royalties (21.71) (25.42) (2.33) (15.24)
----------------------------------------------------------------------------
Production costs (8.42) - (1.24) (7.13)
----------------------------------------------------------------------------
Transportation (5.87) (1.83) (0.32) (2.25)
----------------------------------------------------------------------------
Field netback $ 89.76 $ 86.82 $ 6.37 $ 45.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months to June 30, 2007
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
----------------------------------------------------------------------------
Product sales $ 71.87 $ 62.66 $ 7.47 $ 47.92
----------------------------------------------------------------------------
Hedging gain - - 0.03 0.14
----------------------------------------------------------------------------
Royalty income 0.40 0.53 0.05 0.34
----------------------------------------------------------------------------
Royalties (11.35) (15.09) (1.68) (10.38)
----------------------------------------------------------------------------
Production costs (8.46) - (1.31) (7.62)
----------------------------------------------------------------------------
Transportation (2.34) (4.82) (0.38) (2.38)
----------------------------------------------------------------------------
Field netback $ 50.12 $ 43.28 $ 4.18 $ 28.02
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six months to June 30, 2008
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
----------------------------------------------------------------------------
Product sales $ 110.56 $ 95.69 $ 9.52 $ 63.75
----------------------------------------------------------------------------
Hedging loss - (0.13) (0.70)
----------------------------------------------------------------------------
Royalty income 1.25 0.46 0.04 0.34
----------------------------------------------------------------------------
Royalties (18.08) (21.26) (2.06) (13.41)
----------------------------------------------------------------------------
Production costs (8.43) - (1.28) (7.33)
----------------------------------------------------------------------------
Transportation (5.56) (2.66) (0.33) (2.32)
----------------------------------------------------------------------------
Field netback $ 79.74 $ 72.23 $ 5.76 $ 40.33
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six months to June 30, 2007
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
----------------------------------------------------------------------------
Product sales $ 68.28 $ 59.82 $ 7.61 $ 48.29
----------------------------------------------------------------------------
Hedging gain - - 0.47 2.45
----------------------------------------------------------------------------
Royalty income 0.44 0.66 0.06 0.40
----------------------------------------------------------------------------
Royalties (10.98) (16.15) (1.71) (10.57)
----------------------------------------------------------------------------
Production costs (7.64) - (1.27) (7.33)
----------------------------------------------------------------------------
Transportation (2.01) (4.05) (0.37) (2.28)
----------------------------------------------------------------------------
Field netback $ 48.09 $ 40.28 $ 4.79 $ 30.96
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Production costs for natural gas liquids are included with natural gas costs.
Field netbacks per Boe for the quarter ended June 30, 2008 increased by 61% over
the same period of 2007. Storm benefited from increased prices for each product
category, supported by lower costs, somewhat offset by a hedging loss. For the
six months ended June 30, 2008 field netback increased by 30% over the
equivalent period in 2007. Excluding the effects of a hedging loss in 2008, and
a hedging gain in 2007, the increase in netback per Boe for the first half of
2008 amounted to 44%.
INTEREST
----------------------------------------------------------------------------
Three Months to Three Months to Six Months to Six Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Charge for
period $ 944 $ 868 $ 2,005 $ 1,537
----------------------------------------------------------------------------
Per Boe $ 1.69 $ 1.67 $ 1.74 $ 1.48
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest is paid on Storm's revolving bank facility. Increased interest costs
for the second quarter of 2008, when compared to the equivalent quarter of 2007,
correspond to an increased borrowing level consistent with the growth in the
Company's operations, slightly offset by lower debt service costs. Lower debt
service costs largely benefited the second quarter of 2008 only.
GENERAL AND ADMINISTRATIVE COSTS
Total costs:
----------------------------------------------------------------------------
Three Months to Three Months to Six Months to Six Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Gross general
and
administrative
costs $ 1,414 $ 1,100 $ 2,777 $ 2,507
----------------------------------------------------------------------------
Capital and
operating
recoveries (460) (328) (1,186) (1,192)
----------------------------------------------------------------------------
Net general and
administrative
costs $ 954 $ 772 $ 1,591 $ 1,315
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Costs per Boe:
----------------------------------------------------------------------------
Three Months to Three Months to Six Months to Six Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Gross general
and
administrative
costs $ 2.53 $ 2.12 $ 2.42 $ 2.41
----------------------------------------------------------------------------
Capital and
operating
recoveries (0.82) (0.63) (1.04) (1.15)
----------------------------------------------------------------------------
Net general
and
administrative
costs $ 1.71 $ 1.49 $ 1.38 $ 1.26
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increases in gross general and administrative costs for the quarter and six
months ended June 30, 2008, when compared to the same periods in 2007, are
primarily due to an increased staff count, as well as higher year-over-year
compensation and accommodation costs. In addition, seasonally lower field
activity in the second quarter of each year, results in lower operating
recoveries.
Storm does not capitalize general and administrative costs. General and
administrative costs per Boe for future quarters should be lower, due to higher
operating recoveries and a growing production base.
STOCK BASED COMPENSATION COSTS
----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Charge for
period $ 395 $ 341 $ 731 $ 678
----------------------------------------------------------------------------
Per Boe $ 0.71 $ 0.66 $ 0.64 $ 0.65
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock based compensation costs are non cash charges which reflect the value of
stock options and performance warrants issued to directors and employees. The
value is amortized over the life of the award. Storm's performance warrant plan
was terminated mid 2007, upon the exercise of the remaining warrants. The
increase in the charge in the second quarter of 2008, when compared to the
second quarter of 2007, corresponds to the issue of additional stock options
late in 2007.
DEPLETION DEPRECIATION AND ACCRETION
----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Depreciation and
depletion charge
for period $ 9,470 $ 8,137 $19,527 $16,497
----------------------------------------------------------------------------
Accretion charge
for period 123 115 244 227
----------------------------------------------------------------------------
Total $ 9,593 $ 8,252 $19,771 $16,724
----------------------------------------------------------------------------
Total per Boe $ 17.20 $ 15.87 $ 17.21 $ 16.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The increase in the charge for depreciation, depletion and accretion for the
three and six month periods to June 30, 2008, when compared to the same periods
in 2007, is a consequence of higher production volumes as the depletion
component of the charge is based on a cost per Boe.
The year-over-year increases in the charge for depletion and depreciation per
Boe is largely attributable to a mid 2007 property acquisition, as acquired
reserves were purchased at a higher cost per Boe than Storm's historical finding
costs. Accretion is the increase for the reporting period in the present value
of the Company's asset retirement obligation, which is discounted using an
interest rate of 8%.
INCOME AND OTHER TAXES
For the three months ended June 30, 2008, Storm recorded a future income tax
provision of $3.8 million compared to $1.5 million for the quarter ended June
30, 2007. For the six month periods ended June 30, 2008 and 2007 the future
income tax provision amounted to $6.4 million and $4.0 million. The deferral of
taxes to future periods largely results from resource pool deductions exceeding
the accounting charge for depletion, depreciation and accretion. The statutory
combined federal and provincial rate applicable to income in 2008 is 30%,
compared to 32% for 2007.
At June 30, 2008, Storm had tax pools carried forward estimated to be $187
million. In September 2007 the Company entered into a flow through share issue,
which provided for the renunciation of Canadian Exploration Expense of $15.1
million, and the incurrence of such expenditures by December 31, 2008. At June
30, 2008 the Company considers that $12.0 million of such expenditures have been
incurred. In addition, Storm has a capital loss in the amount of $9 million
available for application against future capital gains.
NET INCOME AND NET INCOME PER SHARE
Net income for the quarter ended June 30, 2008 increased by 234% when compared
to the quarter ended June 30, 2007. Quarter over quarter, net income per diluted
share increased by 233%. For the six months ended June 30, 2008 net income
increased by 101% when compared to the six months ended June 30, 2007. Per
diluted share, net income increased by 89% in the first half of 2008 over the
same period in 2007.
----------------------------------------------------------------------------
Three Months to Three Months to
June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Per Per
diluted diluted
$ share-$ $ share-$
----------------------------------------------------------------------------
Net income for
quarter $ 9,465 $ 0.20 $ 2,832 $ 0.06
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six Months to Six Months to
June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Per Per
diluted diluted
$ share-$ $ share-$
----------------------------------------------------------------------------
Net income for
quarter $ 15,889 $ 0.34 $ 7,898 $ 0.18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FUNDS FROM OPERATIONS
Funds from operations for the quarter ended June 30, 2008 increased by 80% to
$23.3 million, or $0.50 per diluted share, compared to $12.9 million, or $0.29
per diluted share for the equivalent quarter of 2007. For the six month period
to June 30, 2008 funds from operations increased by 46% to $42.8 million, or
$0.93 per diluted share, compared to $29.3 million, or $0.67 per diluted share
for the equivalent period in 2007.
----------------------------------------------------------------------------
Three Months to Three Months to
June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Per Per
diluted diluted
$ share-$ $ share-$
----------------------------------------------------------------------------
Funds from
Operations for
quarter 23,250 0.50 $ 12,921 $ 0.29
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six Months to Six Months to
June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Per Per
diluted diluted
$ share-$ $ share-$
----------------------------------------------------------------------------
Funds from
Operations for
quarter $ 42,768 $ 0.93 $ 29,338 0.67
----------------------------------------------------------------------------
----------------------------------------------------------------------------
INVESTMENT AND FINANCING
Working Capital
Receivables comprise production revenue receivables and accruals, and
receivables in respect of operating and capital costs. Prepaid costs and
deposits include unamortized insurance premiums and software licensing fees,
deposits and certain inventory items. Included in receivables is an amount of
$550,000 in respect of natural gas shipped in June 2008 to SemCAM ULC
("SemCAM"). Subsequent to June 30, 2008, SemCAM, in response to Chapter 11
filings in the United States by its parent company, secured protection under the
Company Creditors' Arrangement Act, which inter alia, resulted in the non
payment of amounts owing to Storm at June 30, 2008. The amount of any loss
relating to the SemCAM receivable is not determinable, and no provision for loss
has been made at June 30, 2008.
Accounts payable include operating, administrative and capital costs payable.
Net payables in respect of cash calls issued to partners regarding capital
projects and estimates of amounts owing but not yet invoiced to the Company have
been included in accounts payable.
Storm had a working capital deficiency of $8.7 million at June 30, 2008 compared
to $2.0 million at June 30, 2007 and $10.2 million at December 31, 2007. The
working capital deficiency at each period end reflects the Company's preference
to act as operator and the seasonality of its field operations. The Company's
working capital deficiency is cyclical and is normally highest at the end of the
first quarter of each year and lowest at the end of second quarter. The
relatively high working capital deficiency at June 30, 2008, when compared to
June 30, 2007, is attributable to receivables at June 30, 2008 being lower than
normal, as a consequence of part of Storm's production being shut in due to
scheduled maintenance at the McMahon gas plant in British Columbia.
Property and Equipment
Capital costs incurred were as follows:
----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Land and lease,
net $ 998 $ 632 $ 2,267 $ 1,776
----------------------------------------------------------------------------
Seismic 23 2,173 (77) 2,946
----------------------------------------------------------------------------
Drilling and
completions 7,381 1,689 28,934 13,665
----------------------------------------------------------------------------
Facilities and
equipment -
net (1,559) 2,163 3,050 9,895
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Field Expenditures 6,843 6,657 34,174 28,282
----------------------------------------------------------------------------
Property
acquisitions - 26,111 528 28,561
----------------------------------------------------------------------------
Property
dispositions (1,063) - (2,147) -
----------------------------------------------------------------------------
Total $ 5,780 $32,768 $32,555 $56,843
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Bank Debt, Liquidity and Capital Resources
Storm has a revolving borrowing base bank credit facility of $110 million. The
amount drawn on this facility at June 30, 2007 amounted to $66.4 million. Debt,
including working capital deficiency, amounted to $75.1 million at June 30,
2008, resulting in a ratio of debt to annualized quarterly cash flow of 0.8
times.
Storm funds its field capital programs through cash flow and bank borrowings.
Acquisitions are funded by a combination of debt and, if required, equity. Field
capital programs tend to be concentrated in the winter months, with the result
that capital expenditures in the first and fourth quarters of the year will
exceed cash flow, which is compensated by lower capital expenditures in the
second and third quarters. In quarters of high field activity, Storm operates
with a substantial working capital deficit, which is paid down in quarters of
lower field activity.
Investments
Storm Ventures International Inc.
At June 30, 2008 the Company's investment in Storm Ventures International Inc.
("SVI") represented a 13% ownership position, comprising 4.3 million common
shares. The carrying amount of the investment on the Company's consolidated
balance sheet comprises the Company's investment cost, plus a dilution gain
recognized during the year ended December 31, 2005. This carrying amount should
not be regarded as representative of the value of Storm's investment in SVI.
Subsequent to June 30, 2008, SVI entered into a private placement financing, in
which Storm participated, purchasing 200,000 common shares at a price of $6.25
per share for a total of $1,250,000. The SVI financing will result in further
dilution of Storm's ownership position, to approximately 12%.
Storm Gas Resource Corp.
Storm Gas Resource Corp. ("SGR") was incorporated to identify and participate in
unconventional natural gas opportunities; initially shale gas in the Horn River
Basin of northeast British Columbia. Storm's ownership position at June 30, 2008
was 1.25 million shares or a 45% ownership position, the remaining shareholders
being SVI, also at 45%, and SGR employees at 10%. Storm's initial investment was
satisfied by a cash contribution of $833,000 for 833,000 common shares at a
price of $1.00 per share, plus the transfer of undeveloped land independently
valued at $417,000, with consideration being 417,000 common shares at $1.00 per
share, for a total initial investment of $1,250,000. Subsequently, in July 2008,
Storm and SVI each purchased an additional 200,000 common shares at a price of
$5.20 per share, and Storm purchased a further 600,000 common shares at a price
of $6.50. Concurrently, SGR entered into a private placement financing, which
resulted in SGR issuing an additional 5,280,000 common shares at a price of
$6.50 per share, for total proceeds before commission and expenses of
$34,320,000. At the conclusion of the private placement, Storm owned 2,050,000
common shares of SGR, equivalent to an ownership position of 23% at an average
price of $3.02. In addition to its investment in SGR, Storm has an agreement to
acquire lands jointly with SGR in the Horn River Basin, with SGR and Storm
having interests of 60% and 40% respectively. The Company's investment in SGR,
combined with its working interest, provides Storm with a 54% exposure to the
Horn River Basin Devonian shale gas play.
SGR had no operations at June 30, 2008. Storm's investment in SGR is carried at
cost, equivalent to the Company's equity interest in SGR.
Future Income Taxes
Estimated future income tax at June 30, 2008 represents the excess of the
accounting amounts over the related tax bases of property and equipment and
share capital.
Details of the Company's tax pools are as follows:
----------------------------------------------------------------------------
As at Maximum Annual
June 30, 2008 deduction
----------------------------------------------------------------------------
Canadian oil and gas property expense 92,000 10%
----------------------------------------------------------------------------
Canadian development expense 45,000 30%
----------------------------------------------------------------------------
Canadian exploration expense (1) 7,000 100%
----------------------------------------------------------------------------
Undepreciated capital cost 42,000 20 - 100%
----------------------------------------------------------------------------
Other 1,000 20%
----------------------------------------------------------------------------
Total 187,000
--------------------------------------------------------
--------------------------------------------------------
Capital losses 9,666
--------------------------------------------------------
--------------------------------------------------------
(1) An additional $3 million of Canadian Exploration Expense must be
incurred prior to December 31, 2008 to satisfy the terms of a flow
through share issue dated September 2007.
Asset Retirement Obligation
Storm's asset retirement obligation represents the present value of estimated
future costs to be incurred to abandon and reclaim the Company's wells and
facilities. Changes in amount of the obligation between June 30, 2008 and
December 31, 2007 comprise the present value of additional obligations accruing
to the Company as a result of field activity and acquisitions during the
quarter, less costs paid in settlement of abandonment obligations, plus the
quarterly increase in the present value of the obligation. The discount rate
used to establish the present value is 8%. Future costs to abandon and reclaim
Storm's properties are based on an internal evaluation of each of the Company's
properties, supported by external data from industry sources.
Share Capital
Details of outstanding share capital and dilutive elements:
----------------------------------------------------------------------------
As at As at
June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
Common shares outstanding
- end of period 44,657 44,532
----------------------------------------------------------------------------
Stock options 2,369 2,166
----------------------------------------------------------------------------
Fully diluted common shares
- end of period 47,026 46,698
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common shares
- basic 44,610 43,449
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common shares
- diluted 46,101 44,132
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock options outstanding are exercisable over five years on various dates
beginning September 2005 at prices ranging from $2.60 to $11.40.
CONTRACTUAL OBLIGATIONS
In the course of its business Storm enters into various contractual obligations,
including the following:
- purchase of services
- royalty agreements
- operating agreements
- processing agreements
- right of way agreements
- lease obligations for accommodation, office equipment and automotive equipment.
All such contractual obligations reflect market conditions at the time of
contract and do not involve related parties.
Obligations with a fixed term are as follows:
----------------------------------------------------------------------------
($000's) 2008 2009 2010 2011 2012
----------------------------------------------------------------------------
Lease of premises $ 759 $ 759 $ 772 $ 785
----------------------------------------------------------------------------
Equipment leases 11 - - -
----------------------------------------------------------------------------
Gas transportation and
processing fee
commitments 885 2,239 1,398 1,120 592
----------------------------------------------------------------------------
Total $ 1,655 $ 2,998 $ 2,170 $ 1,905 $ 592
----------------------------------------------------------------------------
----------------------------------------------------------------------------
QUARTERLY RESULTS
Summarized information by quarter for the two years ended June 30, 2008
appears below:
----------------------------------------------------------------------------
Quarter Ended June March December September June March
30, 31, 31, 30, 30, 30,
2008 2008 2007 2007 2007 2007
----------------------------------------------------------------------------
Production revenue -
($000s) 38,888 33,974 25,553 19,573 25,156 28,009
----------------------------------------------------------------------------
Funds from operations -
($000s)
Per share 23,250 19,520 13,233 9,372 12,921 16,417
- basic $ 0.52 $ 0.44 $ 0.30 $ 0.21 $ 0.30 0.38
- diluted $ 0.50 $ 0.43 $ 0.30 $ 0.20 $ 0.29 0.38
----------------------------------------------------------------------------
Net income - ($000s)
Per share 9,465 6,426 2,852 299 2,832 5,066
- basic $ 0.21 $ 0.14 $ 0.06 $ 0.01 $ 0.06 $ 0.12
- diluted $ 0.20 $ 0.14 $ 0.06 $ 0.01 $ 0.06 $ 0.12
----------------------------------------------------------------------------
Average daily
production - Boe 6,130 6,500 5,992 5,618 5,713 5,776
----------------------------------------------------------------------------
Average field netback
per Boe $ 45.09 $ 35.87 $ 27.44 $ 20.83 $ 28.02 $ 33.91
----------------------------------------------------------------------------
Capital expenditures
- net - ($000s) 5,780 26,775 17,094 19,953 32,768 24,075
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended December September
31, 30,
2006 2006
----------------------------------------------------------------------------
Production revenue -
($000s) 23,590 18,973
----------------------------------------------------------------------------
Funds from operations -
($000s)
Per share 12,748 10,053
- basic 0.30 0.23
- diluted 0.29 0.23
----------------------------------------------------------------------------
Net income - ($000s)
Per share 3,049 1,828
- basic $ 0.07 $ 0.04
- diluted $ 0.07 $ 0.04
----------------------------------------------------------------------------
Average daily
production - Boe 5,442 4,933
----------------------------------------------------------------------------
Average field netback
per Boe $ 27.88 $ 24.24
----------------------------------------------------------------------------
Capital expenditures -
net - ($000s) 13,635 7,619
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
Financial amounts included in the Company's Management's Discussion and Analysis
and in the unaudited consolidated financial statements for the three months and
six months ended June 30, 2008 are based on accounting policies, estimates and
judgment which reflect information available to management at the time of
preparation. Information with respect to the accounting policies selected by the
Company and the use of estimates is set out in the Company's annual report for
the year ended December 31, 2007 and the unaudited consolidated financial
statements for the three and six months ended June 30, 2008.
RISK ASSESSMENT
There are a number of risks facing participants in the Canadian oil and gas
industry. Some of the risks are common to all businesses while others are
specific to the sector and others are specific to Storm. Information with
respect to such risks is set out in the Company's annual report for the year
ended December 31, 2007.
DISCLOSURE CONTROLS
Storm's disclosure control policy provides for the establishment of a Disclosure
Committee, comprised of the Chief Executive Officer and Chief Financial Officer,
which reviews policies and procedures applicable to the provision of information
to any party, other than industry partners in the ordinary course of business,
and reviews any circumstances which may suggest a breach of disclosure controls.
Controls and procedures are designed to provide reasonable assurance that
relevant information is collected and provided to senior management. Although
Storm's Disclosure Committee has concluded that its disclosure policy is
effective, it cannot provide more than reasonable assurance that its objectives
have been realized. No circumstance suggesting a possible breach of disclosure
controls was identified by the Disclosure Committee in the three or six month
periods ended June 30, 2008.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Storm is required to comply with Multilateral Instrument 52-109 "Certification
of Disclosure in Issuers' Annual and Interim Filings". The 2008 certificate
requires that the Company disclose in the interim MD&A any changes in the
Company's internal control over financial reporting that occurred during the
period that has materially affected, or is reasonably likely to materially
affect Storm's financial reporting. The Company confirms that no such changes
were made to the internal controls over financial reporting during the second
quarter of 2008.
ADDITIONAL INFORMATION
Additional information relating to the Company, including the Company's Annual
Information Form, can be viewed at www.sedar.com or on the Company's website at
www.stormexploration.com. Information can also be obtained by contacting the
Company at Storm Exploration Inc., 800, 205 - 5th Avenue, SW, Calgary, Alberta,
T2P 2V7.
Storm Exploration Inc.
Consolidated Balance Sheets
($000s)
UNAUDITED
June 30, December 31,
2008 2007
----------- -------------
ASSETS
Current
Accounts receivable $ 11,283 $ 11,949
Prepaid and other costs 2,981 1,945
----------- -------------
14,264 13,894
Property and Equipment - Net (Note 2) 250,909 237,738
Investments 10,525 9,275
----------- -------------
$ 275,698 $ 260,907
----------- -------------
----------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 22,994 $ 24,103
Unrealized mark-to-market hedging provision
(Note 9) 5,267 -
----------- -------------
28,261 24,103
Bank Indebtedness (Note 4) 66,414 74,472
Asset Retirement Obligation (Note 5) 7,304 6,918
Future Income Taxes (Note 3) 15,316 10,519
----------- -------------
117,295 116,012
----------- -------------
Shareholders' Equity (Note 6)
Share capital 87,750 86,994
Contributed surplus 2,868 2,318
Retained earnings 71,472 55,583
Accumulated other comprehensive income (deficit) (3,687) -
----------- -------------
158,403 144,895
----------- -------------
$ 275,698 $ 260,907
----------- -------------
----------- -------------
-
Storm Exploration Inc.
Consolidated Statements of Income and Retained Earnings
($000s)
Unaudited
Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
---------- ---------- -------------------
Revenue
Production revenue 38,888 25,156 72,862 53,165
Royalties (8,504) (5,398) (15,406) (10,990)
---------- --------- -------------------
30,384 19,758 57,456 42,175
---------- --------- -------------------
Expenses
Production 3,978 3,959 8,426 7,619
Transportation 1,258 1,238 2,666 2,366
Interest 944 868 2,005 1,537
General and administrative 954 772 1,591 1,315
Stock based compensation 395 341 731 678
Depletion, depreciation and
accretion 9,593 8,252 19,771 16,724
---------- --------- -------------------
17,122 15,430 35,190 30,239
---------- --------- -------------------
Income before taxes: 13,262 4,328 22,266 11,936
Future income taxes (Note 3) (3,797) (1,496) (6,377) (4,038)
---------- --------- -------------------
Net income for the period 9,465 2,832 15,889 7,898
Retained earnings, beginning
of period 62,007 49,600 55,583 44,534
---------- --------- -------------------
Retained earnings, end of period 71,472 52,432 71,472 52,432
---------- --------- -------------------
---------- --------- -------------------
Net Income per share (Note 7)
- basic 0.21 0.06 0.36 0.18
- diluted 0.20 0.06 0.34 0.18
Storm Exploration Inc.
Consolidated Statements of Comprehensive Income
($000s)
Unaudited
Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
---------- --------- -------------------
Net Income for the period 9,465 2,832 15,889 7,898
Unrealized Hedging loss (2,489) 155 (5,267) -
Related income tax benefit 802 (50) 1,580 -
---------- --------- -------------------
Other Comprehensive income (loss)
(Note 9) (1,687) 105 (3,687) -
----------------------------------------
Comprehensive income for the period 7,778 2,937 12,202 7,898
----------------------------------------
----------------------------------------
Storm Exploration Inc.
Consolidated Statements of Cash Flows
($000s)
Unaudited
Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
---------- --------- -------------------
Operating activities
Net income for the period 9,465 2,832 15,889 7,898
Add non-cash items:
Depletion, depreciation
and accretion 9,593 8,252 19,771 16,724
Future income tax 3,797 1,496 6,377 4,038
Stock based compensation 395 341 731 678
---------- -----------------------------
Funds from operations 23,250 12,921 42,768 29,338
Net change in non-cash
working capital items (Note 8) 1,640 (299) (998) 2,067
---------- -----------------------------
24,890 12,622 41,770 31,405
---------- -----------------------------
Financing activities
Issue of common shares - net
of expenses 172 13 575 13
Increase (Decrease) in bank
indebtedness (13,636) 28,992 (8,058) 32,365
---------- -----------------------------
(13,464) 29,005 (7,483) 32,378
---------- -----------------------------
Investing activities
Increase in investments (833) - (1,250) -
Additions to property and
equipment (6,841) (32,768) (35,208) (56,843)
Disposals of property and
equipment 1,061 0 2,653 -
Net change in non-cash
working capital items (Note 8) (4,813) (8,859) (482) (6,940)
---------- -----------------------------
(11,426) (41,627) (34,287) (63,783)
---------- -----------------------------
Change in cash during the
period - - - -
Cash, beginning of period - - - -
---------- -----------------------------
Cash, end of period - - - -
----------------------------------------
----------------------------------------
STORM EXPLORATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2008
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
These interim unaudited consolidated financial statements of the Storm
Exploration Inc. ("Storm" or "the Company") have been prepared by management in
accordance with accounting principles generally accepted in Canada, following,
except as described below, the same accounting policies and methods of
computation as used in the audited consolidated financial statements for the
year ended December 31, 2007. The interim unaudited consolidated financial
statement note disclosures do not include all disclosures applicable for annual
audited financial statements. Accordingly, the interim unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto contained in the Company's annual
report for the year ended December 31, 2007.
CHANGES IN ACCOUNTING POLICIES
On January 1, 2008, the Company adopted additional accounting pronouncements
promulgated by the Canadian Institute of Chartered Accountants ("CICA"). The new
accounting policies are set out in CICA Handbook Section 1535 "Capital
Disclosures"; Section 3862 "Financial Instruments - Disclosures"; and Section
3863 "Financial Instruments - Presentation". As required by the new standards,
prior periods have not been restated.
Section 1535 - "Capital Disclosures" This new accounting pronouncement requires
companies to describe their objectives, policies and processes regarding
management of capital. Information about what constitutes capital is also
required; further, the existence of any obligations relating to capital
maintenance must be disclosed, along with the consequences of non-compliance.
Note 10 to these unaudited consolidated interim financial statements provides
the required disclosures.
Section 3862- "Financial Instruments - Disclosures" This pronouncement is an
expansion of existing standards relating to financial instruments and requires
the disclosure of information about financial instruments to which the Company
is a party. Information is provided about financial instruments and their actual
or potential effect on the financial position and results of the Company.
Further, information is provided about risks to which the Company is exposed
through recognized and unrecognized financial instruments and how these risks
are managed. See Note 9.
Section 3863 - "Financial Instruments - Presentation". This pronouncement also
enhances existing disclosure requirements and establishes presentation standards
for financial instruments and non-financial derivatives. See Note 9.
The adoption of these pronouncements has had no effect on the Company's net
income or funds from operations for the period.
2. PROPERTY AND EQUIPMENT
June 30, December 31,
2008 2007
-----------------------------
Property and equipment 348,284 315,587
Accumulated depletion and depreciation (97,375) (77,849)
-----------------------------
$ 250,909 $ 237,738
-----------------------------
-----------------------------
At June 30, 2008, the depletion calculation excluded unproved properties of
$20.0 million (December 31, 2007 - $21.0 million) and included future
development costs of $15.5 million (December 31, 2007 - $23.1 million).
3. FUTURE INCOME TAXES
The future income tax liability is made up of the excess of the accounting
amounts over the related tax bases of the Company's property and equipment,
share capital and other comprehensive income.
The Company has tax pools associated with property and equipment, for accounting
purposes, of approximately $184 million as well as capital losses of
approximately $10 million, all of which are not subject to expiry.
Under the terms of a flow-through share issue in September, 2007, the Company is
obligated to incur Canadian Exploration Expenditures in the amount of $15.1
million prior to December 31, 2008. As at June 30, 2008 the Company had incurred
an estimated $12 million of qualifying expenditures. The full amount of $15.1
million has been renounced to the subscribers at December 31, 2007 and this
amount has been deducted from the Company's tax pool balance.
The provision for future income taxes is different from the amount computed by
applying the combined statutory Canadian federal and provincial tax rates to
pre-tax income for the period.
The differences are as follows:
Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Statutory combined
federal and provincial
income tax rate 30% 32% 30% 32%
Expected income
taxes $ 3,992 $ 1,399 $ 6,704 $ 3,858
Add (deduct) the
income tax effect of:
Stock-based
compensation 119 110 220 219
Rate adjustments (316) (550)
Other 2 (13) 3 (39)
----------------------------------------------------------------------------
Future Income Tax $ 3,797 $ 1,496 $ 6,377 $ 4,038
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The significant components of the future income tax liability are as
follows:
June 30, December 31,
2008 2007
-----------------------------
Property and equipment $ 19,463 $ 13,073
Asset retirement obligation (2,082) (2,006)
Share issue costs (485) (548)
Recovery on unrealized hedging loss (1,580) -
-----------------------------
Future income tax liability $ 15,316 $ 10,519
-----------------------------
-----------------------------
4. BANK INDEBTEDNESS
The Company has an extendible revolving bank facility in the amount of $110
million (December 31, 2007 - $94 million), based on the Company's producing
reserves. The revolving facility is available to the Company until May 31, 2009,
but may be extended at the Company's request until May 30, 2010, subject to the
bank's review of the Company's reserve lending base. If the revolving facility
is not renewed at the end of the current revolving phase, the facility moves
into a term phase whereby the loan is to be retired with one payment on the
366th day following the last day of the revolving phase, in an amount equal to
the outstanding principal. Interest is payable on the revolving facility at bank
prime rate or banker's acceptance rates plus a stamping fee. Security comprises
a floating charge demand debenture on the assets of the Company.
5. ASSET RETIREMENT OBLIGATION
The estimated future asset retirement obligation is based on the Company's net
ownership interest in wells and facilities, the estimated costs to abandon and
reclaim the wells and facilities and the estimated timing of the costs to be
incurred in future periods. The total estimated undiscounted amount required to
settle the Company's asset retirement obligations is approximately $13.4 million
(December 31, 2007 - $13.1 million), which will be paid over the next 20 years,
with the majority of costs incurred between 2018 and 2028. A credit adjusted
risk-free rate of eight percent was used to calculate the present value of the
asset retirement obligations, amounting to $7.3 million (December 31, 2007 -
$6.9 million).
The following table provides a reconciliation of the carrying amount of the
obligation associated with the retirement of oil and gas properties:
----------------------------------------------------------------------------
June 30, December 31,
2008 2007
----------------------------------------------------------------------------
Asset retirement obligation, beginning of
period $ 6,918 $ 5,925
----------------------------------------------------------------------------
Liabilities incurred, net of liabilities
disposed 142 531
----------------------------------------------------------------------------
Accretion expense 244 462
----------------------------------------------------------------------------
Asset retirement obligation, end of period $ 7,304 $ 6,918
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. SHARE CAPITAL
Authorized
An unlimited number of non-voting common shares
An unlimited number of voting common shares
An unlimited number of preferred shares
Included in the following common share balances are 1,275,000 non-voting common
shares.
Except for voting rights, non-voting and voting common shares are identical.
Issued
Number of
Shares Consideration
-----------------------------
Balance as at December 31, 2007 44,532 $ 86,994
Stock options exercised 125 756
-----------------------------
Balance as at June 30, 2008 44,657 $ 87,750
-----------------------------
-----------------------------
Stock Based Compensation Plans
(i) The Company has a stock option plan under which it may grant, at the
Company's discretion, options to purchase common shares to directors, officers
and employees. Under the stock option plan a total of 3,700,000 common shares
has been reserved for issuance. Details of the options outstanding at June 30,
2008 are as follows:
Outstanding Options Exercisable Options
-------------------------------- ------------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Options Life Exercise Options Exercise
Exercise Price Outstanding (years) Price Outstanding Price
----------------------------------------------------------------------------
$ 2.60 to $3.61 290 1.6 $ 3.27 218 $ 3.27
$ 3.91 to $5.71 1,313 2.8 $ 5.46 367 $ 5.29
$ 6.03 to $8.57 758 4.4 $ 7.98 60 $ 6.66
$ 9.00 to $11.40 8 4.7 $ 11.40 - -
-------------------------------- ------------------------
2,369 3.1 $ 6.02 645 $ 4.74
-------------------------------- ------------------------
-------------------------------- ------------------------
7. PER SHARE AMOUNTS
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Basic
Net income per share $ 0.21 $ 0.06 $ 0.36 $ 0.18
Weighted average
number of shares
outstanding ('000) 44,634 42,915 44,610 42,915
Diluted
Net income per share $ 0.20 $ 0.06 $ 0.34 $ 0.18
Weighted average
number of shares
outstanding ('000) 46,179 43,708 46,101 43,702
The reconciling items between basic and diluted weighted average common
shares are stock options described in Note 6.
8. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash working capital
----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2008 2007 2008 2006
----------------------------------------------------------------------------
Accounts
receivable $ 3,086 $ 1,247 $ 665 $ 1,881
Prepaid costs and
deposits (384) (403) (1,036) 516
Accounts payable
and accrued
liabilities $ (5,875) (10,002) (1,109) (7,270)
----------------------------------------------------------------------------
Change in non-cash
working capital $ (3,173) $ (9,158) $ (1,480) $ (4,873)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Relating to:
Financing
activities $ - $ - $ - $ -
Investing
activities (4,813) (8,859) (482) (6,940)
Operating
activities 1,640 (299) (998) 2,067
----------------------------------------------------------------------------
$ (3,173) $ (9,158) $ (1,480) $ (4,873)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest paid during
the period $ 944 $ 868 $ 2,005 $ 1,537
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income taxes paid
during the period $ - $ - $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. FINANCIAL INSTRUMENTS
The Company holds various financial instruments. These financial instruments
expose the Company to the following risks:
- credit risk
- market risk
- liquidity risk
Management has primary responsibility for monitoring and managing financial
instrument risks under direction from the Board of Directors, which has overall
responsibility for the establishing Company's risk management framework. In
certain circumstances, for example, hedging of future production revenue, the
Board has established policies and has established risk limits and controls, and
monitors these risks in relation to market conditions. In other circumstances,
for example extending credit to purchasers of the Company's products, the Board
has delegated responsibility for credit assessment to management, but receives
frequent financial and operating reports.
The Company's financial instruments recognized on the unaudited consolidated
balance sheet consist of accounts receivable, bank indebtedness and accounts
payable and accrued liabilities. The fair value of these financial instruments
approximates their carrying amounts based on the short term to maturity.
Credit risk:
A substantial portion of the Company's accounts receivable are concentrated with
a limited number of purchasers of commodities and joint venture partners in the
oil and gas industry and are subject to normal industry credit risk. Management
considers this concentration of credit risk to be limited, as commodity
purchasers are major industry participants, and receivables from partners are
protected by effective industry standard legal remedies. In addition, the
Company's high working interest in its major operating properties mitigates the
risk of partner default. The Company requires cash calls from its partners on
major field projects in advance of commencement. Receivables related to the sale
of the Company's production are normally collected on the 25th day of the month
following delivery.
Market risk:
Market risks are as follows and are largely outside of the control of the Company:
- Commodity prices
- Interest rates
- Foreign exchange
The Company faces certain other financial risks as follows:
Liquidity risk:
Liquidity difficulties would emerge if the Company was unable to meet its
financial obligations as they fell due within normal credit terms. This may be
the consequence of diminished cash flows resulting from lower product prices,
production interruptions, or unexpected operating or capital cost increases.
Liquidity difficulties could also occur if the Company's bankers were unable to
continue to provide credit at a level and on terms compatible with the Company's
capital requirements. Generally the Company will, over a reasonable period of
time, limit its capital programs to cash flow from operations. In addition, the
Company endeavours to maintain its debt at a level somewhat less than the
maximum amount of its total bank facility to ensure financial flexibility to
deal with unforeseen or rapidly changing circumstances.
Commodity prices-
The Company is constantly exposed to the risk of declining prices for its
products with a corresponding reduction in cash flow. Reduced cash flow may
result in lower levels of capital being available for field activity, thus
compromising the Company's capacity to grow production while at the same time
replacing continuous declines from existing properties. In certain
circumstances, usually when debt levels are forecast to increase due to capital
expenditures exceeding cash flow, or where the Company has financed, in whole or
in part, an acquisition using bank debt, the Company may enter into oil and
natural gas hedging contracts in order to provide stability to future cash flow.
These contracts reduce the fluctuation in production revenue by fixing prices of
future deliveries of oil and natural gas.
For the three and six month period ending June 30, 2008 the Company realized a
hedging loss of $802,000. (2007 - Nil) This amount has been offset against
production revenues.
Volume Term
Fixed price financial sale
12,000 GJ/d $8.04 / GJ - AECO July 1, 2008 - Sept. 30, 2008
Physical Collar
11,000 GJ/d $7.50 - 8.70 / GJ - AECO July 1, 2008 - Sept. 30, 2008
These financial instruments have been designated as meeting the criteria for
hedge accounting. Correspondingly, at June 30, 2008, the market value, being the
cost to exit the contracts, of $3.7 million (net of related income tax of $1.6
million) has been charged to Other Comprehensive Income and not included in the
determination of net income for the year to date.
Interest rates -
Interest on the Company's revolving bank facility varies, and is most commonly
based on bankers' acceptance rates plus a stamping fee. The Company is thus
exposed to increased borrowing costs during periods of increasing interest
rates, with a corresponding reduction in both cash flows and project economics.
The Company had no interest rate swaps or similar contracts in place at June 30,
2008 to reduce interest rate risk.
Foreign exchange -
Although the Company's product revenues are denominated in Canadian dollars, the
underlying market prices are affected by the exchange rate between the Canadian
and the United States dollar. As at June 30, 2008 the Company had no contracts
in place to reduce foreign exchange risk.
10. CAPITAL MANAGEMENT
Capital management is fundamental to the Company's objective of cost-effective
production growth, while simultaneously replacing continuous production
declines. The Company's capital comprises shareholders' equity, bank
indebtedness and working capital. Management of capital involves the preparation
of an annual budget, which may only be implemented after approval by the
Company's Board of Directors. As the Company's business evolves during the
fiscal year, the budget may be amended; however, any changes are again subject
to approval by the Board of Directors. As part of the budget process, and as
part of capital management control procedures, the Company continuously during
the fiscal year uses a non-GAAP measurement of net debt to cash flow to measure
and control debt levels. This measurement is established as follows:
----------------------------------------------------------------------------
June 30, December 31,
2008 2007
----------------------------------------------------------------------------
Current assets $ 14,264 $ 13,894
----------------------------------------------------------------------------
Accounts payable and accrued liabilities 22,994 24,103
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Working capital deficiency 8,730 10,209
----------------------------------------------------------------------------
Bank indebtedness 66,414 74,472
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net debt $ 75,144 $ 84,681
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Annualized cash flow for the period $ 93,000 $ 51,943
----------------------------------------------------------------------------
Net debt to cash flow ratio 0.8 : 1 1.6 : 1
----------------------------------------------------------------------------
The ratio of net debt to cash flow is subject to quarterly variations and is
usually highest in the first and fourth quarter of each year, when capital
expenditures normally exceed cash flow, with a resulting increase in net debt.
The Company's bank indebtedness is based on the Company's producing reserves and
generally is not subject to restrictions which would potentially affect the
Company's operations. However, the ratio of net debt to cash flow is used to
determine the interest rate applied to the Company's bank indebtedness, with
interest rates changing at certain threshold levels of net debt to cash flow.
From time to time the Company may enter into hedging arrangements if capital
programs or acquisitions result in a high net debt to cash flow ratio. Such
arrangements provide for stability of cash flow during periods when the Company
applies cash flow to reduce its net debt.
The Company may issue share capital when debt levels are high and potentially
constrain operations, usually in circumstances when the Company has completed a
large acquisition.
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