Storm Resources Ltd. (TSX VENTURE:SRX)
Storm has also filed its unaudited consolidated condensed interim financial
statements as at March 31, 2012 for the three months then ended along with the
Management's Discussion and Analysis ("MD&A") for the same period. This
information appears on SEDAR at www.sedar.com and on Storm's website at
www.stormresourcesltd.com.
Selected financial and operating information for the three months ended March
31, 2012 appears below and should be read in conjunction with the related
unaudited consolidated condensed interim financial statements and MD&A.
Highlights
Three Months Three Months
Thousands of Cdn$, except volumetric and per- Ended March Ended March
share amounts 31, 2012 31, 2011
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FINANCIAL
Gas sales 1,155 401
NGL sales 576 97
Oil sales 1,659 483
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Production revenue 3,390 981
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Funds from operations(1)) (63) 59
Per share - basic ($) 0.00 0.00
Per share - diluted ($) 0.00 0.00
Net income (loss) (1,615) (321)
Per share - basic ($) (0.04) (0.01)
Per share - diluted ($) (0.04) (0.01)
Field capital expenditures, net of
dispositions 2,207 9,702
Net (debt)/working capital (50,300) 13,688
Weighted average common shares outstanding
(000s)
Basic 38,670 26,377
Diluted 38,670 26,377
Common shares outstanding (000s)
Basic 61,824 26,377
Fully diluted 63,942 28,391
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OPERATIONS
Oil equivalent (6:1)
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Barrels of oil equivalent (000s) 112 25
Barrels of oil equivalent per day 1,229 276
Average selling price (Cdn$ per Boe) 30.31 39.53
Gas production
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Thousand cubic feet (000s) 515 110
Thousand cubic feet per day 5,659 1,221
Average selling price (Cdn$ per Mcf) 2.24 3.65
NGL Production
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Barrels (000s) 7 1
Barrels per day 77 13
Average selling price (Cdn$ per barrel) 81.96 83.68
Oil Production
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Barrels (000s) 19 5
Barrels per day 208 59
Average selling price (Cdn$ per barrel) 87.44 90.59
Wells drilled
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Gross 1.0 -
Net 1.0 -
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(1) Funds from operations and funds from operations per share are non-GAAP
measurements. See discussion of Non-GAAP Measurements on page 15 of the
MD&A and the reconciliation of funds from operations to the most
directly comparable measurement under GAAP, "Cash Flows from Operating
Activities", on page 15 of the MD&A.
PRESIDENT'S MESSAGE
FIRST QUARTER 2012 HIGHLIGHTS
-- The business combination with Bellamont Exploration Ltd. ("Bellamont")
closed on March 23rd and added 1,850 Boe per day of higher netback
production (51% oil plus natural gas liquids) based on field estimates
for April. Estimated April production was reduced by 50 Boe per day shut
in due to low natural gas prices and 250 Boe per day shut in due to
mechanical failures. Using the evaluation completed by InSite effective
March 31, 2012, Storm acquired proved reserves totaling 4.6 Mmboe and
proved plus probable reserves totaling 8.3 Mmboe. Total cost of the
transaction was approximately $96.7 million which includes $37.0 million
of total debt assumed by Storm, a cash component of $20.0 million, and
the issuance of 16.7 million Storm shares to Bellamont shareholders.
-- The transaction with Bellamont was partly funded with a $23.6 million
private placement of common shares of Storm at a price of $3.40 per
Storm share resulting in the issuance of 6.9 million shares at closing
on March 23rd. Management, directors and employees invested $8.4 million
to subscribe for 2.5 million shares.
-- Production increased by 340% from the year ago period to average 1,229
Boe per day which included 285 barrels per day of oil plus natural gas
liquids ("NGLs") and 5.7 Mmcf per day of natural gas. This includes nine
days of production from Bellamont's properties.
-- There was limited activity in the quarter as a result of a focus on
completing the Bellamont and Storm Gas Resource Corp. ("SGR")
transactions and integrating their properties into Storm's operations. A
vertical delineation well (100% working interest) was drilled and cased
at Umbach on the southern block of land with log response across the
Montney being similar to vertical wells further north which offset
Storm's three producing horizontal wells.
-- Funds used in operations was $63,000, the operating netback averaged
$15.73 per Boe, and operating costs were $9.75 per Boe. Costs related to
the Bellamont and SGR transactions reduced cash flow by $0.6 million.
-- Capital investment totaled $162.9 million in the quarter with $3.2
million invested in exploration and development activities, $160.7
million on acquisitions, and $1.0 million was received from the sale of
non-core undeveloped lands.
-- At March 31, 2012, Storm's debt and working capital deficiency was $50.3
million. After including the value of Storm's investment in publicly
listed companies ($8.3 million at March 31), net debt was $42.0 million.
Storm's bank line was increased to $70.0 million with the closing of the
Bellamont transaction.
-- The acquisition of SGR, Storm's partner in the Horn River Basin of north
east British Columbia ("HRB"), was completed on January 12th. This added
2.1 Mmcf per day of natural gas sales (350 Boe per day) in the first
quarter plus 81,400 net acres of undeveloped land including 58,400 net
acres in the HRB. Proved reserves totaling 2.6 Mmboe and proved plus
probable reserves totaling 6.8 Mmboe were acquired based on an
evaluation completed by InSite Petroleum Consultants Ltd. ("InSite")
effective January 31, 2012. The cost to acquire SGR totaled $55.2
million after deducting the working capital surplus of $1.0 million and
including 11.8 million Storm shares issued to SGR shareholders. With the
best estimate DPIIP of 3.1 Tcf and contingent resources of 616 Bcf,
consolidating ownership in the HRB provides a huge option on improving
natural gas prices for Storm shareholders.
OPERATIONS REVIEW
Storm has a focused asset base with an inventory of light oil exploitation
opportunities in the Grande Prairie area and large land positions in resource
plays at Umbach and in the HRB which have multi-year drilling upside.
Umbach, North East British Columbia
Storm's current land holdings at Umbach total 99 gross sections or 75 net
sections (54,000 net undeveloped acres), all of which are prospective for
liquids rich natural gas from the Montney formation. Production in the first
quarter averaged 335 Boe per day (20% liquids) while the operating netback was
$13.46 per Boe. Liquids recovery was 36 Bbls per Mmcf sales gas with
approximately 60% being free condensate plus pentane.
During the first quarter, production was re-directed to the Stoddart Gas Plant
on March 17th which is expected to result in liquids recoveries increasing to 45
to 55 barrels per Mmcf of sales gas (approximately 50% free condensate plus
pentane) and will improve the operating netback by $3 to $5 per Boe using first
quarter pricing.
A vertical delineation well (100% working interest) was drilled on the southern
lands in the first quarter with log response across the Montney being similar to
wells further north offsetting Storm's producing horizontal wells. This well was
cased so that it can be re-entered in the future to drill a horizontal wellbore.
Currently, three horizontal wells are producing from the Montney formation with
production history for each horizontal provided in the presentation on Storm's
website, www.stormresourcesltd.com. In order to reduce the completion cost, a
packer system with frac ports was used for the completion of the last two
horizontal wells with different fracture treatments conducted on each well in an
attempt to improve productivity and reserves. After comparing results to other
horizontal wells completed in the Montney in the area, further modifications are
planned on future horizontal wells including increasing the sand tonnage and
pumping rates in fracture treatments, going back to a perf and plug system with
perf clusters, and possibly lowering the wellbore to access more of the Montney
formation.
Storm's activity in the remainder of 2012 will be focused on increasing the size
of the resource in the Montney formation and improving horizontal well rates and
reserves. The fourth horizontal well (0.6 net) that was drilled late last year
will be completed and two more step-out horizontal wells (1.2 net) will be
drilled and completed in the third quarter. Depending on results, two more
horizontal wells (1.2 net) may be drilled in the fourth quarter with both being
completed in the first quarter of 2013.
Grande Prairie Area, North West Alberta and North East British Columbia
Production in this area comes from the Mica property in north east British
Columbia and from the properties acquired through the transaction with Bellamont
which closed March 23rd. Based on field estimates, production in April was
approximately 2,000 Boe per day (52% oil plus NGLs) with 50 Boe per day shut in
due to low natural gas prices and 250 Boe per day shut in due to mechanical
failures (pipeline failure and installation of artificial lift). The pipeline
failure was repaired in early May which has restored 125 Boe per day from one
well and artificial lift is expected to be installed in the other shut-in well
during early June when road bans have been lifted. During May, an additional 450
Boe per day has been shut in as a result of low natural gas prices.
The Grande Prairie area is relatively mature with shallower declines
(approximately 20% per year) and a higher proportion of oil and NGL production
which results in a higher operating netback (more cash flow). Storm expects to
re-invest approximately 60% to 70% of cash flow from this area in maintaining
production and the remaining 'free cash flow' will be directed to advancing
exploitation of the Montney formation at Umbach, which is a larger scale growth
opportunity.
There is a large inventory of light oil opportunities in this area including 15
to 30 horizontal wells to be drilled targeting light oil in the Doe Creek,
Dunvegan, Charlie Lake, and Montney formations and initiating a waterflood plus
drilling up to six vertical infill wells in a light oil pool at Mica.
During the remainder of 2012, a vertical well in a new pool Montney light oil
discovery at Grimshaw will begin producing and three to five horizontals (all
100% working interest) will be drilled targeting light oil in the Montney,
Dunvegan, and Doe Creek formations.
Horn River Basin, North East British Columbia
Storm's undeveloped land position in the HRB totals 135 sections at a 100%
working interest (87,700 net acres) and is prospective for natural gas from the
Muskwa, Otter Park, and Evie/Klua shales. During the first quarter, production
in the HRB averaged 574 Boe per day at an operating netback of $5.17 per Boe. On
January 12, 2012, Storm completed the previously announced acquisition of SGR,
its partner in the HRB, which increased production in the first quarter by 350
Boe per day. The resource in the Muskwa and Otter Park shales is large with the
best estimate of DPIIP in the core producing area being 3.1 Tcf gross raw gas
(evaluated by InSite December 31, 2011). The core producing area is 30 gross
sections in size (22% of Storm's total land holdings in the HRB) and
productivity has been proven across the area with one horizontal well that has
been on production for 14 months and two vertical wells which were completed and
had final test rates of 950 and 870 Mmcf per day (final test rate is the average
rate over the last 24 hours with cumulative gas production being 12 Mmcf and 7
Mmcf).
Production performance of the first horizontal well (100% Storm) with 12
fracture stimulations continues to exceed expectations with the current rate
being approximately 3.7 Mmcf per day gross raw gas and cumulative production of
2.1 Bcf gross raw gas since production commenced on March 7, 2011. The raw gas
gathering pipeline operates at a higher pressure which has resulted in the flow
rate being restricted since compression has not been installed. Ultimate
recovery for this well is forecast to be 9.6 Bcf gross raw gas which may
increase given that the decline is continuing to flatten. The production decline
is shallower in comparison to other shale plays because the Muskwa and Otter
Park shales are very thick (92 metres thickness in the DPIIP area). Significant
improvements in productivity and reserves are expected on future horizontals by
increasing fracture density (15 to 18 fracture stimulations per horizontal) and
by installing field compression.
Activity in the HRB is being deferred until natural gas prices improve.
INVESTMENTS
At the end of first quarter, Storm had share ownership positions in two publicly
traded companies. The value of the share positions in the two public companies
totaled $8.2 million at the end of the quarter and these securities could
possibly be sold in the future with the proceeds being used to finance the
Company's capital programs.
Chinook Energy Inc. ("Chinook")
Storm holds 4.5 million shares of Chinook which is a TSX-listed oil and gas
exploration and production company (symbol 'CKE') based in Calgary with
operations focused in Tunisia and western Canada.
Bridge Energy ASA ("Bridge")
Storm holds 1.05 million common shares of Bridge (symbol 'Bridge' on the Oslo
Stock Exchange), a Norwegian-based exploration and production company with
production of approximately 1,500 Boe per day (33% light oil) from the UK sector
of the North Sea.
OUTLOOK
Production in the second quarter is forecast to average 2,700 to 2,800 Boe per
day (41% liquids). Since closing the transaction with Bellamont, 500 Mcf per day
has been shut in due to low natural gas prices and an additional 2,500 Mcf per
day has been shut in during early May (total 500 Boe per day). All of the
shut-in production is from natural gas wells with high third party processing
fees and won't be re-started until natural gas prices at AECO are greater than
$2.50 to $3.00 per GJ. Shutting in these wells will have no impact on cash flow.
Mechanical failure has also impacted production (loss of 250 Boe per day in
April from two wells) and we expect these to be resolved by early June.
Due to a further decrease in forecast cash flow caused by the continuing decline
in natural gas prices, capital investment in operations will be reduced to $28
million from previous guidance of $34 million. This will include $20 million for
drilling and completions and $8 million for land, seismic and facilities.
Drilling and completion activity in 2012 will now include one vertical
delineation well (1.0 net) at Umbach, two horizontal wells (1.2 net) at Umbach,
completing one standing horizontal well (0.6 net) at Umbach, and three to five
horizontals or verticals (all 100% working interest) targeting light oil
opportunities in the Grande Prairie area. Fourth quarter or exit production is
forecast to average 3,100 to 3,400 Boe per day (43% liquids) which assumes 500
Boe per day remains shut in due to low natural gas prices. Storm is currently
assuming commodity prices in 2012 average $2.05 per GJ at AECO for natural gas
and Cdn $92.00 per barrel Edmonton Par for oil. Debt plus the working capital
deficiency is targeted to be approximately $50 million at the end of 2012
(including the value of the publicly listed securities owned by Storm) which may
result in capital investment being adjusted higher or lower depending on actual
commodity prices.
Updated 2012 Guidance
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Forecast Q2 production after deducting 5% 2,700 to 2,800 Boe per day
for unplanned outages (41% oil + NGLs)
Bank credit facility $70.0 million
2012 average operating costs $10 to $12 per Boe
2012 average royalty rate 12% to 15%
2012 operations capital $28.0 million
2012 cash G&A(1) $3.8 million
2012 exit or fourth quarter average 3,100 to 3,400 Boe per day
production (43% oil + NGLs)
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(1) Excludes transaction costs associated with the SGR acquisition and
Bellamont combination which are required to be expensed under IFRS.
During and after the end of the first quarter, we entered into hedges on a
portion of our oil production in order to protect our capital investment program
in 2012. The total hedged volume is 450 barrels per day of oil, terms are from
May to December 2012, and the average price is Cdn $104.95 per barrel.
Significant reductions in operating costs ($2.0 to $2.5 million per year) will
be realized on the properties acquired from Bellamont by the end of the second
quarter. Investment in infrastructure projects will result in more than $1.0
million per year of savings which includes converting a well to salt water
disposal to reduce trucking, acquiring and modifying a small gas plant to
eliminate processing fees, eliminating equipment rentals and electrifying well
sites. As well, 100 Boe per day (87% natural gas) that was cash flow negative in
2011 will be permanently shut in (associated operating costs total $1.0 million
per year).
Storm's focus over the remainder of 2012 will be to:
-- Offset declines by drilling three to five horizontals in the Grande
Prairie area targeting light oil;
-- Integrate Bellamont's properties and implement operating cost
reductions; and
-- Use 'free cash flow' plus a limited amount of debt to further expand the
liquids rich Montney gas resource at Umbach by completing the fourth
horizontal well (0.6 net) and drilling and completing two additional
horizontal wells (1.2 net).
Although the decline in natural gas prices over the last four months has
affected our share price and caused many challenges in terms of budgeting, we do
expect that natural gas prices will recover because of simple economics. The
majority of producers that grew natural gas production in 2011 spent more than
cash flow and funded the gap with equity issues, debt, asset sales, or by using
cash flow from oil assets. With prices in 2011 averaging $3.40 per GJ at AECO,
longer-term prices need to be higher in order to attract capital investment
required to maintain current production levels (cash out can't be greater than
cash in for extended periods of time). Timing of the recovery is difficult to
predict but investment generating very low or no economic return cannot continue
indefinitely.
Storm is a somewhat unique junior producer that has accumulated large land
positions over the last four years in two large-scale resource plays offering
multi-year drilling upside. Although there have been many challenges associated
with integrating the Bellamont properties, it adds higher netback, light oil
production and an inventory of horizontal light oil wells that can be drilled to
offset declines. As well, the relatively shallow production decline provides us
with 'free cash flow' for reinvestment into our resource plays. Near term, this
allows us to continue exploitation of liquids rich natural gas in the Montney at
Umbach where horizontal wells are expected to generate a 20% to 25% rate of
return using current forward strip pricing for crude oil and natural gas. Longer
term, significant leverage to an improvement in natural gas prices is offered by
the large DPIIP in the Muskwa and Otter Park shales of the HRB. With a talented
and motivated group of employees at Storm and higher levels of cash flow from a
larger, oilier asset base, we are well positioned for continued growth in 2012
and beyond.
Respectfully,
Brian Lavergne, President and Chief Executive Officer
May 16, 2012
Discovered-Petroleum-Initially-in-Place ("DPIIP") - is defined in the Canadian
Oil and Gas Evaluation Handbook ("COGEH") as the quantity of hydrocarbons that
are estimated to be in place within a known accumulation. DPIIP is divided into
recoverable and unrecoverable portions, with the estimated future recoverable
portion classified as reserves and contingent resources. There is no certainty
that it will be economically viable or technically feasible to produce any
portion of this DPIIP except for those portions identified as proved or probable
reserves.
Contingent Resources - are those quantities of petroleum estimated, as of a
given date, to be potentially recoverable from known accumulations using
established technology or technology under development, but which are not
currently considered to be commercially recoverable due to one or more
contingencies. Contingencies may include factors such as economic, legal,
environmental, political and regulatory matters, or a lack of markets. It is
also appropriate to classify as contingent resources the estimated discovered
recoverable quantities associated with a project at an early stage of
development. Estimates of contingent resources described herein are estimates
only; the actual resources may be higher or lower than those calculated in the
independent evaluation. There is no certainty that the resources described in
the evaluation will be commercially produced.
Boe Presentation - For the purpose of calculating unit revenues and 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. 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 measurements and
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. Mboe means 1,000
Boe.
Forward-Looking Information - This press release contains forward-looking
statements and forward-looking information within the meaning of applicable
securities laws. The use of any of the words "will", "expects", "believe",
"plans", "potential" and similar expressions are intended to identify
forward-looking statements or information. More particularly, and without
limitation, this press release contains forward-looking statements and
information concerning: production; drilling plans; reserve volumes; capital
expenditures; royalties; and production and general and administrative costs.
The forward-looking statements and information in this press release are based
on certain key expectations and assumptions made by Storm, including: prevailing
commodity prices and exchange rates; applicable royalty rates and tax laws;
future well production rates; reserve and resource volumes; the performance of
existing wells; success to be expected in drilling new wells; the adequacy of
budgeted capital expenditures to carrying out planned activities; the
availability and cost of services; and the receipt, in a timely manner, of
regulatory and other required approvals. Although the Company believes that the
expectations and assumptions on which such forward-looking statements and
information are based are reasonable, undue reliance should not be placed on
these forward-looking statements and information because of their inherent
uncertainty. In particular, there is no assurance that exploitation of the
Company's undeveloped lands and prospects will result in the emergence of
profitable operations.
Since forward-looking statements and information address future events and
conditions, by their very nature they involve inherent risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors and risks. These include, but are not limited to the risks
associated with the oil and gas industry in general such as: operational risks
in development, exploration and production; delays or changes in plans with
respect to exploration or development projects or capital expenditures; the
uncertainty of reserve estimates; the uncertainty of estimates and projections
relating to reserves, production, costs and expenses; health, safety and
environmental risks; commodity price and exchange rate fluctuations; marketing
and transportation of petroleum and natural gas and loss of markets;
environmental risks; competition; ability to access sufficient capital from
internal and external sources; stock market volatility; and changes in
legislation, including but not limited to tax laws, royalty rates and
environmental regulations.
Readers are cautioned that the foregoing list of factors is not exhaustive.
Additional information on these and other factors that could affect the
operations or financial results of the Company are included or are incorporated
by reference in the company's MD&A for the three months ended March 31, 2012.
The forward-looking statements and information contained in this press release
are made as of the date hereof and the Company undertakes no obligation to
update publicly or revise any forward-looking statements or information, whether
as a result of new information, future events or otherwise, unless so required
by applicable securities laws.